*The Massachusetts Court of Appeals has on June 17, 2015 ruled that the burden is on the insurer to prove the applicability of an exclusion. Because the facts alleged in the Complaint in the underlying action do not establish that the business pursuits exclusion in a homeowner’s policy applies to all potential liability as a matter of law, the insurer had a duty to defend.
The insured was licensed electrician. The Complaint alleged that the insured acted as a general contractor, contracted with others and oversaw the work of renovations to a house owned by his parents. In the underlying action for personal injuries by the plumber suffered on the project, the plumber recovered a judgment t for $226,218.49.
There were two homeowners policies in force issued by two different insurers. Vermont Mutual assumed the defense of the parents but refused to defend their son, the electrician. Preferred Mutual defended the son but under a reservation of rights.
Preferred filed its separate declaratory relief action against Vermont and the insureds. It sought a judgment declaring that its policy did not provide coverage and that Vermont was obligated to defend and indemnify the son. Preferred also asserted a claim for half of Preferred’s defense costs incurred on behalf of the son.
Exclusion and Coverage
The Vermont policy excluded coverage for bodily injury “arising out of or in connection with a business engaged in by an insured.” The Vermont policy also provided that it was “excess over other valid and collectible insurance…”
The Preferred policy covered the son “only with respect to the conduct of a business of which you are the sole owner.” The Preferred policy also provided that it is the primary policy and that the insurer’s share is “based on the ratio of its applicable limit of insurance to the total applicable limits of insurance of all insurers.”
Duty to Defend
The Court ruled that the duty to defend arises when the allegations in the Complaint in the underlying action are reasonably susceptible of an interpretation that states or roughly sketches a claim that would be covered by the policy terms. The duty to defend is based on the facts alleged in the complaint and on the facts known or readily knowable by the insurer that may aid in its interpretation of the allegations in the complaint. Billings v. Commerce Ins. Co., 458 Mass. 194, 200-201 (2010).
The Court rejected Vermont Mutual’s position that the above business pursuits exclusion applied arguing that the Complaint referred to the son’s occupation and his role in supervising the project. The Court rejected this position and found that the son’s parents owned the building and the project was the renovation of their “mutual home.”
Two Prong Test
The Court went on to rule that, while the Massachusetts Courts had not yet faced this issue, there was in most jurisdictions a two prong test for determining when the business exclusion applied, that is, when an activity arises out of or in connection with the insured’s business. Massachusetts adopted that test. Opinion, page 8.
The first prong is “continuity”, the activity in question must be one in which “the insured regularly engages as a means of livelihood”. The second prong is the “profit motive”, the purpose of the activity must be “to obtain monetary gain.” Opinion, page 8. 5 New Appleman on Insurance Law Library Edition, Section 53.06 [d] [i] (2014); 9A Couch on Insurance Section 128.13 (3d ed. 2006); 3 Windt, Insurance Claims & Disputes, Section 11:15 (6th ed. 2013); Springer v.Erie Ins. Exchange, 439 Md. 142, 162 – 164 (2014).
The Court found that there was no indication in the Complaint that the son’s alleged supervisory or disposal activity on the project were ones “in which he regularly engaged in connection with his means of livelihood.” The Court further found that the Complaint did not indicate whether the son’s participation in the renovation project “was motivated by profit.” The Complaint left it entirely possible that the son contributed his labor out of a desire to help his parents and improve the residence in which they all lived. Opinion, page 9.
Burden on the Insurer
The Court ruled, “It is the insurer who bears the burden of proving the applicability of an exclusion.” In order for an exclusion to negate an insurer’s duty to defend ab initio, the facts alleged in the Complaint must establish that the exclusion applies to all potential liability as a matter of law. Opinion, Page 9. Because the facts alleged in the Complaint do not establish that the business pursuits exclusion applies to all potential liability as a matter of law, Vermont Mutual had a duty to defend and should not have disclaimed coverage outright. Opinion, page 10.
Preferred also had a duty to defend. The claims asserted in the Complaint are also potentially within the scope of Preferred’s coverage. The Complaint alleged that the son was an electrician who had been in charge of the renovations project. These allegations do not negate the possibility that he was engaged to work on the renovations as an electrician and that his supervisory activities and/or his removal and disposal work were ancillary to his electrical work and performed in the conduct of his business. Herbert A. Sullivan, Inc. v. Utica Mutual Ins. Co., 439 Mass. 387, 394-395 (2003).
But, the Court further ruled that Vermont could not demonstrate that the Preferred policy afforded coverage to the son. The Preferred policy covered the son only with respect to the “conduct of a business of which [he was] the sole owner.” Opinion, page 15. That business was identified as the son being an electrician. The record revealed no facts from which it might reasonably be inferred that the son was conducting his business as an electrician at any time relevant to the occurrence of the accident at issue. Opinion, page 16.
The Court concluded that both Vermont and Preferred had duties to defend the son. But, while Vermont had a duty to indemnify the son, Preferred did not. Furthermore, Preferred was entitled to equitable contribution and Vermont shall reimburse Preferred 50% of its costs in defending the son. Opinion, pages 16-17.
Preferred Mutual Insurance Company v. Vermont Mutual Insurance Company, ___N.E. 3d ____, 2014 WL 99009470 (MA Ct. App. June 17, 2015).