Capstone Bldg. Corp. v. Am. Motorists Ins. Co.

Decision Date11 June 2013
Docket NumberNo. 18886.,18886.
Citation67 A.3d 961,308 Conn. 760
PartiesCAPSTONE BUILDING CORPORATION v. AMERICAN MOTORISTS INSURANCE COMPANY. Capstone Development Corporation v. American Motorists Insurance Company.
CourtConnecticut Supreme Court

OPINION TEXT STARTS HERE

Jeffrey J. Vita, Hamden, and David G. Jordan, Hamden, for the appellants (plaintiff in each case).

Tom E. Ellis, with whom were Susan Evans Jones and, on the brief, Deborah Etlinger, Hartford, for the appellee (defendant in both cases).

Michael J. Donnelly, Hartford, and Patrick J. Wielinski, pro hac vice, filed a brief for the American Subcontractors Association as amicus curiae.

Wystan M. Ackerman, Hartford, filed a brief for the Property Casualty Insurers Association of America as amicus curiae.

Joseph K. Scully, Hartford, filed a brief for the American Insurance Association as amicus curiae.

ROGERS, C.J., and NORCOTT, PALMER, ZARELLA, EVELEIGH, HARPER and VERTEFEUILLE, Js.*

ROGERS, C.J.

This case, on certification from the United States District Court for the Northern District of Alabama, Southern Division (District Court), pursuant to General Statutes § 51–199b,1 presents questions regarding the interpretation of commercial general liability insurance policies under Connecticut law. The plaintiffs, Capstone Building Corporation (Capstone Building) and Capstone Development Corporation (Capstone Development),2 served, respectively, as the general contractor and the project developer for construction of the Hilltop student housing complex (Hilltop) at the University of Connecticut (UConn). UConn procured a commercial general liability policy for the Hilltop project, which insured the plaintiffs and their work. The defendant, American Motorists Insurance Company (AMICO), is the issuing insurer's successor in interest.3 The District Court determined that the resolution of the parties' claims depended on propositions of law for which there was no controlling precedent in this court's decisions.

We accepted the following three questions for our consideration, and answer them accordingly: “1. Whether damage to a project contracted to be built, which was caused by defective construction or faulty workmanship associated with the construction project, may constitute ‘property damage’ resulting from an ‘occurrence,’ triggering coverage under a commercial general liability insurance policy?”

We conclude that allegations of unintended defective construction work by a subcontractor that damages nondefective property may constitute an “occurrence” resulting in “property damage” under certain circumstances. We also hold, however, that defective work standing alone or repairs to that defective work do not constitute property damage and, therefore, are not covered under the particular insurance policy in the present case. Finally, we hold that work by a contractor, as opposed to a subcontractor, is excluded from coverage under the terms of the policy.

“2. Can an insurer's bad faith conduct in investigating an insurance claim provide a basis for a cause of action for bad faith under Connecticut law?”

We conclude that under the plain language of the insurance policy in the present case, we do not recognize a cause of action based on the insurer's failure to conduct a discretionary investigation of claims for coverage.

“3. Does Alderman v. Hanover Ins. Group, 169 Conn. 603 (1975), apply to pre-suit settlement cases wherein the insurer, under a commercial general liability insurance policy, wrongfully denies coverage, but where only some of the underlying claims should have been covered under the policy?”

We conclude that, in global settlements encompassing multiple claims, the insured has the burden of proving that the settlement is reasonable in proportion to claims that, considered independently, the insurer had a duty to defend.

I

The District Court has provided us with the following facts relevant to resolving these questions.4Capstone Building Corp. v. American Motorists Ins. Co., United States District Court, Docket No. 2:08–CV–00513–RDP (N.D.Ala. September 22, 2011). On June 2, 2000, Capstone Development entered into an agreement with UConn to coordinate and supervise construction at Hilltop. Pursuant to the agreement, Capstone Building would serve as the general contractor for the project. The cost of the project was not to exceed $39,325,000. The contract between the plaintiffs and UConn contained provisions governing, inter alia, insurance and the resolution of disputes arising out of the project. The contract required UConn to procure [l]iability insurance providing coverage not less than a[c]ommercial [g]eneral [l]iability insurance policy and insuring [itself], the [s]tate of Connecticut, the Design/Builder, Subcontractors of all tiers and such other persons or interest as [UConn] may designate in connection with the performance of the work ... such that the total available limits to all insureds combined will not be less than $2,000,000 per occurrence and $5,000,000 aggregate....”

