Annual Survey of Developments in Insurance Coverage Law
| Publication year | 2021 |
| Pages | 157 |
Edward J. Stein, [*] Cort T. Malone,
[*]
and Anna M. Piazza[**]
This article reviews recent insurance coverage decisions. Most notably, the Connecticut Supreme Court shifted the burden of proof regarding the prejudice element of a liability insurance company's late notice defense and held that the insurance company, not the policyholder, now bears that burden. Connecticut state and federal courts issued several other decisions favorable to policyholders in the context of bad faith claims against insurance companies. In general, though, the cases continued the balanced jurisprudence noted in last year's survey of 2011 insurance coverage developments.[1] Connecticut courts also decided several cases concerning policy exclusions in homeowner's and professional liability insurance policies; strictly construed the terms "suit" and "other dispute resolution proceedings, " as used in commercial general liability insurance policies; clarified a policyholder's ability to implead an insurance company via a third-party complaint; and addressed an insurance company's right to subrogation in specific contexts.
I. Late Notice
In Arrowood Indemnity Company v. King, [2] the Supreme Court addressed an insurance company's late notice defense to coverage, noting that Connecticut requires two conditions to be met before an insurance company's duties can be avoided under a policy's notice provision: (1) an unexcused unreasonable delay in notification by the policyholder, and (2) resulting material prejudice to the insurance company.[3] With regard to the prejudice element, in 1988, in Aetna Casualty & Surety Co. v. Murphy, [4] the Supreme Court held that "[i]f it can be shown that the insurer suffered no material prejudice from the delay, the nonoccurrence of the condition of timely notice may be excused, " provided the policyholder could prove the absence of material prejudice.[5] In its 2012 Arrowood decision, the Court overruled Aetna v. Murphy "to the extent that it allocated the burden to the insured to disprove prejudice" from late notice of a liability insurance claim. Under Arrowood, the insurance company now "bears the burden of proving, by a preponderance of the evidence, that it has been prejudiced by the insured's failure to comply with a notice provision."[6] In so holding, the Supreme Court reasoned:
[T]he task of proving a negative is an inherently difficult one, and it may be further complicated by the opposing party's interest in concealment . . . Imposing this difficult task on the insured—the party least well equipped to know, let alone demonstrate, the effect of delayed disclosure on the investigatory and legal defense capabilities of the insurer—reduces the likelihood that the fact finder will possess sufficient information to determine whether prejudice has resulted from delayed disclosure.
(Internal citations omitted).[7]
With regard to the unexcused, unreasonable delay element, the facts of Arrowood raised the question whether social interactions between the insured and the claimant making no reference to an accident claim justified a delay in giving notice of a potential claim to the insurer, where the policy requires notice of "as soon as practical." Arrowood involved a serious head injury to a child who fell from a skateboard towed by an all-terrain-vehicle driven by the policyholders' son. The policyholders did not immediately notify their insurance company, and they continued to socialize with the injured boy's family after the accident with no mention of a potential lawsuit. More than a year after the accident, however, an attorney for the injured boy alerted the policyholders that an action might be filed, at which time the policyholders gave notice to the insurance company. The Supreme Court found this delay unreasonable and unexcused, because the injury "was far from slight and was unmistakably apparent."[8] The policyholders' reliance on their social interactions with the family of the injured child failed because "the notice requirement turns not on an insured's subjective assessment of how likely a claim is to be brought, but rather on whether a reasonable person would recognize that 'liability may have been incurred.'"[9]
II. Bad Faith
The cases addressing bad faith reflect continuing uncertainty as to the degree of specificity required when pleading a general business practice supporting a violation of the Connecticut Unfair Trade Practice Act ("CUTPA") based on the Connecticut Unfair Insurance Practices Act ("CUIPA") and other bad faith theories. In many cases, relatively bare allegations survived a motion to strike. For example, in Savanella v. Kemper Independence Insurance Company, [10] the Superior Court denied the insurance company's motion to strike: (1) a breach of the implied convent of good faith and fair dealing claim, where the policyholders alleged that the insurance company conspired to subvert Connecticut law; and (2) a CUTPA/CUIPA claim alleging that the insurance company committed unfair and deceptive acts "with such frequency as to constitute a general business practice of insurance misconduct." In connection with the CUTPA/CUIPA claim, the policyholders alleged the insurance company's conduct in the case at bar and multiple other cases—without providing specific examples—in which the insurance company and its related corporate entities engaged in unfair insurance practices. The court held that the policyholders should be able to take discovery, and that a summary judgment motion "would be the appropriate vehicle to test" their allegations.[11]
A number of trial courts similarly denied motions to strike, holding essentially that so long as plaintiffs alleged that the insurer misconduct involved other insureds, detailing specific instances of the other misconduct is not required.[12] Others, however, required that plaintiffs plead the particulars of misconduct involving other policyholders simply to survive a motion to strike.[13] Past the pleadings stage, however, the decisions are sparse.
