Whether an insurance carrier has a duty to defend its insured in an underlying lawsuit is perhaps the most critical determination of a coverage investigation and can be a highly contested issue. A carrier’s allegedly wrongful breach of this duty can have substantial ramifications, including potential bad faith exposure and forfeiture of policy-based coverage defenses that would otherwise apply to limit or preclude the insurer’s indemnity obligation. Accordingly, when Connecticut law governs the interpretation of a liability policy, a carrier would be wise to consider the impact of a recent Supreme Court of Connecticut decision, Nash St., LLC v. Main St. Am. Assur. Co., before reaching a determination regarding its duty to defend.
In Nash St., the Connecticut Supreme Court expanded a liability carrier’s duty to defend to apply to situations where the allegations of an underlying complaint do not create any factual uncertainty, but do create what the court referred to as “legal uncertainty.” According to the court, legal uncertainty exists if at the time the insured tendered the underlying lawsuit to the carrier there was no controlling Connecticut appellate authority regarding the meaning or application of the policy exclusion, and either (1) the exclusion could be considered ambiguous and interpreted in favor of the insured; or (2) there is a significant split of authority regarding the interpretation of the exclusion in other jurisdictions and if presented to the Supreme Court of Connecticut, the court could adopt a principle of law that creates a reasonable possibility of coverage.
In Nash St., the court applied this new legal principle to the policy’s so-called “business risk” exclusions, which generally bar coverage for claims involving the insured’s faulty work, and evaluated whether a legal uncertainty existed concerning those exclusions that created the possibility of coverage. The court concluded that a legal uncertainty existed when the insured tendered the underlying lawsuit because there was no controlling Connecticut appellate authority interpreting the meaning and applicability of the exclusions and thus, the reviewing court could follow a rule of construction adopted in other jurisdictions that would create a reasonable possibility of coverage for the underlying lawsuit.
The court reasoned that if it were asked to decide the meaning and applicability of the exclusions, it could―consistent with Connecticut’s precedent holding exclusions are to be interpreted narrowly and ambiguity resolved in favor of the insured―follow a minority of other jurisdictions in adopting the narrower construction of the exclusions or deem them ambiguous. Thus, the court determined that when the insured tendered the lawsuit, a legal uncertainty existed with respect to whether the Connecticut Supreme Court would agree that the “business risk” exclusions operated as a complete bar to coverage for the lawsuit. The court held that this legal uncertainty created a possibility of coverage that triggered the carrier’s defense obligation.
The scope of the court’s holding in Nash St. remains to be seen, but certainly has the possibility to be extensive, given the lack of appellate level authority on many common policy exclusions. Notably, however, the Connecticut Supreme Court expressly stated that the absence of controlling authority in and of itself does not constitute legal uncertainty. Moreover, the court did not address whether a single contrary decision constitutes legal uncertainty when the “vast majority” of courts have interpreted an exclusion in a manner that operates to entirely bar coverage. By emphasizing the extensive litigation over the meaning and application of the “business risk” exclusions and characterizing the split of authority as “significant,” the court indicated that a single contrary decision may not qualify as legal uncertainty, potentially limiting the reach of the court’s holding in Nash St.
Another noteworthy aspect of the decision in Nash St. was that the Connecticut Supreme Court, reiterated that it is well settled in Connecticut that a carrier who wrongfully breaches its duty to defend forfeits its policy-based coverage defenses for indemnity. So, not only does the Nash St. decision potentially expand the duty to defend, it reaffirms prior Connecticut jurisprudence holding the breach of that duty can strip an insurer of its coverage defenses, effectively compelling the insurer to pay claims not otherwise covered by the policy. As such, when there may be legal uncertainty about whether a carrier has a duty to defend its insured, a carrier should assess the applicability of Nash St. and evaluate whether a court strictly following the decision would conclude a defense is owed while also remaining conscious of the potential deleterious consequences should a court determine the carrier breached its duty to defend.
For more information or for immediate guidance, contact: