Massachusetts Appeals Court Adopts Two-Prong Continuity and Profit Motive Test to Determine Whether Business Pursuits Exclusion Applies Under Homeowners’ Policy
The Massachusetts Appeals Court has provided some much needed guidance on the “business pursuits exclusion” in a recent coverage dispute between a homeowners’ insurer and a commercial liability insurer. In Preferred Mutual Ins. Co. v. Vermont Mut. Ins. Co., Mass. App. Ct. No. 13-P-1890 (June 17, 2015), the Court adopted a two-prong analysis that considers the continuity of the alleged business pursuit and if there is a profit motive behind the pursuit in determining whether the exclusion should apply. However, as the facts of the case presented a relatively straightforward analysis, the Court provided little instruction on how those factors should be applied, and there remains plenty of room for advocacy on the issue.
The case arose when a plumber was injured as a result of falling from a second-floor deck when working on a bathroom renovation. The homeowners’ son, Joseph, who lived with them, and who was a self-employed electrician by trade, was acting as their general contractor for the project. There was no allegation that he was being paid for the work. On the day before the plumber arrived to work on the bathroom, Joseph had removed the second-floor deck railing to remove an old tub. He then propped the railing in place, without securing it. When the plumber leaned against the railing the next day, it gave way and he fell to the ground.
Two insurance policies were potentially available to provide liability coverage. The homeowners’ policy provided coverage to the owners and to Joseph, as a resident relative. In addition, Joseph had his own commercial general liability (CGL) policy in connection with his business as a licensed electrician. When the homeowners and Joseph were sued, the homeowners’ insurer assumed the defense of the homeowners, but refused to defend Joseph. The homeowners’ carrier took the position that coverage for Joseph was excluded under a “business pursuits exclusion.” Joseph’s CGL carrier defended him, but did so under a reservation of rights as coverage was questionable given that liability coverage was only afforded “with respect to the conduct of a business of which [the insured is] the sole owner.”
A jury rendered a verdict for the plaintiff against the homeowners and Joseph, finding them jointly liable. The homeowners’ insurer paid the verdict and sought contribution from Joseph under the CGL policy. The CGL carrier refused to pay any part of the judgment and filed a declaratory judgment action, seeking a declaration that (1) its policy did not afford coverage for Joseph and (2) the homeowners’ insurer should reimburse half of its costs incurred in defending Joseph.
Determining which carrier had a duty to defend and indemnify Joseph on the facts alleged, and ultimately as proven, required the Court to construe provisions in both policies. Most significantly, the Court was required to provide guidance as to the scope of the business pursuits exclusion, which excluded coverage for bodily injury “arising out of or in connection with a business engaged in by an insured.” Massachusetts courts had never addressed this particular exclusion, and the Appeals Court adopted a two-prong functional test involving an analysis of (1) the continuity of the activity (whether the activity was one in which the insured regularly engages as a means of livelihood) and (2) whether there was a profit motive behind the insured’s activity. The Appeals Court’s adoption of this approach was consistent with the majority of jurisdictions and the weight of authorities.
The court determined that the complaint as pled triggered a duty to defend under both coverages. The facts alleged by the plaintiff did not establish on the face of the complaint that the business pursuits exclusion applied, because the allegation was that the plaintiff’s regular occupation was as an electrician, not a general contractor. In addition, there was nothing on the face of the complaint to show that Joseph was acting as a general contractor out of a profit motive. On the other hand, the Court determined that the CGL carrier’s duty to defend was also triggered, because the allegations could be read to establish that Joseph’s negligence with respect to the deck railing occurred “with respect to” the conduct of his business as an electrician.
As the underlying case had proceeded to trial, the Court was able to make a determination as to each carrier’s duty to indemnify. Vermont Mutual, bearing the burden of proving that the business pursuits exclusion applied, was unable to sustain its burden on summary judgment because it had admitted that Joseph did not act as a general contractor on the job, was not licensed as such and had never earned money as such. Because there was no “continuity” of activity as a general contractor, the exclusion did not apply. As to the CGL policy, the Court determined that coverage had not been triggered because there was no evidence that the accident arose in connection with his business as an electrician. Thus, even though the complaint had triggered the duty to defend under both policies, only one insurer was required to indemnify Joseph.
Secondarily, the Court held that the “other insurance clause” in the CGL policy applied only to Preferred Mutual’s duty to indemnify and not to its duty to defend. Each policy contained another insurance clause. The other insurance clause in the CGL policy provided that its insurance would be “excess to” any other available insurance. The Court determined that this “excess” other insurance clause in the CGL policy trumped the “pro rata” other insurance clause in the homeowner’s policy. However, although an excess policy is typically not triggered until primary coverage is exhausted, in this instance, the Court held that the excess clause did not affect the CGL carrier’s duty to defend Joseph, reasoning that when a policy is not a “true” excess policy, the limiting language is directed only to its obligation to contribute to the settlement or judgment, and not its duty to defend.
Apparently faced with a dearth of Massachusetts authority on this point, the Court relied on decisions from other jurisdictions. However, the cases cited appear to have been decided based on specific language in the policies deemed excess. Here, the precise language of the “other insurance clause” was not provided in the opinion. It is possible that based on the precise wording of the policy, a different result might obtain. It is also noteworthy that the CGL carrier had only requested reimbursement for half of its costs in defending Joseph, not the full amount.
This decision reinforces the principle that the duty to defend is broader than the duty to indemnify. In addition, it provides some guidance to counsel with respect to framing a complaint in a way that enhances the possibility of triggering multiple liability policies for purposes of sharing defense costs.
In adopting the two-prong continuity and profit motive analysis, Massachusetts continues its practice of following the majority rule in interpreting common policy provisions. How this rule is applied by Massachusetts courts remains to be seen, however.