Title: VEPCO v. Northbrook Prop. and Cas. Ins.

State: virginia

Issuer: Virginia Supreme Court

Document:

Present:  Carrico, C.J., Compton, Stephenson, Lacy, Keenan, 
Koontz, JJ., and Whiting, Senior Justice 
 
VIRGINIA ELECTRIC AND POWER COMPANY 
 
OPINION BY JUSTICE LAWRENCE L. KOONTZ,
v. Record No.  951919               September 13, 1996 
 
NORTHBROOK PROPERTY AND CASUALTY INSURANCE COMPANY 
 
 
FROM THE CIRCUIT COURT OF THE CITY OF RICHMOND 
 
Melvin R. Hughes, Jr., Judge 
 
 
In this appeal we consider whether, under a liability policy 
which excludes coverage for suits for bodily injury filed by "an 
employee" of the insured, an insurance company has an obligation 
to defend an insured where such a suit is brought by an 
individual who would be deemed a statutory employee of the 
insured under the Virginia Workers' Compensation Act. 
 
The essential facts of the case are not in dispute.  In 
October 1989, Commercial Courier Express (Commercial Courier) 
entered into a contract with Virginia Electric and Power Company 
(VEPCO) to provide designated courier services to VEPCO.  The 
contract included provisions which referenced Commercial 
Courier's existing general liability policy (the policy) with 
Northbrook Property and Casualty Insurance Company (Northbrook). 
 
As required by its contract with VEPCO, Commercial Courier 
submitted and Northbrook accepted an addendum to the policy 
adding VEPCO as an additional insured for suits arising out of 
courier services Commercial Courier provided to VEPCO.  The 
policy included a standard "duty to defend" clause, as well as 
various exclusions from coverage.  One such exclusion eliminated 
Northbrook's liability for bodily injury to an employee of the 
insured for injuries "arising out of and in the course of 
employment by the Insured."  In the context of this case, VEPCO 
is the insured party. 
 
On March 23, 1990, Margaret C. Laveri (Laveri), a Commercial 
Courier employee, delivered parcels to VEPCO's office at One 
James River Plaza.  Subsequently, in a suit filed against VEPCO, 
Laveri alleged that while making the delivery she fell and was 
injured after stepping on a slippery substance in VEPCO's 
delivery area.   
 
VEPCO requested that Northbrook defend the Laveri suit under 
the duty to defend clause in Commercial Courier's liability 
policy.  Northbrook denied coverage, and VEPCO proceeded to 
successfully defend the Laveri suit on its own by asserting that 
Laveri was its statutory employee as defined by the Virginia 
Workers' Compensation Act.  Code § 65.2-302.  VEPCO asserted 
that, as a statutory employee, Laveri's sole remedy was under the 
Act, Code § 65.2-307, thus barring the civil suit. 
 
VEPCO then filed a bill of complaint seeking a declaratory 
judgment that Northbrook had wrongly refused to provide a defense 
to VEPCO as an additional insured under Commercial Courier's 
policy.  Northbrook moved to dismiss on the ground that VEPCO had 
an adequate remedy at law.  The chancellor transferred the case 
to the law docket, granting VEPCO leave to file a motion for 
judgment.  VEPCO thereafter filed a motion for judgment asserting 
that Northbrook had breached its duty to defend and seeking 
damages in the amount of the legal fees expended in defending the 
Laveri suit. 
 
The parties filed cross-motions for summary judgment.  In 
its motion, Northbrook asserted various defenses including the 
exclusion of coverage for a claim filed by an employee.  
Following an ore tenus hearing, the trial court rejected VEPCO's 
assertion that the exclusion did not apply to a statutory 
employee, reasoning that the language of the exclusion of 
coverage for injuries to an employee "suggest[s] an employee in 
the context of workers['] compensation."  Accordingly, the trial 
court found that Northbrook properly refused to defend the suit 
on the ground that Laveri was "an employee of [VEPCO]."  We 
awarded VEPCO this appeal. 
 
