Brown v. Employer's Reinsurance Corp.

• Decision Date: 29 March 1988
• Docket Number: No. 13151,13151
• Citation: 539 A.2d 138,206 Conn. 668
• Court: Connecticut Supreme Court
• Parties: Michael F. BROWN v. EMPLOYER'S REINSURANCE CORPORATION.

Page 138

539 A.2d 138

206 Conn. 668

Michael F. BROWN v. EMPLOYER'S REINSURANCE CORPORATION.

No. 13151.

Supreme Court of Connecticut.

Argued Dec. 11, 1987.

Decided March 29, 1988.

John F. McKenna, Hartford, for appellant (plaintiff).

Duncan B. Hume, Stamford, for appellee (defendant).

Before ARTHUR H. HEALEY, SHEA, CALLAHAN, GLASS and HULL, JJ.

CALLAHAN, Associate Justice.

The plaintiff, Michael F. Brown, has filed this appeal from a judgment of the trial court, Susco, J., wherein the court found that the defendant's assured, the K.N.D. Corporation (KND), had materially breached the terms of the libel insurance policy issued by the defendant, Employer's Reinsurance Corporation (Employer's), and consequently, that the plaintiff could not recover from the defendant under General Statutes § 38-175. ¹ The principal issue raised by the plaintiff is whether the trial court erred in finding that KND had materially breached its insurance contract with the defendant by failing to appear at trial and at the hearing in damages in the prior libel action brought by Brown against KND and Wilber Smith, a KND radio show host, who allegedly libeled the plaintiff on the air. Brown v. K.N.D. Corporation, Superior Court, judicial district of Hartford-New Britain at Hartford, Docket No. CV 80 0242122S (1980).

The relevant facts are not in dispute. In early 1980, Michael F. Brown brought a libel action against KND and its employee Wilber Smith for damages he sustained as a result of the alleged defamatory statements made during a radio broadcast by Smith. At the time KND maintained a libel insurance policy that had been issued by the Employer's Reinsurance Corporation. In the event an action was brought against KND that involved the policy, KND was required to notify Employer's immediately and to forward copies of all process served upon KND. The policy also required KND to employ counsel for the defense of such a suit and to file proper pleadings within the time required by law. Under the terms of the policy, the defendant would reimburse KND only after it had paid any loss incurred that was covered by the policy.

In accordance with these obligations, KND retained an attorney who entered an appearance on behalf of KND and began filing the appropriate responsive pleadings. During the course of this litigation, KND was unable to pay its creditors and was subsequently dissolved as a corporation under state law on November 5, 1981. On September 16, 1983, KND was defaulted by the trial court for its failure to appear at trial. At the close of the trial that proceeded against Smith, the trial court rendered a judgment in favor of the defendant Smith. ² On June 25, 1984, after a hearing in damages against KND as a result of its default, at which KND again failed to appear, the trial court rendered a final judgment against KND in the amount of $95,000.

After unsuccessful attempts to execute upon the judgment, Brown initiated the present action against the defendant under the provisions of Connecticut's "direct action" statute, General Statutes § 38-175. The defendant responded by asserting, inter alia, a special defense which alleged that KND had materially breached the contract of insurance by failing to appear at trial and at the hearing in damages. Consequently, the defendant alleged that because KND could not have maintained an action for reimbursement under the insurance contract, the plaintiff could not recover under § 38-175.

The trial court, Susco, J., agreed and held that KND had in fact materially breached its contract by failing to appear at trial and defend the action, thus preventing a recovery by the plaintiff under § 38-175. The plaintiff on appeal argues that the trial court erred in (1) concluding that KND had materially breached the contract of insurance, and (2) finding that KND was not legally excused from performing its contract obligations under the principles of waiver, estoppel and laches. ³ We find no error.

I

The principal claim raised by the plaintiff is that the trial court erred in concluding that KND had materially breached the terms of the insurance policy by failing to appear at trial and at the hearing in damages, by failing to defend the action, and by failing to notify the defendant of its decision not to defend the action. The gravamen of the plaintiff's claim is that the court's conclusion is not supported by the evidence and is, in fact, contrary to the "undisputed or admitted" facts that appear on the record. We disagree.

