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August 2014

Connecticut Supreme Court: Insurer Has Standing to Seek Declaration on Fellow Insurers’ Contractual Duties to Defend Mutual Insured

In Travelers Cas. & Surety Co. v. Netherlands Ins. Co., the Connecticut Supreme Court held on Aug. 5 that the plaintiff insurer had standing to institute a declaratory judgment action against the defendant co-insurer in the absence of any cognizable legal relationship between the parties.  Applying traditional concepts of classical aggrievement and looking to federal law, the court affirmed the trial court’s denial of the co-insurer’s motion to dismiss for lack of subject matter jurisdiction.

Plaintiffs Travelers Casualty and Surety Co. of America and Travelers Indemnity Co. (collectively, Travelers) brought a declaratory judgment action against defendants The Netherlands Insurance Co.,  Lumbermens Insurance Co. and Lombardo Brothers Mason Contractors, Inc. in connection with an underlying action in which the state of Connecticut sued Lombardo and others for $18 million in alleged defective construction work on the UConn School of Law library.  Several carriers insured Lombardo’s construction work including Travelers, Netherlands, and Lumbermens (all under commercial general liability policies) and Peerless Insurance Co. (under umbrella general liability policies).  Prior to the lawsuit, Lombardo notified its carriers of the state’s potential claim against it, and Travelers agreed to participate in the investigation and related defense.  Netherlands refused to participate in the investigation and defense.     

In 2009, Travelers filed a two-count complaint against Netherlands, Peerless, Lumbermens and Lombardo seeking a declaratory judgment that its fellow insurers were obligated to pay their pro rata shares of the cost of Lombardo’s defense (Count One) and alleging a claim of equitable subrogation (Count Two).  The matter proceeded to a one-day court trial during which Travelers withdrew the second count of its complaint.  Shortly after the trial, Netherlands moved to dismiss the case for lack of subject matter jurisdiction, claiming that Travelers’ withdrawal of the equitable subrogation claim deprived it of standing to assert the sole remaining declaratory judgment claim in the complaint because Travelers was not a party to Lombardo’s insurance contracts with Netherlands and Peerless.  The trial court denied Netherlands’ motion to dismiss and an appeal followed.

Netherlands raised multiple issues on appeal, including that the trial court improperly denied its motion to dismiss the declaratory judgment action – the first and only remaining count in the complaint – for lack of subject matter jurisdiction.  Relying on Wilson v. Kelley, 224 Conn. 110 (1992), Netherlands argued that Connecticut’s declaratory judgment statute (C.G.S. § 52-29) does not create an independent cause of action or substantive rights that do not otherwise exist.  Netherlands further argued that the first count alleged a breach of contract between it and Lombardo and that, because Travelers was neither a party to Netherlands’ insurance contracts with Lombardo nor an intended third-party beneficiary thereof, Travelers lacked standing to bring a claim.  Lastly, Netherlands argued that Travelers “deprived itself” of standing when it withdrew its equitable claims at trial. 

Travelers, joined by Lombardo, argued in response that the trial court had subject matter jurisdiction because Travelers withdrew the equitable subrogation claim for the sole reason that the parties had agreed the case would be tried only under the first count, with the parties seeking only a percentage determination as to their pro rata responsibility for defense.  The parties agreed to this litigation posture because privilege issues arising from the pending underlying action precluded the discovery necessary to arrive at a money judgment on the equitable subrogation count.  Travelers further argued that it was classically aggrieved, thereby giving it standing to bring a declaratory judgment action with respect to the duty to defend as between carriers with a mutual insured.  Despite Travelers being neither a party to, nor an intended beneficiary of, an insurance policy between Lombardo and Netherlands, Travelers argued that its aggrievement was established by the fact that it paid all of Lombardo’s defense costs and that Netherlands refused to defend Lombardo or contribute to the defense costs incurred by Travelers.  Lastly, as a policy matter, Lombardo claimed that insureds, especially when a large claim is made, are often not in the best financial position to bring and prosecute a declaratory judgment action against multiple insurers and that it had a very real interest with respect to the responsibilities of the various carriers to provide a defense. 

In its analysis, the Connecticut Supreme Court refined the issue as to whether an entity that is not a named insured or otherwise a party to certain insurance policies may demonstrate a “specific, personal and legal interest” in those policies that would give it standing to commence a declaratory judgment action.  The court analyzed two lines of federal Circuit Courts of Appeals authority and their progeny: Provident Life & Accident Ins. Co. v. Transamerica-Occidental Life Ins. Co., 850 F.2d 1489, 1492-93 (11th Cir. 1988), cert denied, 489 U.S. 1081 (1989) (allowing declaratory judgment actions between insurers but requiring that the insured be included as a named party), and United Services Auto. Assn. v. Royal-Ins. Co., 511 F.2d 1094, 1095-96 (10th Cir. 1976) (allowing such actions without requiring that the insured be included as a party). 

The court held that the cases following United Services Auto. Assn. v. Royal-Globe Ins. Co. were more persuasive authority because they were more consistent with Connecticut’s existing caselaw.  The court further held that these cases were in accord with the classical aggrievement approach, and that Travelers had demonstrated a “specific, personal and legal interest” in Netherlands’ insurance policy.  Specifically, the court found that the controversy was real and ongoing, with Travelers’ claim of injury more than colorable, given the nature of the coverage dispute and its claim of bearing more than its fair share of Lombardo’s defense because of Netherlands’ refusal to contribute to that defense.  Accordingly, the court concluded that the trial court properly determined that Travelers had standing to bring the declaratory judgment action against Netherlands. 


To read the opinion in Travelers Cas. & Surety Co. v. Netherlands Ins. Co. (Aug. 5, 2014) ____ Conn. ____ (2014) (SC 19089), click here.


Thomas C. Blatchley