We have previously addressed at length the question of an 
insurer's duty to defend, holding that the "obligation to defend 
is broader than [the] obligation to pay, and arises whenever the 
complaint alleges facts and circumstances, some of which would, 
if proved, fall within the risk covered by the policy."  Lerner 
v. Safeco, 219 Va. 101, 104, 245 S.E.2d 249, 251 (1978).  In 
Lerner, we went on to say "that such a provision [to defend] 
places no obligation on the insurer to defend an action against 
the insured when, under the allegations of the complaint, it 
would not be liable under its contract for any recovery therein 
had."  Id. (citing Travelers Indem. Co. v. Obenshain, Committee, 
219 Va. 44, 46, 245 S.E.2d 247, 249 (1978)).  In addition, we 
have explained that: 
 
[I]f it is doubtful whether the case alleged is covered 
by the policy, the refusal of the insurer to defend is 
at its own risk.  London Guar. Co. v. White & Bros., 
Inc., 188 Va. 195, 199-200, 49 S.E.2d 254, 256 (1948). 
 And, if it be shown subsequently upon development of 
the facts that the claim is covered by the policy, the 
insurer necessarily is liable for breach of its 
covenant to defend.  Id. at 200, 49 S.E.2d at 256. 
 
Brenner v. Lawyers Title Ins. Corp., 240 Va. 185, 189, 397 S.E.2d 
100, 102 (1990). 
 
However, as will become apparent from our analysis in the 
present case and is perhaps self-evident, the obligation to 
defend is not negated merely by the unsuccessful assertion of a 
claim otherwise facially falling within the risks covered by the 
policy.  Various defenses applicable to specific factual 
circumstances may be successfully asserted against claims 
otherwise covered by the policy.  The insurer has the obligation 
to defend the insured in such circumstances even though the 
obligation to pay is not ultimately invoked.  It is in this 
context that the obligation to defend is said to be broader than 
the obligation to pay.  Stated differently, the insurer has a 
duty to defend against risks covered by the policy even though 
the defense successfully litigates the issue of its lack of 
obligation to pay the claim. 
 
In applying these well established principles to determine 
Northbrook's obligation to defend in this particular case, we are 
concerned exclusively with the risks covered by the express 
provisions of the policy and the allegations of Laveri's motion 
for judgment.  As it did in the trial court, Northbrook urges 
this Court to interpret the policy in the context of the 
provisions of the contract between VEPCO and Commercial Courier. 
 
While referring to several provisions of that contract in 
rendering its judgment, the trial court expressly ruled that "the 
focus must remain on the insurance contract at issue between 
[Northbrook and VEPCO]."  Assuming, without deciding, that the 
applicable rules of evidence would have permitted consideration 
of the provisions of the Commercial Courier/VEPCO contract to 
determine the intended coverage of the insurance policy, 
Northbrook's failure to assign cross-error to the trial court's 
failure to do so precludes our consideration of that issue.  Rule 
5:18(b). 
 
We turn then initially to the allegations of Laveri's motion 
for judgment.  That pleading alleged that Laveri was a "business 
invitee" of VEPCO and that, as a result of VEPCO's negligent 
maintenance of its delivery area, she was injured while making a 
delivery to that area "in the course and scope of her then 
employment."  Unquestionably, if proven at trial, these 
allegations would fall within the ambit of the risks for which 
the policy's general liability provisions for bodily injury 
afford protection to VEPCO. 
 
A fair reading of the record makes it clear, and the parties 
are not in disagreement, that at the time of her injury Laveri 
was an employee of Commercial Courier.  Similarly, it is clear 
that Northbrook's decision, and the risk it ran, not to defend 
against her claim was based on the provision of the policy that 
excluded coverage for bodily injury to an employee of the 
insured.  Thus, the sole question is whether the trial court 
correctly ruled that Laveri's status as a statutory employee of 
VEPCO for purposes of workers' compensation brought her within 
the definition of the term "employee" as used in the coverage 
exclusion contained in the policy. 
 
