Insurance Law: State Supreme Court's Capstone Decision Addresses Key Topics
This year the Connecticut Supreme Court issued a ruling with broad implications for insurance coverage disputes. In Capstone Building Corp. & Capstone Development Corp. v. American Motorists Insurance Co., 308 Conn. 760 (2013), a unanimous Supreme Court decided two highly significant issues in the insurance coverage arena which will impact a broad scope of coverage disputes under commercial general liability (CGL) policies.
First, the court put to rest the argument that policyholders could maintain a bad faith claim even if the insurance policy did not cover the underlying claim in the first place, rejecting lower court decisions that appear to create an independent tort of bad faith in the insurance context.
Second, the court held that, where an insurer wrongfully disclaims a duty to defend and the insured later settles a dispute involving both covered and non-covered claims, the insured is only entitled to recover for that portion of the settlement that the insured can prove should be reasonably allocated to the covered claims, rejecting a rule that would provide coverage to non-covered claims as a penalty for refusing to defend an insured.
The Capstone court's resolution of these issues marks a return to the fundamental principle that the terms of a contract govern the scope of the contracting parties' rights and obligations, even when the contract happens to be an insurance policy.
The plaintiffs in the underlying action, Capstone Building Corp. and Capstone Development Corp. (together, "Capstone"), entered into a contract with the University of Connecticut under which Capstone agreed to serve as the general contractor for the construction of a student housing complex at the Storrs campus. In 2004, following completion of the project, UConn discovered several defects in the construction. UConn demanded that Capstone pay for the costs to correct the construction defects and the other alleged resulting damage. Pursuant to their contract, Capstone and UConn proceeded to a mediation over their dispute.
Capstone demanded that American Motorists Insurance Co. (AMICO) respond to the claims at issue in the mediation under a CGL policy issued by AMICO. AMICO denied coverage for the claims and declined to participate in the mediation. Capstone eventually negotiated a settlement agreement that resolved all of UConn's claims, some of which, if not all, were not covered under the CGL.
Capstone later sued AMICO in Alabama state court. AMICO removed the dispute to the Northern District of Alabama. After years of discovery, the parties filed motions for summary judgment. Recognizing that the motions involved significant issues of Connecticut state law, the Northern District of Alabama certified three questions for resolution by the Connecticut Supreme Court. While the first asked for guidance as to the extent to which faulty workmanship can be an "occurrence giving rise to property damage" under a CGL policy, the other two aimed at more general issues of law with significant consequences for insurance coverage disputes more generally.
The second certified question presented to the Supreme Court asked 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. This type of claim is sometimes referred to as "procedural bad faith." To resolve this question, the Supreme Court was required to assume that none of Capstone's claims were covered under AMICO's policy and decide whether an insured nonetheless may pursue a bad faith claim based solely on the insurer's conduct in investigating the request for coverage.
The Supreme Court held that Connecticut does not recognize a cause of action based solely on an insurer's failure to investigate a claim properly. Relying on long-established contract principles as laid out in earlier coverage case, the court explained that a bad faith claim can only lie a claim for breach of the covenant of good faith and fair dealing which requires a plaintiff to demonstrate that the allegedly wrongful conduct deprived it of some benefit of the parties' agreement. The court stated "[u]nless the alleged failure to investigate led to the denial of a contractually mandated benefit . . . [a plaintiff cannot raise] a viable bad faith claim." (Emphasis added.)
In this regard, Capstone seemingly rejects the idea of a bad faith claim as a species of tort and instead ties it to the contract concept of the covenant of good faith and fair dealing. In other words, bad behavior alone does not create a bad faith claim; the bad behavior must deprive a party of an actual benefit they bargained for under the contract.