Broadly Interpreted Duty to Defend
January 9, 2017
The town of Monroe Connecticut brought action against its E&O insurer for a declaratory judgment that the insurer owed a duty to defend against allegations of negligent misrepresentation. The developer alleged that Monroe negligently misrepresented that they would locate police communications systems on a tower if the developer obtained necessary approvals. Monroe claims that the court erred in holding that the allegations fell within an exclusion in the applicable policy and, therefore, that the insurer had no duty to defend the town. This case is Town of Monroe v. Discover Prop. & Cas. Ins. Co., 169 Conn. App. 644 (2016).
In 2005 Monroe purchased a Public Entity Errors and Omissions Liability Policy from Discover Property and Casualty. In 2006 an action was issued against Monroe alleging that the town had agreed to assist in the “development and implementation of a wireless telecommunications tower.” And had harmed the defendant (Bellsite Development) by abandoning the agreement. The town of Monroe requested defense and indemnity from Discover Property and Casualty, its insurer. The insurer denied coverage. The case was decided for the defendant, and reversed on appeal.
Insurance policies are constructed so that the obligation of the insurer to defend does not hinge on whether the injured party has a successful cause of action against the insured, but instead on whether the complaint states facts that bring the injury within coverage. If the allegations fall within an exclusion, though, there is no duty to defend.
The policy in question included an exclusion from coverage that stated “any claim. . . based upon, arising out of, directly or indirectly resulting form, or in consequence of construction, architectural or engineering contracts or any other procurement contract or (2) for which the insured has assumed the liability in a contract or agreement.” The agreement also stated that “this exclusion does not apply to liability for damages that the insured would have in the absence of the contract or agreement.”
The plaintiff, the town of Monroe, argues that the court erred in finding that allegations of negligent misrepresentation in the complaint fell within the exclusion, and that the allegations could not support finding an enforceable contract or a procurement contract of any kind, and therefore it could not be proved that the negligent misrepresentation cause of action arose out of that contract. They also argue that even if there is evidence of a contract, the negligent misrepresentation claim is a tort claim “separate and independent from” the contractual claims and coverage should not necessarily be precluded by the contract exclusion and thus there would be a duty to defend.
Defendants argue that the negligent misrepresentation claim did arise out of a breach of contract claim because the negligent misrepresentation arose out of business transactions and the underlying transaction that brought the negligent misrepresentation to light arose out of the contract. The defendant also argues that because the allegedly breached contract was the sole basis alleged in the complaint for the misrepresentation, the claim did not trigger the duty to defend.
To determine the correct answer the complaint language and the policy language must be compared. The court decided that because the present case facts make it possible that the allegations in the negligent misrepresentation claim set forth a claim that is outside of the terms of the exclusion, the underlying complaint triggered the duty to defend. The judgement was reversed and further proceedings denied according to law.
Editor's Note: The Appellate Court of Connecticut had to make a difficult decision based largely on previous case law. It is important that insurers take their duty to defend very seriously as it is a subject that is very widely interpreted throughout the insurance industry. It is not wise for an insurer to deny to defend because even if an allegation of the complaint falls even possibly within coverage then the insurer must defend the insured.