Exclusionary language in an insurance policy is to be 
construed most strongly against the insurer, and the burden is 
upon the insurer to prove that an exclusion applies.  Johnson v. 
Insurance Co. of No. America, 232 Va. 340, 345, 350 S.E.2d 616, 
619 (1986).  This is true whether the insurer is asserting the 
exclusion to deny liability for payment or to avoid its duty to 
defend the insured.  Accordingly, Northbrook bears the burden of 
showing that the policy clearly intended the term "employee" as 
used in the exclusion to include a statutory employee as defined 
in Code § 65.2-302 of the Virginia Workers' Compensation Act. 
 
Northbrook asserts that the policy contemplated use of the 
statutory definition of the term "employee" found in the Act, as 
shown by the use of the phrase "[a]n employee of the Insured 
arising out of and in the course of employment by the Insured" in 
the exclusion provision.  (Emphasis added.)  Indeed, the trial 
court agreed with this assertion, noting that: "It is significant 
that this policy language while mentioning the word 'employee' 
also mentions 'arising out of and in the course of employment,' 
words that suggest an employee in the context of workers['] 
compensation . . . ."  We disagree.   
 
The Act defines statutory employees for the specific purpose 
of applying workers' compensation laws.  Thus, we hold that the 
statutory definition contained in the Act will not be applied to 
an insurance policy unless the policy provides by reference to 
the specific statute that the statutory definition is intended to 
be applied.  Cf. United Services Auto. Ass'n v. Pinkard, 356 F.2d 
35, 37-38 (4th Cir. 1966) (workers' compensation rationale used 
where employee exclusion specifically precluded coverage for 
injury arising out of employment "if benefits thereof are in 
whole or in part either payable or required to be provided under 
any [workers'] compensation law"). 
 
In American Reliance Insurance Co. v. Mitchell, 238 Va. 543, 
385 S.E.2d 583 (1989), an insurance policy "excluded coverage for 
'bodily injury to any farm employee . . . arising out of and in 
the course of his employment by any insured.'"  Id. at 545, 385 
S.E.2d at 584.  In addressing the employee exclusion clause, the 
insurance company urged the application of workers' compensation 
analysis to expand the definition of employee to include persons, 
including the injured party in that case, who would be eligible 
for workers' compensation benefits even though they were merely 
occasional or irregular laborers.  We declined to apply workers' 
compensation definitions in interpreting the term "farm 
employee", holding that the plain and generally accepted meaning 
of employee "connotes continuous service of a person who works 
full time for another for a consideration."  Id. at 549, 385 
S.E.2d at 586. 
 
The same rationale we employed in Mitchell applies here.  
While it is true that the exclusion in the policy uses language 
evocative of a workers' compensation law definition of 
"employee," nothing in the policy expressly designates the Act as 
providing the definition for terms used in the coverage 
exclusion.  Id. at 548, 385 S.E.2d at 586; cf. Pinkard, 356 F.2d 
at 37.
*T  Thus, as in Mitchell, the plain and generally accepted 
                     
     
*We note that a separate exclusion within the policy 
meaning of the term "employee" is controlling.  Using that 
definition, we hold that, although deemed a statutory employee 
for purposes of workers' compensation, Code § 65.2-302, Laveri 
was not an employee of VEPCO within the plain meaning of the 
policy.  Accordingly, the trial court erred in determining that 
the employee exclusion clause of the policy permitted Northbrook 
to refuse to fulfill its obligation to defend VEPCO. 
 
For these reasons, we will reverse the judgment of the 
circuit court and enter judgment for VEPCO, and the case will be 
remanded for a determination of damages. 
 
Reversed and remanded. 
(..continued) 
excludes coverage for "[a]ny obligation of the Insured under a 
workers' compensation, disability benefits or unemployment 
compensation law or any similar law."  In the trial court, 
Northbrook relied on this exclusion to bolster its argument that 
the policy excluded generally any claim that was subject to 
workers' compensation law.  Northbrook did not reassert this 
argument on appeal.