In Capstone Building Corp. v. American Motorists Ins., the Connecticut Supreme Court responded to three questions, all matters of first impression under Connecticut law, reserved to it from the U.S. District Court for the Northern District of Alabama. On June 11, the court held:
1. Defective construction or faulty workmanship that causes damage to nondefective property can constitute property damage resulting from an occurrence under a commercial general liability (CGL) policy.
2. Connecticut does not recognize a cause of action for bad-faith investigation of an insurance claim in the absence of a breach of an express duty under the policy.
3. Where the insurer breaches its duty to defend a claim that involves covered and noncovered claims (for purposes of the duty to defend) and the plaintiff subsequently settles the claim with the insured, the insured bears the burden of proving what part of the settlement represents claims that would have fallen within the duty to defend. The insurer is not liable for claims that did not create a duty to defend.
The plaintiffs in this consolidated appeal, Capstone Building and Capstone Development (Capstone), were the general contractor and project developer for the Hilltop student housing complex at the University of Connecticut (UConn). Pursuant to the construction contract, UConn was obligated to obtain liability insurance for the project, including insurance covering Capstone. To fulfill this obligation, UConn procured an owner-controlled insurance program CGL policy from American Motorists’ predecessor in interest. The policy included Capstone as an insured and provided coverage, in relevant part, for property damage caused by an occurrence. The policy defined property damage as: “a. Physical injury to tangible property, including all resulting loss of use of that property . . . ; or b. Loss of use of tangible property that is not physically injured.” (The parties ultimately made no claim under b., so the case concerned only the first part of the property damage definition.)
Several years after the Hilltop project was completed, UConn notified Capstone about a number of problems with the complex, including elevated levels of carbon monoxide. UConn’s subsequent investigation revealed problems with the vents for the hot water heaters in the buildings and a number of other “defects and deficiencies” allegedly attributable to Capstone’s work. UConn remediated the problems and ultimately claimed $25 million in resulting damage.
Capstone notified the insurer of UConn’s claims but the insurer denied without an investigation. After several Alabama lawsuits were commenced and dismissed, UConn and Capstone resolved the claim in mediation. Capstone then sued American Motorists in Alabama state court and the insurer removed the claim to the federal district court. In considering the parties’ cross-motions for summary judgment, the district court determined that resolution of the issues depended on propositions of Connecticut state law for which there was no controlling precedent. The court reserved three questions of law to the Connecticut Supreme Court and that court agreed to respond.
First, the court considered whether defective construction or faulty workmanship associated with a construction project may constitute property damage resulting from an occurrence. The court held that defective construction or faulty workmanship that causes damage to nondefective property could constitute property damage caused by an occurrence.
In reaching its conclusion, the court rejected the argument that defective construction lacks the element of fortuity necessary to constitute an accident. The court held that, because negligent work is unintentional from the standpoint of the insured, it may constitute an accident resulting in an occurrence. The court also held that the insuring agreement made no distinction between damage to the insured’s property and damage to the property of others.
Although many of UConn’s claims alleged only defective construction, poor quality, or building code violations, UConn also claimed that Capstone’s defective work resulted in water and mold damage and the escape of carbon monoxide. The court held that the defective work itself could not constitute property damage, but that water and mold damage to nondefective property met the policy definition of property damage. With respect to carbon monoxide, the court held that the escape of carbon monoxide, without more, is not property damage. The court finally concluded that the policy covered claims for the repair of property damage caused by defective work, but not for repairs to the defective work itself. Most of the claims, however, would be excluded by the policy’s “your work” exclusion, though an exception for work performed by subcontractors left some of the claimed property damage within the scope of the policy coverage.
Second, the court considered whether the insurer’s alleged bad-faith conduct in investigating the claim could provide the basis for a cause of action for bad faith under Connecticut law. The court reviewed its prior jurisprudence and concluded that, to make a valid bad-faith claim, Connecticut law requires an allegation that the insured has been denied an express benefit under the policy. Because the duty to investigate was discretionary under the standard CGL language of the UConn policy, the court held that there could be no bad-faith claim arising solely from the insurer’s conduct in performing this discretionary act. The point of the covenant of good faith and fair dealing, the court held, was to require that neither party injure the right of the other to receive the benefits of the agreement. While an investigation may in many cases be important to a party’s rights under the contract, without an allegation that those express rights have been violated, bad faith in the investigation is not actionable. (The court noted, however, that evidence of a bad-faith investigation could support a bad-faith claim, if that claim was based on the denial of an express benefit under the policy.)
Finally, the court considered Connecticut’s rule that, where an insurer refuses to provide a defense and subsequently is found to have breached its defense obligation, the insurer will be responsible for the full amount of any reasonable settlement, up to the limits of the policy, without regard to whether the insurer actually had a duty to indemnify. The question reserved by the district court was how did this rule apply where the insured settled an action where some claims potentially triggered a duty to defend while others clearly did not?
The court noted that in recovering for a settlement following an insurer’s breach of the duty to defend, the insured always has the burden to establish that the amount of the settlement was reasonable. The insured need not show actual liability, but only that the amount was reasonable given the claims made against it. The court considered the options and concluded that the most equitable application of this rule -- where some of the claims triggered a duty to defend and some did not -- was to require the insured to show not only that the amount of the settlement was reasonable, but also what proportion of the settlement was fairly attributable to claims for which the insurer had an obligation to defend.
Click here for the opinion in Capstone Building Corp. v. American Motorists Ins., (June 11, 2013) 308 Conn. 760 (2013).
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