Fireman's Fund Ins. Co. v. TD Banknorth Ins. Agency, Inc.

• Citation: 72 A.3d 36,309 Conn. 449
• Decision Date: 30 July 2013
• Docket Number: No. 18796.,18796.
• Court: Supreme Court of Connecticut
• Parties: FIREMAN'S FUND INSURANCE COMPANY v. TD BANKNORTH INSURANCE AGENCY, INC.

309 Conn. 449

72 A.3d 36

FIREMAN'S FUND INSURANCE COMPANY

v.TD BANKNORTH INSURANCE AGENCY, INC.

No. 18796.

Supreme Court of Connecticut.

Argued Feb. 5, 2013.

Decided July 30, 2013.

Frederick M. Klein, for the appellant (defendant).

Christopher B. Weldon, with whom, on the brief, was Darren P. Renner, for the appellee (plaintiff).

James Andriola filed a brief for United Policyholders as amicus curiae.

Coleman C. Duncan III and Laura Pascale Zaino, Hartford, filed a brief for the National Association of Subrogation Professionals as amicus curiae.

ROGERS, C.J., and NORCOTT, PALMER, ZARELLA, McDONALD and VERTEFEUILLE, Js.

ZARELLA, J.

This case comes before us upon our acceptance of a certified question from the United States Court of Appeals for the Second Circuit, arising within the context of a dispute between the defendant, TD Banknorth Insurance Agency, Inc. (TD Banknorth), and the plaintiff, Fireman's Fund Insurance Company (Fireman's Fund), pertaining to a liability insurance policy. Pursuant to General Statutes § 51–199b,¹ we accepted certification with respect to the following question: “Are insurance policy deductibles subject to Connecticut's make whole doctrine?” ²Fireman's Fund Ins. Co. v. TD Banknorth Ins. Agency, Inc., 644 F.3d 166, 172–73 (2d Cir.2011). Because it does not appear that Connecticut expressly has adopted the make whole doctrine, we deem it appropriate to reformulate the question, pursuant to § 51–199b (k),³ in the following manner: (1) Is the make whole doctrine recognized as the default rule under Connecticut law; and, if so, (2) does the make whole doctrine apply to insurance policy deductibles under Connecticut law? We conclude that (1) the make whole doctrine is the default rule under Connecticut law but that (2) the doctrine does not apply to insurance policy deductibles.

In certifying the question to us, the Second Circuit Court of Appeals set forth the following relevant facts and procedural history. “In 2005 Haynes Construction Company [Haynes] began work on a housing development and retained TD Banknorth as its agent to arrange insurance. TD Banknorth procured a [b]uilder's [r]isk insurance policy from Peerless Insurance Company [Peerless] and an [i]nland [m]arine insurance policy from Hartford Insurance Company [Hartford]. In February 2006, a fire destroyed a house being built on Lot 14 of the Haynes development. Peerless denied coverage of the loss because Lot 14 was not listed in its [b]uilder's [r]isk policy—an error of omission by TD Banknorth. Haynes thereupon claimed against TD Banknorth for its negligent omission of Lot 14.

“To protect against the risk of such negligence, TD Banknorth had purchased [e]rrors [and] [o]missions coverage [ (errors and omissions contract) from] Fireman's Fund.... Fireman's Fund undertook to pay on TD Banknorth's behalf any sums TD Banknorth became ‘legally obligated to pay as damages because of a negligent act, error or omission in the performance of [TD Banknorth's] professional services.’ The [errors and omissions] [c]ontract had a deductible of $150,000 per claim. TD Banknorth gave timely notice of the loss to Fireman's Fund.

“In July 2006, TD Banknorth and Fireman's Fund settled with Haynes for $354,000. Of that, TD Banknorth contributed $150,000 (its single claim deductible) and Fireman's Fund contributed the $204,000 remainder. In the settlement, Haynes assigned its rights against Peerless and Hartford to Fireman's Fund and TD Banknorth collectively.

“TD Banknorth—and Fireman's Fund as subrogee—then proceeded against Peerless and Hartford for the $354,000. In the ensuing settlement, Peerless paid $88,000 and Hartford paid [$120,000] in exchange for complete releases. TD Banknorth and Fireman's Fund ‘reserve[d] all rights that they may have against each other relating to the allocation of the [settlement funds] held in escrow.’ The $208,000 was deposited in an escrow account.

“In March 2008, Fireman's Fund commenced this action against TD Banknorth in the [United States District Court for the] District of Connecticut, seeking a declaratory judgment that it was entitled to all of the escrow funds. Fireman's Fund claimed $10,000 in defense costs (incurred on TD Banknorth's behalf) in addition to the $204,000 it had paid Haynes: a total of $214,000. TD Banknorth counterclaimed for a declaratory judgment that, under Connecticut's make whole doctrine, it was entitled to recover its $150,000 deductible from the escrow funds.

