Connecticut Supreme Court Holds Make Whole Doctrine Does Not Apply to Deductibles

In a recent decision, the Connecticut Supreme Court provided valuable clarification regarding the application of the make whole doctrine in Connecticut. Fireman’s Fund Ins. Co. v. TD Banknorth Ins. Agency, Inc., — A.3d — , 309 Conn. 449 (Conn. July 30, 2013).

The case arose out of an insurance coverage dispute. In 2005, Haynes Construction Company (“Haynes”) filed a claim against TD Banknorth Insurance Agency Inc. (“TD Banknorth”), alleging negligent procurement of insurance in connection with a housing development project. TD Banknorth in turn filed a claim with its insurer, Fireman’s Fund, under an Errors & Omissions policy issued to TD Banknorth by Fireman’s Fund. In 2006, Fireman’s Fund and TD Banknorth settled with Haynes. TD Banknorth contributed its $150,000 deductible to the settlement and Fireman’s Fund contributed the remainder. Fireman’s Fund then brought a subrogation action and recovered $208,000 from the responsible parties, which was deposited into an escrow account.

In 2008, Fireman’s Fund brought suit 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 escrowed funds. 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. The District Court found that the subrogation clause in the E & O contract abrogated Connecticut’s make whole doctrine, and granted summary judgment in favor of Fireman’s Fund. Fireman’s Fund Ins. Co. v. TD Banknorth Ins. Agency, Inc., No. 3:08–cv–364, 2010 WL 420041 (D. Conn. Feb. 1, 2010).

On appeal, the United States Court of Appeals for the Second Circuit held that the contract at issue did not abrogate Connecticut’s make whole doctrine. The Second Circuit further concluded, however, that Connecticut law was silent on the more basic issue of whether Connecticut’s make whole doctrine applies to insurance policy deductibles. Accordingly, the Second Circuit certified the following question to the Connecticut Supreme Court: “Are insurance policy deductibles subject to Connecticut’s make whole doctrine?” Fireman’s Fund Ins. Co. v. TD Banknorth Ins. Agency, Inc., 644 F.3d 166 (2d Cir. 2011).

Because there was no Connecticut case in which the make whole doctrine had been expressly adopted, the Connecticut Supreme Court deemed it appropriate to reformulate the question as follows: (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?

The Court first concluded that the make whole doctrine is the default rule under Connecticut law. In reaching its decision, the Court noted that the make whole doctrine is designed to prevent inequitable results when the amount recoverable from the responsible third-party is insufficient to satisfy both the loss sustained by the insured and the amount the insurer paid on the claim. In order to prevent such results, the make whole doctrine restricts the enforcement of the insurer’s subrogation rights until after the insured has been fully compensated for his or her injuries.

Next, the Court held that the make whole doctrine does not apply to insurance policy deductibles. The Court concluded “that the equitable considerations supporting the make whole doctrine are inapplicable to deductibles . . . If we were to decide otherwise, as TD Banknorth urges, we would effectively disturb the contractual agreement into which TD Banknorth and Fireman’s Fund entered, thereby creating a windfall for TD Banknorth for a loss that it did not see fit to insure against in the first instance when it contracted for lower premium payments in exchange for a deductible.”

As one of the first courts to address whether the make whole doctrine applies to insurance policy deductibles, this decision will provide valuable precedent to subrogation professionals in cases in which a defendant argues that the insured has not been made whole due to the insured’s payment of a deductible.

 

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