Opinion
No. CV 06-4018752
July 30, 2009
MEMORANDUM OF DECISION RE MOTION FOR SUMMARY JUDGMENT #142
This case arises out of a $5 million insurance coverage dispute between Clarendon National Insurance Company (Clarendon) and Philadelphia Indemnity Insurance Company (Philadelphia) as to the applicability of a professional liability insurance policy's prior-knowledge exclusion, which excludes coverage for any claim based on a wrongful act committed prior to the effective date of the policy, unless the insured "had no basis to believe" that the act "might reasonably be expected to give rise to" a claim under the policy. Philadelphia brings the present declaratory judgment action requesting that the court "find and declare that [it] is not obligated" under the policy "to provide a defense or indemnification" to ARM because the prior-knowledge exclusion applies.
Atlantic Risk Management, Inc. (ARM), the third-party administrator on insurance policies that Clarendon issued, is no longer a party to this case, as its counsel withdrew their appearances on July 27, 2007 and it was defaulted for its failure to appear on September 13, 2007. Clarendon became a party to this case when this court granted its motion to intervene on September 20, 2006.
PROCEDURAL HISTORY
In December 2002, Leroy and Donna Pittenger brought a personal injury action (Pittenger Action) in the Court of Common Pleas of Lackawanna County, Pennsylvania against Kephart Trucking Company (Kephart), a Clarendon insured, and four other defendants. In May 2006, Clarendon brought an action (Underlying Action) against ARM in the Supreme Court of New York, New York County, alleging that, despite ARM's duties to Clarendon and Kephart, ARM negligently handled the Pittenger Action against Kephart by denying coverage, by failing to appoint counsel to defend Kephart, and by allowing a default judgment to enter against Kephart. Clarendon further alleged that the court granted judgment against Kephart in the amount of $3,186,291 and thereafter, awarded delay damages of $114,793.76 and postjudgment interest amounting to $225,197.29; and that, as a result, Clarendon had to settle claims brought against it by the Pittengers and Kephart in a subsequent action for $4.6 million. Clarendon claimed this $4.6 million, as well as reasonable costs, expenses, and attorneys fees, for a total amount of damages exceeding $5 million.
Philadelphia now moves for summary judgment, arguing that the prior-knowledge exclusion applies because "prior to the effective date of the policy, ARM [had] a basis to believe that its role in the denial of coverage to Kephart for the Pittenger action could reasonably be expected to give rise to a claim under its professional liability policy." The court must next apply this standard to determine whether the prior-knowledge exclusion applies. Philadelphia has presented extensive evidence tending to suggest that the subjective-objective test is met; i.e., that, based on the facts known to ARM in 2003 and 2004, a reasonable policyholder in ARM's position might have reasonably expected a claim to arise. However, Clarendon presents contradictory evidence on each of Philadelphia's points, creating genuine issues of material fact.
FACTS A. The Pittenger Action
On December 16, 2002, Leroy and Donna Pittenger filed a personal injury action, Pittenger v. East Manufacturing Corp., Docket No. 02-CV-223, in the Court of Common Pleas of Lackawanna County, Pennsylvania against five defendants: East Manufacturing Corp.; Superior Leasing, Inc.; Transfer Systems, Inc.; Kephart Trucking Co. (a Clarendon insured); and American Disposal Services, Inc. Leroy Pittenger brought claims for negligence, strict liability, and breach of warranty against the defendants arising out of a severe injury to his hand (requiring amputation) that occurred when he was unloading a truck trailer at Alliance Landfill in Taylor, Pennsylvania after he had hauled a shipment of municipal solid waste from Stratford, Connecticut. Donna Pittenger brought claims for loss of consortium against the defendants.
The complaint from this action was one of several attachments in Kephart's "Answer, New Matter and Counterclaim," which was attached to "Exhibit D" in Clarendon's responses to Philadelphia's requests for admissions.
A. The Underlying Action
On May 28, 2006, Clarendon filed an action against ARM in the Supreme Court of New York, New York County, entitled Clarendon National Ins. Co. v. Atlantic Risk Management, Inc., Docket No. 106324/06. Clarendon essentially claimed that ARM was negligent in handling the claim against Kephart in the Pittenger Action — in particular, in allowing a default judgment to enter against Kephart and in denying coverage to Kephart — and that, as a result, Clarendon had to settle claims brought against it by the Pittengers and Kephart in a subsequent action for $4.6 million.