“Both parties moved for summary judgment. The [D]istrict [C]ourt found that the subrogation clause in the [errors and omissions] [c]ontract abrogated Connecticut's make whole doctrine ... and accordingly granted summary judgment in favor of Fireman's Fund.” (Footnote omitted.) Fireman's Fund Ins. Co. v. TD Banknorth Ins. Agency, Inc., supra, 644 F.3d at 168.

Thereafter, TD Banknorth appealed to the Second Circuit Court of Appeals. Relying on our decision in Wasko v. Manella, 269 Conn. 527, 533–34, 541, 849 A.2d 777 (2004), for the proposition that boilerplate subrogation clauses are inadequate to abrogate default common-lawsubrogation rules, the Second Circuit concluded that the District Court incorrectly determined that the terms of the errors and omissions contract abrogated the make whole doctrine. Fireman's Fund Ins. Co. v. TD Banknorth Ins. Agency, Inc., supra, 644 F.3d at 169–70. In addition, the Second Circuit rejected Fireman's Fund's alternative argument that, under Connecticut law, the make whole doctrine applied only to insurance for first party losses rather than third party liability. See id., at 171. With respect to Fireman's Fund's argument that the make whole doctrine does not apply to deductibles, however, the Second Circuit determined that “no statutory or precedential support for either position” could be found in Connecticut law. Id., at 172. Accordingly, the Second Circuit certified the question to this court under § 51–199b (d), and we accepted certification.

Relying on the make whole doctrine, TD Banknorth claims that, before Fireman's Fund may assert any right of equitable subrogation against a responsible third party, TD Banknorth is entitled to recover $150,000, which represents the amount of its deductible that it paid to settle the Haynes claim. Fireman's Fund, by contrast, maintains that the deductible is not part of the loss to which the make whole doctrine applies and that to conclude otherwise would essentially convert the policy into one without a deductible, thereby providing TD Banknorth with an unbargained for windfall at the expense of Fireman's Fund. We agree with the position advanced by Fireman's Fund.

The resolution of the questions before us presents a question of law, over which our review is plenary. See, e.g., DeLeo v. Nusbaum, 263 Conn. 588, 593, 821 A.2d 744 (2003); see also New London County Mutual Ins. Co. v. Nantes, 303 Conn. 737, 753, 36 A.3d 224 (2012) (determination of rights and liabilities under insurance policy presents question of law).

I

We begin with the threshold question of whether the make whole doctrine should apply in Connecticut, because it has not heretofore been addressed expressly by this court. The doctrine arises in the context of legal or equitable subrogation. “In its simplest form, subrogation allows a party who has paid a debt to step into the shoes of another (usually the debtee)to assume his or her legal rights against a third party to prevent that party's unjust enrichment.” (Internal quotation marks omitted.) Rathbun v. Health Net of the Northeast, Inc., 133 Conn.App. 202, 211, 35 A.3d 320, cert. granted, 304 Conn. 905, 38 A.3d 1201 (2012). The common-law doctrine of legal or equitable subrogation therefore enables an insurance company that has made a payment to its insured to substitute itself for the insured and to proceed against the responsible third party. See, e.g., Allstate Ins. Co. v. Mazzola, 175 F.3d 255, 258 (2d Cir.1999); Albany Ins. Co. v. United Alarm Services, Inc., 194 F.Supp.2d 87, 93 (D.Conn.2002).

“As we stated in Westchester Fire Ins. Co. v. Allstate Ins. Co., [236 Conn. 362, 372, 672 A.2d 939 (1996) ], insurers that are obligated by a preexisting contract to pay the losses of an insured proceed in a subsequent action against the responsible party under the theory of equitable subrogation, and not conventional subrogation.” (Emphasis omitted.) Wasko v. Manella, supra, 269 Conn. at 533, 849 A.2d 777. In such cases, in the absence of express contractual language indicating an intention to depart from the default rules, “[t]he contract ... is not the source of the right, but rather is a reference to those rights that may exist at law or in equity.” (Internal quotation marks omitted.) Id.; see also id., at 532, 849 A.2d 777 (“[t]he right of [legal or equitable] subrogation ... does not arise from any contractual relationship between the parties, but takes place as a matter of equity, with or without an agreement to that effect” [internal quotation marks omitted] ). Thus, although a “right of true [equitable] subrogation may be provided for in a contract ... the exercise of the right will ... have its basis in general principles of equity rather than in the contract, which will be treated as being merely a declaration of principles of law already existing.” (Internal quotation marks omitted.) Id., at 533–34, 849 A.2d 777.

“The object of [legal or equitable] subrogation is the prevention of injustice. It is designed to promote and to accomplish justice, and is the mode [that] equity adopts to compel the ultimate payment of a debt by one who, injustice, equity, and good conscience, should pay it.” (Internal quotation marks omitted) Id., at 532, 849 A.2d 777. Subrogation further promotes equity by preventing an insured from receiving more than full indemnification as a result of recovering from both the wrongdoer and the insurer for the same loss, which would unjustly enrich the insured. See, e.g., 16 L. Russ & T....