• Damages For Breach of an Insurer's Duty To Defend - Are They Capped At Policy Limits?
  • August 21, 2013
  • Law Firm: Halloran Sage LLP - Hartford Office
  • In Sharon Capel ppa Donte Capel v. Plymouth Rock Assurance Corporation, AC34524, the Connecticut Superior Court, Agati, J., reserved the following question to the Appellate Court upon which advice was desired: “In a claim against Plymouth Rock for breach of contract for failure to defend and indemnify Charles Ingala, brought by the Capels as judgment creditors, are the damages limited to the limits of the putative liability policy, $300,000?”

    In Capel, Plymouth Rock refused to defend or indemnify its putative insured, Charles Ingala (“Ingala”), in connection with a personal injury lawsuit that had been brought against Ingala on the grounds that the applicable policy of insurance had been cancelled.  Left without a defense, a judgment in excess of $1.5 million was rendered against Ingala and that judgment was doubled due to a finding of recklessness.  When the judgment went unpaid, the judgment creditors brought a statutory subrogation action against Plymouth Rock pursuant to Conn. Gen. Stat. Section 38a-321.

    During the pendency of the Section 38a-321 action against Plymouth Rock, the parties requested the trial court to reserve to the Appellate Court the question of law set forth above.  Argument was held before the Appellate Court on January 15, 2013.

    Based on the Connecticut Supreme Court’s decision in Keithan v. Massachusetts Bonding & Ins. Co., 159 Conn. 128, 139 (1970), Plymouth Rock argued that measure of damages in a claim for breach of the duty to defend is “the amount of a judgment obtained against the insured up to the limit fixed by [the insurer’s] policy.”  The plaintiffs-judgment creditors, on the other hand, argued that pursuant to the Connecticut Supreme Court’s decision in Black v. Goodwin, Loomis & Britton, Inc., 239 Conn. 144, 153 (1996), an insurer that breaches the duty to defend “must bear the consequences of its decision, including the payment of any reasonable settlement agreed to by the plaintiff and the insured.”

    Unfortunately, based on questions posed to counsel during the course of oral argument, there is a serious question whether or not the Appellate Court will reach the merits of the reserved question.  This is so because under Connecticut’s Rules of Appellate Procedure, the reservation of a question of law is proper where the answer to that question will determine, or is reasonably certain to enter into, the final determination of the case.  In Capel, a predicate issue which had yet to be decided was whether or not the insurance policy at issue had been canceled properly prior to the date of the accident at issue.  The trial court never decided this issue.  If the trial court had reached this issue and decided that the policy had been properly canceled, then any question as to the measure of damages for breach of the duty to defend would be moot.  On the other hand, if the trial court had determined that the policy was improperly canceled such that it should have been in effect on the date of the accident, then the issue concerning the measure of damages for breach of the duty to defend would be considered ripe for resolution.

    Here, because the cancelation issue remains unresolved, the Appellate Court’s answer to the reserved question of law is not reasonably certain to enter into the final determination of the case.  While counsel argued to the court that resolution of the issue concerning the appropriate measure of damages would eliminate any impediment to meaningful settlement discussions, the court did not appear persuaded by this argument.  It may be, therefore, that the reservation will be remanded to the trial court and resolution of the reserved question will have to wait until another day.  As discussed below, however, that “day” may come sooner rather than later.

    In Ryan v. National Union Fire Ins. Co. of Pittsburgh, 692 F.3d 162 (2012), the Second Circuit Court of Appeals confronted the issue of whether or not National Union could be held liable for consequential damages for breach of the duty to defend, including damages for injury to reputation.  Ryan involved a situation where National Union’s insureds, executives at a securities broker dealer, were subjected to an arbitration before the National Association of Securities Dealers.  The insureds tendered the defense of this claim to National Union, and several months into its investigation of the claim, National Union withdrew the defense.  Thereafter, an arbitration award was rendered against the insureds in the amount of $1.125 million in damages.  The insureds then commenced a breach of contract and bad faith lawsuit against National Union in the United States District Court in Connecticut.

    In connection with their breach of the duty to defend claim, the insureds claimed that they suffered consequential damages consisting of injury to their professional reputations and future earning potential.  The insureds’ claims were tried to the jury which heard testimony from the insureds’ expert who testified that brokers/dealers who have been subjected to significant monetary sanctions have trouble finding work.  Following trial, while the jury found for National Union on the bad faith claim, it awarded consequential damages for National Union’s breach of the duty to defend in an amount totaling nearly $1 million.

    On appeal to the Second Circuit, the parties relied principally upon the Connecticut Supreme Court’s decision in Missionaries of the Company of Mary, Inc. v. Aetna Casualty & Surety Co., 155 Conn. 104 (1967).  Based on the holding of the court in Missionaries, as well as the holding of the court in Keithan, National Union argued that the only damages potentially available to the insureds for breach of the duty to defend were, in the absence of fraud or collusion, the amount of the judgment obtained against the insured up to the policy limits together with reasonable expenses in conducting the defense.  The insureds, meanwhile, argued that Missionaries did not preclude the availability of traditional contract remedies, including consequential damages.

    In addressing these issues, the Second Circuit noted that no Connecticut court had ever provided an authoritative answer to these issues and as such, in the interest of judicial economy, it elected to certify to the Connecticut Supreme Court the following questions:

    1. Does Connecticut law permit a policyholder to recovery consequential damages in a breach of contract action against an insurer predicated on the insurer’s breach of its duty to defend?

    2. If consequential damages are available, may such damages include damages for harm to reputation and loss of income?

    These certified questions were accepted by the Connecticut Supreme Court on November 27, 2012.  Thereafter, the insureds’ brief was filed on January 14, 2013 and the brief of National Union was due to be filed by February 13, 2013.  Assuming the timely filing of reply briefs, the appeal could be argued in the Connecticut Supreme Court late spring in which case a decision could be rendered sometime in the summer.

    The issues to be addressed in Ryan differ from the question of law reserved for the advice of the Appellate Court in Capel.  That is, Ryan involves claims for true consequential damages, or damages that an insured must prove flowed from the insurer’s breach of the duty to defend.  In Capel, on the other hand, the issue is whether an insured can recover a judgment or settlement in excess of policy limits where the insurer breaches the duty to defend.  Although the Appellate Court in Capel may not reach this issue for procedural reasons, in our opinion the Supreme Court in Ryan will address this issue in the context of the insured’s claims for consequential damages.