Connecticut’s trend of liberal, policyholder-oriented insurance coverage decisions continued apace with the recent Connecticut Supreme Court decision, Nash Street, LLC v. Main Street America Assurance Company et al.  Confronting an issue of first impression, the Court held that, when there is no Connecticut appellate authority interpreting a particular policy provision, but when courts in other jurisdictions have interpreted the same provision to create a possibility of coverage, or even when they have interpreted the provision differently, an insurer may nonetheless have a duty to defend an insured in Connecticut based simply on the legal uncertainty that existed at the time the defense was tendered.

In Nash Street, the plaintiff property owner retained a contractor to repair a Milford home that was damaged following Hurricanes Sandy and Irene. The work required the house to be lifted and temporarily placed onto cribbing. The contractor retained a subcontractor to lift the house and perform concrete work on the foundation. As the subcontractor was lifting the house in preparation for the foundation work, the house ‘‘shifted off the supporting cribbing and collapsed.’’ The only work being performed on the house at the time was related to the lifting. The plaintiff sued the contractor for the work of its subcontractor. The contractor tendered the defense to its insurer pursuant to a commercial general liability policy.

The insurer declined to defend, citing two of the policy’s ‘‘business risk’’ exclusions—k (5) and (6). Under exclusion k (5), the policy excluded coverage for property damage to ‘‘[t]hat particular part of real property on which you or any contractor or subcontractor working directly or indirectly on your behalf is performing operations, if the ‘property damage’ arises out of those operations . . . .’’ Under exclusion k (6), the policy excludes coverage for property damage to ‘‘[t]hat particular part of any property that must be restored, repaired or replaced because ‘your work’ was incorrectly performed on it.’’ Following the coverage denial, the plaintiff was awarded a $558,007.16 default judgment against the contractor. The plaintiff then sued the insurer under the direct action statute (Conn. Gen. Stat. § 38a-321) to collect the judgment.

The insurer argued that exclusions k (5) and (6) squarely applied to the facts in this case as ‘‘that particular part’’ of the property on which the subcontractor was performing operations was the whole house, since the whole house was being lifted. The plaintiff, on the other hand, argued that whether the exclusions actually applied was not relevant to whether the duty to defend was triggered. Rather, the question was whether there was a possibility that the insurer had a duty to defend. On that front, the plaintiff argued, in the alternative, that 1) the exclusions were either ambiguous and, given the ambiguity, coverage should be decided in its favor, or, 2) if they were not ambiguous, they should be interpreted narrowly so as not to deny coverage to the insured.

The trial court found in favor of the insurer on summary judgment, determining that the exclusions were clear and that they precluded coverage. The plaintiff appealed.

In a unanimous opinion, the Supreme Court did not decide the ultimate question of whether the exclusions actually applied. Rather, it examined the law of legal uncertainty, and whether the insurer was required to defend its insured when the law was unclear and there remained a possibility that coverage could be owed at the time the contractor tendered the defense to its insurer. The Court noted just how broad the duty to defend is in Connecticut and how, if an “allegation of the complaint falls even possibly within the coverage, then the [insurer] must defend the insured.” According to the Court, “all that is necessary to trigger an insurer’s duty to defend is a possibility of coverage” at the time of the tender of defense and that “any uncertainty as to whether an alleged injury is covered works in favor of providing a defense to an insured, and uncertainty may be either factual or legal.”

The reason the Court did not proceed to interpret exclusions k (5) and (6) and apply them to the underlying circumstances of the case, was its conclusion that it was not necessary to determine this ultimate question where the issue was simply whether there was a duty to defend. As the Court described it, the “inquiry is not whether exclusions k (5) and (6) actually preclude coverage; nor does this case require us to determine conclusively what those exclusions mean;” instead, the  pertinent question is “whether there was any possibility of coverage at the time [the contractor] tendered defense to [its insurer].”

The Court noted the difference between factual uncertainty, i.e. whether the facts alleged in the complaint trigger coverage, versus legal uncertainty, i.e. whether the law itself can be applied to a certain set of facts to determine whether coverage is owed given a lack of Connecticut appellate authority on the subject. In deciding that the requisite legal uncertainty existed concerning the interpretation of exclusions k (5) and (6), the Court looked to cases from other jurisdictions interpreting those exclusions and found that they have been interpreted in many different ways, sometimes narrowly, sometimes broadly, or that they have been found to be ambiguous.

Given this conflict in other jurisdictions, and the lack of prior Connecticut appellate authority on the subject, the court found that the insurer “was presented with a legal uncertainty with regard to its duty to defend. Because uncertainty works in favor of providing a defense to an insured, exclusions k (5) and (6) did not relieve the insurer of its duty to defend the contractor here.

The Supreme Court’s opinion does give specific guidance to insurance carriers confronted with this situation. The insurer should agree to defend its insured at the time the defense is tendered and file a declaratory judgment action to determine whether coverage actually exists. As Justice McDonald, the author of the opinion, observed, “[t]his approach incentivizes insurers to honor the contractual duty to defend insureds in cases in which there is a genuine dispute as to coverage arising from legal uncertainty.” On the other hand, “[i]f the inquiry in this procedural posture were whether there was actually coverage, insurers could decline to defend, wait for judgment or settlement in the underlying action between the plaintiff and the insured, and then litigate the question of indemnity, thereby effectively avoiding the duty to defend.” Justice McDonald highlights the untoward effect of pursuing such a course: it “would deprive insureds of a bargained for contractual right for which insureds pay a premium.”

Justice McDonald goes on to note that the path for an insurer to defend against a claim for a breach of a duty to defend requires the insurer to “establish that there is no possibility that coverage existed and no legal uncertainty regarding the existence of such coverage.”

Of course, insurers may hope that construction firms and contractors will refrain from contesting a decision made by an insurer who will not provide a defense. But just because an insurer may say it has no obligation to defend does not mean that there is no obligation to defend. As demonstrated in Nash Street, if there is just some uncertainty as to how the Connecticut courts would interpret a policy provision pertinent to coverage in the matter, the insurer would have a duty to defend. And from the insurer’s perspective, it must establish that there is no uncertainty as to whether coverage applies if it wishes to avoid its defense obligation.  

The implications of this decision for policyholders, claimants, and insurance carriers are vast.

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