Connecticut Court Takes Up Meaning of “Suit” within CGL
February 10, 2014
In Recall Total Information Management, Inc. v. Federal Ins. Co., 2014 WL 43529, No. 34716 (Conn. App. Ct. 2014), the court was asked to interpret the meaning of the term “suit” under the general liability policy. On appeal from a grant of summary judgment in favor of the insurers, insureds argued that a negotiated settlement constituted a suit for which insurer owed a duty to defend.
In 2003, IBM contracted for Recall to transport and store various mediums of electronic media. Such media included tapes containing the personal data, like social security numbers, birthdates, and contact information, of nearly 500,000 IBM employees. In 2007, Recall entered into a subcontract with Ex Logistics whereby Ex Log would provide the transportation services of IBM's media. The subcontract required Ex Log to maintain a CGL policy in the amount of $2 million naming Recall as an additional insured, which Ex Log issued.
During a transport one year later, 130 tapes containing such data fell from an Ex Log vehicle and were never recovered. Following the incident, IBM immediately made efforts to mitigate any damage to its employees. Those efforts included notifying potentially affected persons and establishing a call center to address any concerns and questions about the incident. In addition, IBM provided those potentially affected with one year of free credit monitoring to combat the possibility of identity theft resulting from the lost tapes. Together, the remedial action taken by IBM totaled over $6 million, for which it entered into a negotiated settlement with Recall to recover.
When Recall sought indemnification from Ex Log for the total amount of damages claimed by IBM, Ex Log filed a claim under its CGL policy. Federal Insurance Company declined to defend and indemnify the insured. Thereafter, Recall and Ex Log settled with IBM. The settlement included a promissory note from Ex Log to Recall for nearly $6.5 million and an assignment of all rights. Subsequently, Recall brought this action against Federal for breach of an insurance contract. The trial court ruled that Federal did not have a duty to defend and this appeal followed.
On appeal, Recall argued that nearly two years' worth of settlement negotiations with IBM and Ex Log amounted to a suit or other dispute resolution proceeding, for which Federal had a duty to defend. The court disagreed, restating the bedrock principle of contract law: where a plain reading of the policy leaves no room for ambiguity, a court will not “torture” words to fulfill a plaintiff's burden of proving such an ambiguity.
“Suit” is a defined term in the CGL policy. Here, the policy defined “suit” as a “civil proceeding in which damages, to which the insurance applies are sought… [and] includes arbitration or other dispute resolution proceeding…to which the insured must submit or does submit with our consent.”
According to the court, Recall's interpretation of the term to include negotiated settlements would create internal inconsistency within the other provisions of the policy. For example, noted the court, the policy states that the insured must notify the insurer of both suits and claims; however, the insurer only has a duty to defend against suits. Moreover, the Supreme Court of Connecticut has ruled that a demand letter from a possible plaintiff in a personal injury suit is not a suit, but merely a claim, which has no immediate legal effect.
Thus, the court stated that mere negotiations following a demand letter fell short of the term “suit” as intended by the parties under the policy. Moreover, even if Recall's meaning of “suit” was adopted, the court's holding would not change, as the policy requires that the insurer consent to the “suit” or civil proceeding, and Federal did not consent to the negotiations by and between Recall and IBM. Accordingly, the court ruled that the duty to defend was not triggered.
Editor's Note: The Connecticut Appeals Court correctly noted that “suit” is a defined term in the general liability policy, and unless the allegations against the insured rise to meet that definition, the policy does not provide coverage. It is also worth mentioning that the court was asked to decide whether the data loss involved here constituted property damage under the policy. We are asked this type of question often. The court soundly ruled that data, such as media tapes containing sensitive personal information, is intangible property, the loss of which is expressly removed from coverage under the policy.