This complaint was attached as an exhibit to Philadelphia's motion for summary judgment. Clarendon has also attached (as an exhibit to its March 6, 2006 motion to intervene) a similar complaint from an action that Clarendon filed in the United States District Court for the Southern District of New York, entitled Clarendon National Ins. Co. v. Atlantic Risk Management, Inc., Docket No. 06-CV-1300. This "corrected complaint" contains no date stamp; however, Clarendon stated on this complaint and in its memorandum of law in support of its motion to intervene that it filed the original complaint in this action on February 17, 2006.
A review of the complaint reveals that Kephart was the named insured under two Clarendon insurance policies, a trucker's liability policy and a general liability policy; and while Clarendon insured Kephart, ARM administered claims made on insurance policies that Clarendon issued.
Clarendon brought claims for negligence, breach of contract, indemnification, injunctive relief, specific performance, and an accounting, and alleged the following facts common to all counts. On or about January 16, 2003, ARM, in its capacity as Clarendon's claims administrator, received notice of the Pittenger Action, in which Kephart was one of five named defendants. Despite its duties to Kephart and Clarendon, ARM did not appoint counsel to defend Kephart in this action, and on or about February 7, 2003, a default judgment establishing liability for damages entered in favor of the Pittengers. On or about February 27, 2003, ARM sent Kephart a "reservation of rights letter" in which it did not offer to provide Kephart with counsel to defend it in the Pittenger Action and informed Kephart that — due to a workers' compensation exclusion, an employee exclusion in the trucker's liability policy, and the late reporting of the claim — there were questions as to whether coverage would be provided. On March 25, 2003, ARM sent Kephart a letter denying coverage under the trucker's liability policy.
On or about September 22, 2004, the court granted judgment to the Pittengers in the amount of $3,186,291. Shortly thereafter, in accordance with the Pennsylvania Rules of Civil Procedure, the court awarded delay damages of $114,793.76. On or about October 20, 2004, a judgment was entered in the amounts above, with postjudgment interest amounting to $225,197.29.
Kephart assigned its rights against Clarendon to the Pittengers, and on or about January 11, 2005, the Pittengers commenced an action against Clarendon in the Court of Common Pleas of Lackawanna County, Pennsylvania. The action was later removed to the United States District Court for the Middle District of Pennsylvania and repleaded as an action entitled Pittenger v. Clarendon Ins. Co., Docket No. 3:CV-05-0269. That case was consolidated with another case (also commenced by Kephart and the Pittengers in state court and then removed to federal court), entitled Kephart Trucking Co. v. Clarendon Ins. Co., Docket No. 3:CV-05-270.
In the consolidated action, Kephart and the Pittengers alleged that Clarendon was liable for punitive damages because its agent, ARM, in denying coverage, acted unreasonably, contrary to industry practice, with reckless indifference, and in bad faith. Clarendon paid $4,601,387.06 to settle the claims brought against it as a result of ARM's actions. In the complaint, Clarendon claimed that, in addition to this sum, it was entitled to reasonable costs, expenses, and attorneys fees as well, and that the total amount of damages will exceed $5,000,000.
C. Philadelphia's Declaratory Judgment Action
On February 10, 2006, Philadelphia filed the declaratory judgment action presently before the court against ARM requesting that the court "find and declare that [it] is not obligated [under its professional liability insurance policy with ARM] to provide a defense or indemnification" to ARM. Philadelphia alleged the following facts. Philadelphia is a Pennsylvania insurance company with an office in Bala Cynwyd, Pennsylvania and licensed to do business in Connecticut. ARM is a corporation organized with a principal place of business in Woodbridge, Connecticut.
Philadelphia issued a "claims made" professional liability for specified professions policy, no. PHSD114142 to ARM for a policy year beginning January 1, 2005 at 12:01 a.m. (Eastern Standard Time) and ending January 1, 2006 at 12:01 a.m. (Eastern Standard Time). In 2005, Philadelphia was advised of a claim or potential claim against ARM by the Pittengers as assignees of Kephart. In January 2006, Philadelphia was advised of a claim or potential claim against ARM by Clarendon relating to ARM's contractual agreement with Clarendon and ARM's handling of the Pittenger claim.
