Insurance Coverage Litigation in Connecticut: Is There a Level Playing Field in the "insurance State"?

JurisdictionConnecticut,United States
Publication year2021
CitationVol. 74 Pg. 362
Pages362
Connecticut Bar Journal
Volume 74.

74 CBJ 362. INSURANCE COVERAGE LITIGATION IN CONNECTICUT: IS THERE A LEVEL PLAYING FIELD IN THE "INSURANCE STATE"?




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INSURANCE COVERAGE LITIGATION IN CONNECTICUT: IS THERE A LEVEL PLAYING FIELD IN THE "INSURANCE STATE"

BY CHARLES T. LEE

In 1996, 140 insurance companies were headquartered in Connecticut.(fn1) Ever since the late eighteenth century, when merchant ship owners decided to pool their losses, Connecticut has been a prominent location for the insurance industry.(fn2) As a result, Connecticut is a convenient venue for litigation of insurance coverage, as so many insurers can be "found" here. The choice of forum, or venue, for coverage litigation can have a profound effect on its outcome, due to the provisions of a particular forum's substantive law and choice of law standards. As Harvard Professor Richard Neustadt noted in his study of governance: "Where you stand depends on where you sit."(fn3) This principle would seem to apply to jurists as readily as to other members of government.

Accordingly, this article examines the question posed by its title to determine whether the concentration of the insurance industry in Connecticut has influenced the state's jurisprudence and whether recent case law shows any "tilt" towards the insurers or the insureds.

To do this, we have interviewed officials of the Connecticut Insurance Department and have reviewed reported and unreported cases issued in the period from 1995 through 1999 by the state and federal courts of Connecticut which deal with coverage issues under property and casualty policies - some 141 decisions in all.




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This article will analyze the most important doctrines in coverage litigation during the period to determine whether there is a bias towards insured or insurer. Specifically, it examines: (1) general principles of policy construction;(2) environmental coverage; (3) the availability of punitive damages; and (4) the liability of insurance brokers and agents. Finally, the article presents a numerical assessment of the decisions in the study period to assess any prejudice in Connecticut's jurisprudence relating to property and casualty insurance coverage.

I. GENERAL PRINCIPLES

The evaluation of a forum for coverage litigation involves the assessment of many variables, the most important of which include standards for determining the choice of law, the duty to defend, construction of policy language, burden of proof, timeliness of notice, availability of relief to third parties, and likelihood of summary judgment. Most of these factors are surprisingly favorable to the policyholder suing in Connecticut.

A. Choice of Law

The decision to litigate in a particular forum does not, in itself, dictate the substantive law that will apply to the dispute. In this era of interstate and international commerce, it is a rare case that involves only Connecticut litigants and property, to which the state's common and statutory law would unquestionably and exclusively apply. Not surprisingly, the courts of Connecticut recently have clarified the applicable choice of law with respect to both contract and tort claims in the insurance context.

With respect to contract claims, the Connecticut Supreme Court adopted the position presented in the Restatement (Second), Conflicts of Laws, for consideration of the substantive law to be applied in connection with liability insurance policies. In Reichhold Chemicals, Inc. v. Hartford Accident & Indemnity Co., the Connecticut Supreme Court stated:

[W]e adopt the § 188 general presumption, which provides that unless another state has an overriding policy-based interest in the application of its law, the law of the state in which the bulk of the contracting transactions took place should be applied. We also adopt the § 193 special presumption




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for liability insurance contracts, which provides that unless another state has an overriding policy-based interest in the application of its law, the law of the state in which the insured risk is located should be applied.(fn4)

Thus, the Court modified the traditional "location of the contract" analysis to a presumptive "location of the risk" test in the liability insurance context, subject to an "overriding policy-based interest" of another state, including the forum state. In the context of environmental contamination, the Court held that the principal place of the insured risk is the location of the contaminated site.(fn5) Therefore, unless Connecticut or some other state has an overriding policy-based interest in the application of its law, the law of the state where the site is located will apply.

