CT Supreme Court Capstone Decision Limits Scope Of Insurers’ Liability

Earlier this week, the Connecticut Supreme Court decided several questions of first impression on important insurance coverage issues. In Capstone Building Corp. & Capstone Dev. Corp. v. Am. Motorists Ins. Co., SC 18886, 2013 Conn. LEXIS 187 (2013), the Connecticut Supreme Court addressed three certified questions arising out of an underlying action in which breach of contract and bad-faith claims had been brought against an insurer. Day Pitney served as amicus curiae counsel for the American Insurance Association with respect to the second and third certified questions. In summary, the court held:

The cost of repairing faulty workmanship is not covered under a commercial general liability policy, but allegations of unintended defective construction work by a subcontractor may constitute an "occurrence" resulting in "property damage" in limited circumstances. An insured cannot maintain a bad faith cause of action based solely on an insurer's failure to conduct a discretionary investigation of a claim. Where an insured settles a dispute involving mixed covered and noncovered claims against which an insurer wrongfully refused to defend, the insured is entitled to recover from the insurer only that portion of the settlement that the insured can prove should be reasonably allocated to those claims against which the insurer had a duty to defend. Background In spring 2000, the plaintiffs, Capstone Building Corp. and Capstone Development Corp. (together, "Capstone"), entered into a contract with the University of Connecticut ("UConn") under which Capstone agreed to serve as the general contractor and project developer for the construction of a student-resident housing complex on UConn's Storrs campus. Capstone completed the project in August 2001. In 2004, UConn discovered that the construction for which Capstone was responsible was defective. Among other things, UConn alleged Capstone's faulty construction would require UConn to take remedial steps to correct elevated carbon monoxide levels resulting from inadequate venting, improperly sized flues, "[p]oor workmanship and quality control," as well as "[v]iolations of numerous code requirements." Capstone, 2013 Conn. LEXIS 187, at *33 n.20. UConn's claims against Capstone were mediated. Capstone demanded that American Motorists Insurance Company ("AMICO") participate in the mediation, claiming a policy AMICO issued covered the damages UConn sought. AMICO declined to participate in the mediation...