In one case that survived summary judgment on claims of breach of the covenant of good faith and fair dealing and CUTPA violations, Glidepath, LLC v. Lawrence Brunoli, Inc., [14] the court found triable fact questions regarding a surety's failure to investigate. The evidence offered in opposition to summary judgment included that the insurance company did not discuss or review claims information with the claimant, and provided a conclusory denial letter without substantive analysis.
In theory, insurers maybe liable for negligent claims handling as well as bad faith. That theory was tested, unsuccessfully for the policyholder, in Carford v. Empire Fire & Marine Ins. Co.[15] After a bench trial, the court held for the insurance company, concluding from the totality of evidence that it had acted with reasonable care in obtaining information and evaluating a claim of serious injury to support payment of policy limits, and tendering the balance of its limits seventeen months after the accident.[16] Plaintiff thus failed to establish its claim for excess liability based on negligent failure to settle the claim earlier, before a deadline unilaterally set by plaintiffs counsel; the court appeared unswayed by arguments that the earlier refusal to settle was unreasonable, and it gave "great weight" to a senior claims handler's contemporaneous reports to a reinsurer regarding uncertainty as to damages before the injured party's full medical recovery and to his suggestion that plaintiff file suit to allow time to "properly evaluate" the claim.[17]
In Tucker v. American International Group Inc., [18] the United States District Court for the District of Connecticut held that the Connecticut Supreme Court would recognize a "procedural bad faith claim"—i.e., a cause of action for bad faith in the insurance company's handling of a claim in the absence of a finding that the insurance company breached the policy. The court held that an insurance company has a duty to act in good faith while processing a policyholder's claim.
Finally, in a decision favorable to insurance companies, the Superior Court in Ridgaway v. Mount Vernon Fire Insurance Co.[19] held that an insurance company's claim file was not discoverable or even subject to in camera review in a lawsuit by the assignees of an excess liability insurance policy alleging breach of the duty of good faith and fair dealing and CUIPA and CUTPA violations. Applying a test set forth in Hutchinson v. Farm Family Casualty Insurance Co., [20] the court held that although the plaintiffs had "alleged that the defendant acted in bad faith in various ways when denying coverage, " satisfying the test's first prong, they had neglected "to allege that the defendant sought the advice of its attorney in order to conceal or facilitate its alleged bad faith conduct, " thereby failing to satisfy the test's second prong.[21]
III. Duty To Defend
In Ryan v. National Union Fire Ins. Co. of Pittsburgh PA, [22] the United States Court of Appeals for the Second Circuit affirmed summary judgment on the duty to defend in circumstances that highlight the breadth of the defense obligation, and certified to the Connecticut Supreme Court an issue that highlights the costly potential consequences of breach. The coverage litigation arose from National Union's reliance on a prior wrongful acts exclusion to withdraw a defense to executives of a broker-dealer firm under a professional liability insurance policy against claims that a broker at their firm had mismanaged and "churned" an investor account. While certain allegations of the underlying claim expressly pre-dated the August, 1999 retroactive date referenced in the exclusion, the claim was ambiguous, and other allegations were undated or occurred after that date.[23] Rejecting the...
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