In QSP, Inc. v. Aetna Casualty and Surety Company,(fn6) the court limited the application of the "location of the risk" analysis to situations involving immovable risks, such as the environmental clean-up sites at issue in Reichhold. Where the coverage related to a nationwide risk, such as unfair competition, the court looked to the "most significant relationship" analysis contained in sections 6 and 188 of the Restatement.(fn7) With respect to tort claims, the Connecticut Supreme Court recognized in Reichhold that it had previously "expressly abandoned 'categorical allegiance' to [the lex loci] doctrine in [tort cases] in O'Connor v. O'Connor, 201 Conn. 632, 648, 519 A.2d 13 (1986), in favor of the Restatement (Second) approach."(fn8) In a subsequent federal case, the district court relied on O'Connor in applying the Restatement (Second), Conflicts of Law, to choice of law issues arising out of insurance contracts.(fn9) In that case, the court found that the "most significant relationship" test, set forth in section 6(2) of the Restatement, favored the application of Connecticut law because notice of the claims was received in Connecticut and another of the factors, "ease in determining the applicable law, favors




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application of Connecticut law because it is the law of the forum."(fn10)

The above principles would appear to be fairly neutral as to the interests of policyholders and carriers, but they demonstrate that the "playing field" in Connecticut is also a chessboard in which choice of law principles will dictate which law is applied to a given question.

B. The Duty to Defend

Typically, an insurance carrier has two distinct duties under a policy: the duty to indemnify an insured against damages arising out of covered activities and the duty to defend the insured in related litigation.

As recently stated by the Connecticut Supreme Court, "[i]t is beyond dispute that an insurer's duty to defend, being much broader in scope and application than its duty to indemnify, is determined by reference to the allegations contained in the complaint."(fn11) The courts will look to the "four corners" of the complaint to determine if a claim has been alleged which triggers the carrier's duty to defend.(fn12) Once this showing is made, the burden shifts to the carrier to show that an exclusion would bar coverage.(fn13) These are fairly standard national rules.

In the most important coverage case of the study period, Heyman Associates No. 1 v. Insurance Company of the State of Pennsylvania,14 the Connecticut Supreme Court held that where an absolute pollution exclusion clearly barred indemnification coverage, the duty to defend would be eliminated as well:


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Because we hold that the defendants owe no duty to indemnify the plaintiff for damages arising from the fuel oil spill, we also conclude that they owe no duty to defend the plaintiff from claims arising from those damages. We acknowledge the plaintiff's citation to cases holding that an insurer's duty to defend is broader than its duty to indemnify, but we are unpersuaded that such authority is relevant when, as in this case, the exclusion clearly and unambiguously excludes coverage for fuel oil spilled in Stamford Harbor.(fn15)

In many contexts, including sexual harassment, the appellate and trial courts have regularly declined to find a duty to defend where the underlying complaint demonstrates that an exclusion is applicable.(fn16)

However, in EDO Corporation v. Newark Insurance Co., ("EDO II"),(fn17) the United States District Court for the District of Connecticut held that a duty to defend could arise under the complaint even if it became clear from extrinsic facts that there was no duty to indemnify. Similarly, the Connecticut Appellate Court stated, "The contractual duty to defend exists regardless of the duty of the insurer to indemnify."(fn18) The conflict between these decisions and Heyman and its progeny is more apparent than actual, however, because the courts that refused to find a duty to defend did so on the basis of what




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was alleged in the complaint and not in response to any extrinsic facts.

A breach of the duty to defend can subject the carrier to liability for damages up to the policy limits. As the Connecticut Supreme Court stated in Black v. Goodwin, Loomis & Britton, Inc.:

An insurer who chooses not to provide its insured with a defense and who is subsequently found to have breached its duty to do so must bear the consequences of its decision, including the payment of any reasonable settlement agreed to by the plaintiff and the insured.(fn19)

In summary, the federal courts of Connecticut, and several state court decisions, have expressed fairly aggressive propolicyholder positions on the duty to defend.

C. Construction of Policy Language

In interpreting the meaning of insurance policy language, Connecticut law requires the construction of any ambiguity against the carrier.(fn20) Thus, the courts have referred to "the consumer oriented spirit of the rules of insurance policy construction,"(fn21) and have sought to apply a "layman's understanding" to the language at issue.(fn22)

As a...

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