Accordingly, UConn procured an owner controlled insurance program commercial general liability policy (policy) from AMICO'spredecessor in interest.5 The commercial general liability policy is the standardized form used in the construction business, and tracks the language of the 1986 revisions by the Insurance Services Office, Inc.6 The policy provides that [a]ny entity you [i.e., the Named Insured] are required in a written contract ... to name as an insured (the ‘Additional Insured’) is an Insured but only with respect to liability arising out of ‘your work’ for the Additional Insured, or acts or omissions of the Additional Insured in connection with the general supervision of ‘your work.’ The policy's definition of [y]our work’ includes [w]ork or operations performed by you or on your behalf....” 7 The policy's general insuring provision covers damages resulting from “bodily injury” or “property damage” if the bodily injury or property damage is caused by an “occurrence” that takes place in the “coverage territory” and occurs during the “coverage period.” 8 We discuss these terms as they relate to the certified question in more detail later in this opinion.

The project was completed in August, 2001, and the project's architect certified that it complied with the state building and fire safety codes. More than three years later, on September 29, 2004, UConn sent a letter to the plaintiffs regarding alleged defects in the project. See footnote 20 of this opinion. The letter was triggered by the discovery of elevated levels of carbon monoxide in several areas of Hilltop. According to UConn's investigation, the source of the leak “was the individual hot water heaters serving the residential units and the insufficient draft of the exhaust from the heater through the venting system.” In the course of the investigation, UConn identified a number of other “defects and deficiencies” allegedly attributable to the plaintiffs' work. Consequently, UConn prepared to take remediation efforts, including “the installation of direct and separate flues from all third floor hot water heaters, the provision for consistent sizes of piping, the installation of spill switches, the installation of hard-wired carbon monoxide detectors directed to [UConn's] [d]epartment of [p]ublic [s]afety, the replacement or modification of the fan coil units in the two-bedroom residential units, and other potential actions.”

In response, Capstone Building forwarded UConn's letter to AMICO, and demanded that AMICO defend against UConn's claims. AMICO acknowledged receipt of the letter on December 6, 2004, recognizing that UConn had made a claim against Capstone Building for elevated levels of carbon monoxide. Apart from the carbon monoxide issue, however, AMICO's response did not detail UConn's other allegations, except to note [a]dditional defects and deficiencies in the performance [by Capstone Building], its engineers and contractors....” AMICO concluded that UConn's claims were not covered under the policy: “As the liability at issue arises out of [Capstone Building's] own work, including its role as general contractor and heating and plumbing installation, there can be no coverage for this matter for Capstone [Building] under the policy.” 9

Subsequently, on April 4, 2005, Capstone Building filed an action against AMICO's predecessor in interest in the Circuit Court of Jefferson County, Alabama, seeking, inter alia, a declaratory judgment that “the subject insurance policy obligates [AMICO] to provide coverage to [Capstone Building] for [UConn's] claims and contentions against [it].” AMICO removed the case to the District Court on March 31, 2006. Capstone Building Corp. v. Kemper Ins. Co., United States District Court, Docket No. 2:06–CV–639–JHH (N.D.Ala.2006). The District Court dismissed the declaratory judgment claim for failure to join UConn, a necessary party, and dismissed the breach of contract and bad faith claims on ripeness grounds, noting that there was no “suit” under the meaning of the policy when the action was filed.10 In addition, on May 31, 2006, in response to Capstone Building's requests that AMICO review UConn's claims, AMICO sought a declaratory judgment against Capstone Development, denying any responsibility for the claims, which the District Court dismissed for failure to join UConn as a necessary party. American Motorist Ins. Co. v. Capstone Development Corp., Inc., United States District Court, Docket No. 2:06–CV–1031–WMA (N.D.Ala.2006).

Meanwhile, on May 16, 2006, UConn sent the plaintiffs a letter formally requesting their participation in mediation pursuant to the construction contract.11 Upon receipt of the mediation request, Capstone Building again contacted AMICO, demanding its defense at the mediation. AMICO responded on May 31, 2006, asserting, in addition to generic defenses, the pending declaratory judgment action in the District Court and denying any...

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