On certification from the U.S. District Court for the Northern District of Alabama, the Supreme Court of Connecticut recently issued an opinion holding that an insurer’s bad faith conduct in the investigation of a third-party liability insurance claim does not provide a basis for recovery under Connecticut law. Capstone Bldg. Corp. v. Am. Motorists Ins. Co., 2013 Conn. LEXIS 187 (Conn. June 11, 2013).
In Capstone, the insureds filed suit against their insurer alleging breach of contract and bad faith in connection with the insurer’s denial of coverage for a claim arising out of the construction of a student housing building at the University of Connecticut. The insurer disclaimed coverage under the CGL policy at issue on the basis that the liability arose out of the insureds’ own work. After settling the underlying litigation, the insureds filed suit against the insurer in the Northern District of Alabama. The district court then certified three issues of unsettled law to the Supreme Court of Connecticut for resolution. These issues included the proper interpretation of the terms “property damage” and “occurrence”; the circumstances under which a cause of action is available for the insurer’s bad faith conduct in the investigation of a claim; and the circumstances under which an insurer that wrongfully denies coverage is liable for settlement costs where only certain claims are covered under the policy.1
Citing precedent that a bad faith action must allege denial of the receipt of an express benefit under the policy, Renaissance Mgmt. Co. v. Conn. Housing Finance Auth., 915 A.2d 290 (2007), the Connecticut Supreme Court declined to recognize a bad faith cause of action “based solely on the [ ] insurer’s failure to conduct a discretionary investigation of claims.” The court, however, reaffirmed that its analysis did not limit the bad faith cause of action for failure to defend or indemnify, which is well established under Connecticut law.
In reaching its conclusion that there was no separate cause of action for bad faith based solely on the insurer’s failure to conduct a discretionary investigation of claims for coverage, the court cited the language of the insuring agreement that specifically provided: “[w]e may, at our discretion, investigate any ‘occurrence’ and settle any claim or ‘suit’ that may result.” The court reasoned that insofar as the policy gave the insurer the “sole discretion” to determine when and whether to investigate a claim, the insured could not recover for bad faith based on the insurer’s conduct in its investigation, if any. Instead, the court held that bad faith requires the breach of an express duty and must implicate the insurer’s obligations under the policy. “Unless the alleged failure to investigate led to the denial of a contractually mandated benefit in this case, the plaintiffs have not raised a viable bad faith claim.”
Though an insurer’s investigation is an essential part of the insurer’s assessment of its duty to defend or indemnify, the court held that a bad faith cause of action lies only where the insurer breaches a contractual duty. The court opined that its holding was consistent with the majority of jurisdictions and authoritative treatises, as those cases that permit recovery based on deficiencies in the insurer’s investigation generally do so when the conduct is coupled with the insurer’s breach of its duty to defend or indemnify its insured.
While this decision generally favors insurers, the court’s analysis recognizes that even if the failure to properly investigate a claim does not give rise to a separate cause of action, the conduct can still be evidence of bad faith. The court cautioned that its holding “should not create an incentive for insurers to fail to investigate claims. Insurers disclaiming their duty to defend or indemnify under the policy, subsequent to a failure to investigate, risk extracontractual liability for consequential economic and noneconomic losses.” Connecticut also provides a statutory remedy against insurers with a “general business practice” of improper investigations. See Connecticut Unfair Insurance Policies Act (CUIPA), Gen. Stat. § 38a-815 et seq. and Connecticut Unfair Trade Practices Act (CUTPA), Gen. Stat. § 42-110a et seq.
The court’s decision reflects that an independent basis for bad faith liability was not warranted in this context. As the court explained, “imposing liability for bad faith investigation … would open a new avenue for the litigation of claims that, by definition, are outside of the policy's coverage, and burden our courts with litigation on peripheral issues. … to the extent that the rule would incentivize insurers to investigate meritless claims, these costs would be passed on to all consumers of commercial general liability policies.”