Earlier this week, the Connecticut Supreme Court decided several questions of first impression on important insurance coverage issues. In Capstone Building Corp. & Capstone Dev. Corp. v. Am. Motorists Ins. Co., SC 18886, 2013 Conn. LEXIS 187 (2013), the Connecticut Supreme Court addressed three certified questions arising out of an underlying action in which breach of contract and bad-faith claims had been brought against an insurer. Day Pitney served as amicus curiae counsel for the American Insurance Association with respect to the second and third certified questions. In summary, the court held:
- The cost of repairing faulty workmanship is not covered under a commercial general liability policy, but allegations of unintended defective construction work by a subcontractor may constitute an "occurrence" resulting in "property damage" in limited circumstances.
- An insured cannot maintain a bad faith cause of action based solely on an insurer's failure to conduct a discretionary investigation of a claim.
- Where an insured settles a dispute involving mixed covered and noncovered claims against which an insurer wrongfully refused to defend, the insured is entitled to recover from the insurer only that portion of the settlement that the insured can prove should be reasonably allocated to those claims against which the insurer had a duty to defend.
Background
In spring 2000, the plaintiffs, Capstone Building Corp. and
Capstone Development Corp. (together, "Capstone"),
entered into a contract with the University of Connecticut
("UConn") under which Capstone agreed to serve as the
general contractor and project developer for the construction of a
student-resident housing complex on UConn's Storrs campus.
Capstone completed the project in August 2001. In 2004, UConn
discovered that the construction for which Capstone was responsible
was defective. Among other things, UConn alleged Capstone's
faulty construction would require UConn to take remedial steps to
correct elevated carbon monoxide levels resulting from inadequate
venting, improperly sized flues, "[p]oor workmanship and
quality control," as well as "[v]iolations of numerous
code requirements." Capstone, 2013 Conn. LEXIS 187,
at *33 n.20.
UConn's claims against Capstone were mediated. Capstone
demanded that American Motorists Insurance Company
("AMICO") participate in the mediation, claiming a policy
AMICO issued covered the damages UConn sought. AMICO declined to
participate in the mediation. UConn and Capstone eventually
negotiated a settlement agreement. Thereafter, Capstone sued AMICO
in Alabama. The U.S. Court for the District of Northern Alabama
concluded that the insurance policy at issue was governed by
Connecticut law. The court identified three issues of first
impression relating to the policy. Those issues were submitted as
certified questions to the Connecticut Supreme Court.
The Connecticut Supreme Court's Decision
The first certified question was whether damage to a construction
project caused by construction defects and faulty workmanship may
constitute "property damage" resulting from an
"occurrence," triggering coverage under a commercial
general liability policy. Id. at *21-22. The court
concluded that defective workmanship can give rise to an occurrence
under a commercial general liability policy. Id. at *22.
The court noted that whether such an occurrence has caused covered
property damage will depend on the specific facts of each case.
Id. at *33. The court held, however, that a loss would
constitute property damage only if it involved physical injury to
or loss of use of "nondefective property."
Id. at *45 (emphasis added). The court then explained that
"project components defective prior to delivery, or those
defectively installed," do not constitute "physical
injury within the meaning of the policy's terms."
Id. Thus, property damage occurs only when faulty
workmanship has damaged the otherwise nondefective completed
project. Id. at *48. Lastly, the court determined that the
policy's "your work" exclusion meant that such
coverage was further limited to property damage caused by the work
of a subcontractor and not by the insured. Id. at
*58.
The second certified question was whether an insurer's conduct
in investigating an insurance claim provides an independent basis
for a cause of action for bad faith, even in the absence of
coverage. Id. at *64. Agreeing with the majority of
jurisdictions, the court held that Connecticut does not recognize a
cause of action based solely on an insurer's failure to
investigate a claim. Id. at *75, 79. Relying on
long-established contract principles, the court explained that bad
faith (a claim for breach of the covenant of good faith and fair
dealing) requires a plaintiff to demonstrate that the allegedly
wrongful conduct deprived it of some benefit of the parties'
agreement. The court explained, "Unless the alleged failure to
investigate led to the denial of a contractually mandated
benefit...[a plaintiff cannot] raise[] a viable bad faith
claim." Id. at *68 (emphasis added). Under the
express terms of the policy at issue, AMICO had sole discretion to
decide whether to investigate Capstone's claims, and any
failure or deficiency by AMICO in investigating the claim did not
deprive Capstone of any bargained-for benefit. Id. at
*69.
The final certified question was whether, under Alderman v.
Hanover Ins. Group, 169 Conn. 603 (1975), an insured is
entitled to recover the full amount of a pre-suit settlement
involving both covered and noncovered claims after an insurer
wrongfully disclaims coverage. Id. at *83-84. The court
noted that the premise of the certified question did not fall
squarely within either Alderman or Missionaries of Co.
of Mary, Inc. v. Aetna Cas. & Sur. Co., 155 Conn. 104
(1967), because in both those cases the policy provided coverage
for all the claims at issue, whereas the policy in
Capstone covered only some of the underlying claims.
Id. at *97. The court reaffirmed the rule that an insurer
forfeits its policy defenses against indemnity coverage when the
insurer breaches the duty to defend. Id. at *89. The court
also reaffirmed that the breaching insurer must pay the amount the
insured paid to settle with the claimant, to the extent the
settlement was reasonable, as well as the costs incurred in
effectuating the settlement but only "up to the limits of the
policy." Id. at *92. In cases involving settlements
of both covered and noncovered claims, however, the insurer would
be liable, up to its policy limit, only for that part of the
settlement the insured could demonstrate should properly be
apportioned to the claims that triggered the insurer's duty to
defend. Id. at *106. The court reasoned that to hold
otherwise would create coverage by estoppel. Id. The court
also held that the insured bears the burden of demonstrating the
proper allocation to covered claims. Id. at *106-107.
Significantly, the court did not limit its holding to pre-suit
settlements and acknowledged that this new rule represents an
erosion of some of the insured's advantages under
Missionaries. Id. at *108-109.
Consequences for Insurance Companies
The Capstone decision is an important ruling for insurance
companies conducting business in Connecticut. It limits the scope
of coverage for construction defect claims. It also imposes
reasonable requirements on an insured to allocate a settlement
between covered and noncovered claims. Perhaps more important,
Capstone should end insureds' claims for bad faith in
the absence of coverage.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
