In a Case of First Impression, the Connecticut Supreme Court Held that an Insurer Must Afford a Defense Where Coverage is “Uncertain”
09/09/20 Nash Street, LLC v. Main Street America Assurance Co.
Supreme Court of Connecticut
Court Finds a Duty to Defend Uncertain Claims, Encourages Declaratory Judgment Actions
In a case of first impression, the Connecticut Supreme Court held that an insurer must afford a defense where coverage is “uncertain.”
So, who had Connecticut doing its best Washington State impression on their 2020 bingo card of disasters? Well, certainly not this observer. Perhaps motivated to increase work for coverage lawyers and encourage the filing of declaratory judgment actions a la Illinois, the Court did an “ole,” sidestepping entirely the issue of whether the carrier correctly denied coverage. A disturbingly unanimous court held that the issue of coverage was, somehow, immaterial in a coverage case. Instead, the Court, relying on Washington state precedent (always dangerous), held that when no Connecticut appellate authority has interpreted particular policy language, but courts in other jurisdictions have interpreted the same language in a manner that could result in coverage, the legal uncertainty as to how a court might interpret the language may give rise to a duty to defend. Citing, among others, American Best Food, Inc. v. Alea London, Ltd., 168 Wn. 2d 398, 229 P.3d 693 (Wash. 2010) (insurer had duty to defend when cases from other jurisdictions suggested that exclusion did not apply, and there was no controlling case from Washington courts).
Let’s talk a little bit about uncertainty. We are, or at least should be, familiar with factual uncertainty. A factual uncertainty exists when it is unclear from the four corners of a complaint whether the allegations fall within coverage. Because the duty to defend is broader than the duty to indemnify, just the possibility of coverage triggers the duty. When the facts are disputed, say for example was it an excluded assault or a covered self-defense, the duty to defend is triggered because the carrier is not entitled to resolve factual uncertainties on its own. Here, the Court’s troubling illustration of factual uncertainty posited that where a complaint is silent on a date of loss essentially all of the insured’s carriers, from time immemorial, have a duty to defend until a court determines when the injury occurred. Still, the duty to defend will last only until the factual ambiguity is resolved.
A legal uncertainty, the Court wrote, arises when it is unclear how a court might interpret policy language. “Legal uncertainty can arise in at least two ways. First, as this court has recognized, ambiguous policy language can give rise to the duty to defend… Second, a duty to defend may arise if there is a question as to whether ‘‘the cases governing the insurance policy [will] be read to impose coverage in a given situation ....”” (Citations omitted).
Here, it is the Court’s extension of the duty to defend to legal uncertainty that makes news. Extending the scope of the duty to defend, the Court found legal uncertainty mandates a defense obligation when there is either an ambiguity in a policy or a split of authority in other jurisdictions as to the meaning of a particular policy provision, and Connecticut law is silent on the issue. Unlike factual uncertainty, legal issues of contract interpretation are the province of judges. Underlying discovery is unnecessary to resolve whether the complaint falls within or without coverage. Still, the Court held that an insurer cannot avoid a duty to defend until the legal uncertainty of coverage is resolved. This holding ignores that, from the carrier’s perspective, there is no legal uncertainty. The carrier is interpreting its policy as providing no coverage, something done hundreds of times a day, and is not weighing facts over which it has no control. Inherently, in every disputed coverage case, there remains legal uncertainty until the trial court rules and the appellate court affirms the correctness of an insurer’s decision not to defend.
Returning to the case at hand, let’s put these legal issues in context. The plaintiff, Nash St., owned a home in Milford that was damaged by both hurricanes Sandy and Irene. Unlucky. A contractor, New Beginnings, was retained to renovate the house. A subcontractor was retained to lift the house and to do concrete work on the foundation. While the subcontractor was lifting the house, it shifted off and collapsed. At the time of the collapse, the only work being performed was the lifting. New Beginnings and/ or its subcontractor caused the collapse by failing to ensure that the cribbing was secure. The house sustained ‘extensive physical damage.
Nash St. sued New Beginnings, which tendered the complaint to its carrier, Main Street, which declined to defend. Nash St. was awarded $558,007.16 when New Beginnings defaulted and then commenced a direct action against Main Street in an effort to collect the unsatisfied judgment. On cross-summary judgment motions, both sides agreed that there were no disputed facts, only contract interpretation issues. Main Street argued that the CGL policy’s business risk exclusions, commonly the j(5) and (6) exclusions precluded coverage.
