Standing On Its Own: CT Supreme Court Expands Insurers’ Ability to Sue Another Insurer

In Travelers Casualty & Surety Co. of America v. The Netherlands Insurance Co., 2014 Conn. LEXIS 262, 312 Conn. 714 (Aug. 5, 2014), the Connecticut Supreme Court broadened an insurance company’s ability to sue another insurance company pursuant to the state’s declaratory judgment statute.

The coverage dispute arose as follows.  Lombardo Brothers Mason Contractors was hired by the state of Connecticut to perform masonry for the construction of the law library for the University of Connecticut School of Law.  The masonry work was performed from 1994 through 1996.  In 2008, the state filed suit against Lombardo and other entities seeking $18 million for faulty workmanship resulting in water intrusion and other property damage.  Travelers covered Lombardo from 1994 through 1998, Lumbermen’s covered Lombardo from 1998 through 2000, and Netherlands and Peerless provided coverage from 2000 through 2006.  Lumbermen’s, Netherlands, and Peerless refused to participate in the defense of Lombardo.  Travelers filed a declaratory judgment action against them asserting, among other things, that the other insurers were obligated to pay their pro rata share of defense costs.  The trial court denied Netherlands’ motion to dismiss, finding that Netherlands owed a duty to defend and was obligated to pay its pro rata share.

On appeal, the Connecticut Supreme Court affirmed, in pertinent part, the trial court’s denial of Netherlands’ motion to dismiss.  The Supreme Court held that Travelers had standing to file its declaratory judgment action based on a theory of “classical aggrievement,” i.e., (1) the party claiming aggrievement must demonstrate a specific, person, and legal interest in the subject matter of the challenged action, and (2) the party claiming aggrievement must demonstrate that the specific, personal, and legal interest has been specially and injuriously affected by the challenged action.  In particular, Travelers was aggrieved here based on having paid all of the insured’s defense costs and had a practical interest in a declaration of Netherlands’ obligations under the Netherlands Policy.  The Supreme Court stated that standing required no more than a claim of injury that the party has suffered or is likely to suffer based on a legal interest specific to Travelers.  Travelers had thus established its legal interest on the duty to defend question and also its injury with regard to payment of approximately $500,000 in defense fees.  The Supreme Court explained:  “[T]he controversy is real and ongoing, with Travelers’ claim of injury more than colorable, given the nature of this coverage dispute and its averment that it ‘is bearing more than its fair share of Lombardo’s defense’ because of Netherlands’ refusal to contribute to Lombardo’s defense.”

Further, the standing issue was clarified to the extent that an insurer can now file a declaratory judgment in Connecticut even though it is not a party to or a third-party beneficiary of another’s insurance policy.  The Superme Court adopted the Tenth Circuit Court of Appeals’ ruling in United Services Automobile Association v. Royal-Globe Insurance Co., 511 F.2d 1094 (10th Cir. 1975), wherein the court there found that a suit for a duty to defend was definite and substantial, and each party’s interests were adverse, for the proposition that one insurer had standing to sue another.

The Connecticut Supreme Court’s ruling acknowledges an insurer’s ability to litigate priority of coverage disputes or disputes with a recalcitrant insurer, despite that the plaintiff-insurer has no contract or privity with the defendant-insurer.  Procedurally, defendant-insurers have often used the standing defense as a shield against other insurers’ declaratory judgment actions.  At least in Connecticut, this procedural tool is now significantly weakened.