General Statutes § 38-175 provides in pertinent part: "Each insurance company which issues a policy to any person, firm or corporation, insuring against loss or damage on account of ... damage to the property of any person, ⁴ for which loss or damage such person, firm or corporation is legally responsible, shall, whenever a loss occurs under such policy, become absolutely liable, and the payment of such loss shall not depend upon the satisfaction by the assured of a final judgment against him for loss, damage or death occasioned by such casualty." In addition, the statute provides that when a final judgment is rendered against the assured for loss or damage covered by the policy and the judgment remains unsatisfied for more than thirty days, then "the judgment creditor shall be subrogated to all the rights of the defendant and shall have a right of action against the insurer to the same extent that the defendant in such action could have enforced his claim against such insurer had such defendant paid such judgment." "[T]he legislature's purpose in enacting the 'direct action' statute was to remedy '[t]he unfairness to the assured of contracts of insurance' with provisions that the insurer should be liable only in cases where the assured had actually paid a judgment obtained against him. Guerin v. Indemnity Ins. Co., 107 Conn. 649, 652, 142 A. 268 (1928). 'The intention of the Act is to give the injured person the same rights under the policy as the assured....' Id., 653 ." Verdon v. Transamerica Ins. Co., 187 Conn. 363, 369, 446 A.2d 3 (1982). Thus, the statute protects those injured by judgment proof insureds, by subrogating the injured party or judgment creditor to the rights of the assured against the insurer. Bourget v. Government Employees Ins. Co., 287 F.Supp. 108, 110 (D.Conn.1968), rev'd on other grounds, 456 F.2d 282 (2d Cir.1972).

A party subrogated to the rights of an assured under § 38-175 obtains no different or greater rights against the insurer than the insured possesses and is equally subject to any defense the insurer may have against the assured under the policy. Arton v. Liberty Mutual Ins. Co., 163 Conn. 127, 139-40, 302 A.2d 284 (1972); Commercial Contractors Corporation v. American Ins. Co., 152 Conn. 31, 40, 202 A.2d 498 (1964); Connecticut Savings Bank v. First National Bank & Trust Co., 138 Conn 298, 305, 84 A.2d 267 (1951); Goergen v. Manufacturers Casualty Ins. Co., 117 Conn. 89, 93, 166 A. 757 (1933); Rochon v. Preferred Accident Ins. Co., 114 Conn. 313, 315-16, 158 A. 815 (1932). Consequently, in order for one to proceed under § 38-175, the insured must have had a viable statutory or contractual claim against the insurer; Cook v. Collins Chevrolet, Inc., 199 Conn. 245, 255, 506 A.2d 1035 (1986); and where the insurer has raised the special defense that the insured materially breached the provisions of the contract of insurance, the judgment creditor suing under § 38-175 bears the burden of proving that the insured complied with his or her obligations contained therein. O'Leary v. Lumbermen's Mutual Casualty Co., 178 Conn. 32, 38, 420 A.2d 888 (1979); Arton v. Liberty Mutual Ins. Co., supra, 163 Conn. 135, 302 A.2d 284; Manthey v. American Automobile Ins. Co., 127 Conn. 516, 519, 18 A.2d 397 (1941). It must also be noted that the insolvency of the insured is irrelevant as far as a plaintiff's rights of subrogation under § 38-175 are concerned. Bourget v. Government Employees Ins. Co., 313 F.Supp. 367, 369 (D.Conn.1970).

Here the contract of insurance specifically imposed upon KND the duty to hire counsel and file the appropriate pleadings within the time required by law in the defense of any action brought against KND that involved the policy. In addition, the contract required that "[i]f the suit is brought to trial, the Assured shall conduct the defense thereof, but the Corporation, at its own election and expense, shall have the right to participate with the Assured in such defense." The policy also imposed a continuing duty on KND to forward to the defendant immediately all copies of process served upon it. There is no dispute that neither KND nor its counsel appeared at trial in September, 1983, or at the hearing in damages conducted in June, 1984. In fact, the limited record below indicates that KND did very little, if anything, with regard to the defense of the suit after the corporation's dissolution in November, 1981. It appears that KND's decision to walk away from the defense of the suit was a business decision based upon the advice of their attorney that a judgment rendered against the corporation was worthless because the corporation had been dissolved and all of its assets had been sold. There can be no question that KND's abandonment of the defense of the suit prior to trial was a material breach of its obligation under the insurance policy. Accordingly, we find that the trial court did not err in holding that KND materially breached the insurance policy by failing to defend the action at trial.

II

The plaintiff next claims that, in the event the court finds a material breach of the contract, the principles of waiver, estoppel and laches ⁵ should apply to bar the defendant from relying upon KND's breach in order to escape its liability under the policy. In support of these claims the plaintiff argues that, not only did the defendant know approximately eighteen months before trial that KND had neither the...