Under exclusion k (5), the policy excludes coverage for property damage to ‘‘[t]hat particular part of real property on which you or any contractor or subcontractor working directly or indirectly on your behalf is performing operations, if the ‘property damage’ arises out of those operations ....’’ Under exclusion k (6), the policy excludes coverage for property damage to ‘‘[t]hat particular part of any property that must be restored, repaired or replaced because ‘your work’ was incorrectly performed on it.’’
The parties disputed the interpretation of the phrase “that particular part.” Main Street argued that the entire house was being lifted and, therefore, in this context any damage from the collapse of the structure was excluded. Nash St argued, I believe unpersuasively, that New Beginnings was only working on the foundation under the house, and not the house itself, at the time of the collapse. The trial court agreed with me, and Main Street, and granted the insurer summary judgment. The Court summarized that decision:
The court stated that the parties agreed that the only issue was whether exclusions k (5) or (6) ‘‘preclude[d] coverage for the property damage to the entire house that occurred as a result of the [house's] shifting [off of] the cribbing and collapsing at the time that grading and foundation work was being performed.’’ The court concluded that exclusions k (5) and (6) were clear and unambiguous, and ‘‘‘that particular part of real property’’’ on which New Beginnings or the subcontractor was performing operations was the entire house. As such, the court concluded that these exclusions precluded coverage, and, thus, the defendant had no duty to defend or to indemnify New Beginnings.
Nash St. appealed. The Supreme Court framed the issue in a way that avoided a legal interpretation of the meaning of these standard exclusions:
[W]e are mindful that our inquiry is not whether exclusions k (5) and (6) actually preclude coverage; nor does this case require us to determine conclusively what those exclusions mean. The only question we must answer is whether there was any possibility of coverage at the time New Beginnings tendered defense to the defendant.
Instead of deciding whether Main Street was correct that there was no coverage or it was wrong and it owed the underlying judgment—which was the risk the carrier took in denying coverage and allowing its insured to default, the Court asked whether it was possible that there was coverage at the time the complaint was tendered.
[B]ecause the plaintiff alleged damage to “the house and the renovation work therein,’’ we must consider whether legal uncertainty existed regarding the coverage issue in dispute. That is, was it possible, at the time New Beginnings tendered defense to the defendant, that this court, if presented with the issue, could construe ‘‘that particular part’’ in exclusions k (5) and (6) to mean that any portion of the alleged damage would fall outside the scope of the exclusions?
Now, it’s been a long time since I took Evidence in law school, but I strongly recall Professor Kessler (the now retired Richard J. Cardali Distinguished Professor of Trial Advocacy at Hofstra University School of Law) saying, you can’t ask a witness if something is possible because ‘anything is possible.’ The Supreme Court must have been absent that day, because it launched into an analysis as to whether it was possible if faced with this question might it have sided with the insured’s contract interpretation. Oddly, there was nothing hypothetical here, the Court was in fact faced with making this decision, just in a direct-action setting and not in a declaratory judgment setting. The Court could have resolved the coverage issues both for the instant parties and to settle Connecticut law. A simple result, Main Street’s interpretation was right and it wins, or its interpretation was wrong and it pays.
But no, after weighing cases from various jurisdictions, the Court concluded that if asked the question it might have gone one way or the other. That lack of certainty in how it would rule in this case, the Court determined, triggered Main Street’s duty to defend. “Because such an uncertainty works in favor of providing a defense to an insured, exclusions k (5) and (6) did not relieve the defendant of its duty to defend New Beginnings.” Because it breached the duty to defend, under Connecticut law, Main Street may not subsequently argue that these exclusions absolved it of its duty to indemnify. The Court remanded the case to the trial court for determination of Main Street’s non-exclusionary defenses that were not considered below.
Here’s the big takeaway: although the Court gives lip service to the notion that Connecticut law does not require an insurer to always defend and bring a declaratory judgment action (see footnote 4), well, it does just that. “Although our case law does not require it, the prudent, if not ordinary, course would have been for the [insurer] to defend its insured under a reservation of rights and separately pursue a declaratory judgment action to resolve the legal uncertainty at issue.”
Today, as the Court suggests, vigilant Connecticut insurers, in the absence of black letter, controlling precedent, must defend their insureds and commence a coverage action, or risk waiving their defenses to coverage.