On February 3, 2006, Philadelphia advised ARM by letter that it reserved its rights to disclaim, deny, or limit coverage under the policy with regard to the Pittenger claim pursuant to the terms and conditions of the policy. The policy provided that Philadelphia would pay sums which ARM became legally obligated to pay as damages resulting from a claim, but it contained a prior-knowledge exclusion, which specifically excluded claims based on wrongful acts committed pror to the effective date of the policy where ARM had a "basis to believe" that the wrongful act "might reasonably be expected to give rise to" a claim under the policy.
ARM, through its officers, agents, and employees, had a basis to believe, prior to the policy period, that circumstances involving Pittenger and Kephart might give rise to a claim against ARM. In addition, ARM failed to disclose and materially misrepresented information concerning circumstances involving Pittenger and Kephart that it had a duty to disclose in connection with its application for policy renewal. Furthermore, ARM failed to give written notice to Philadelphia of circumstances involving Pittenger and Kephart which could reasonably be expected to give rise to a claim as required by the policy.
A provision in the policy provided that ARM "shall admit no liability, make no payments, assume no obligation and incur no expenses related to [claims] without the written consent of [Philadelphia]." ARM breached this condition by and through its agents, servants and employees' participation in Pittengers' litigation against Clarendon without the knowledge and consent of Philadelphia. Finally, Clarendon's claim, based on ARM's assumption of liability under contract, is excluded from coverage under the policy, which excludes from coverage "any claim and claim expenses arising out of" ARM "assuming liability under contract unless [ARM] would have been legally liable in the absence of such contract." In Philadelphia's prayer for relief, it asks that the court "find and declare that [it] is not obligated to provide a defense or indemnification" (1) to ARM in regard to the Kephart matter; and (2) to ARM in regard to the Clarendon claim.
On March 6, 2006, Clarendon filed a motion to intervene pursuant to Practice Book § 9-18, arguing that it "has an interest in the subject matter of the declaratory judgment action and is so situated that the disposition of the declaratory judgment action in [its] absence will likely impair or impede [its] ability to protect that interest." On September 20, 2006, the court granted Clarendon's motion to intervene.
Practice Book § 9-18 provides as follows: "Addition or Substitution of Parties; Additional Parties Summoned in by Court . . . The judicial authority may determine the controversy as between the parties before it, if it can do so without prejudice to the rights of others; but, if a complete determination cannot be had without the presence of other parties, the judicial authority may direct that they be brought in. If a person not a party has an interest or title which the judgment will affect the judicial authority, on its motion, shall direct that person to be made a party."
On March 8, 2006, ARM filed a notice of removal to the United States District Court for the District of Connecticut. On March 29, 2008, ARM filed an answer, affirmative defenses, a breach of contract counterclaim, and a counterclaim for a declaratory judgment requesting that the court declare that Clarendon's claims against ARM are covered under the professional liability policy. The action was subsequently remanded to this court.
On September 8, 2008, Philadelphia filed a motion for summary judgment and supporting memorandum, arguing that the prior-knowledge exclusion in the insurance policy applies because "prior to the effective date of the policy, ARM [had] a basis to believe that its role in the denial of coverage to Kephart for the Pittenger action could reasonably be expected to give rise to a claim under its professional liability policy." Philadelphia attached various documentary evidence in support of its motion.
On November 20, 2008, Clarendon filed an objection, attaching various documentary evidence and advancing the following three arguments: (1) "the policy does not exclude Clarendon's claim based on ARM's adjustment of the Pittinger's suit against Kephart"; (2) "the `known risk' exclusion does not absolve Philadelphia of its duty to defend and indemnify ARM"; and (3) "that which is, at most, an innocent misrepresentation, cannot void coverage." On February 6, 2009. Philadelphia filed a reply memorandum in support of its motion for summary judgment, arguing that: (1) a review of the plain language of the prior-knowledge exclusion demonstrates that coverage should be denied; and (2) Clarendon misapplies the subjective-objective test.
DISCUSSION A. Introduction
Under Practice Book § 17-49, summary judgment "shall be rendered forthwith if the pleadings, affidavits and any other proof submitted show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." Practice Book § 17-49; see also Provencher v. Enfield, 284 Conn. 772, 790-91, 936 A.2d 625 (2007). "[T]he moving party for summary judgment has the burden of showing the absence of any genuine issue as to all the material facts, which, under applicable principles of substantive law, entitle him to a judgment as a matter of law . . . the evidence must be viewed in the light most favorable to the opponent . . ." (Internal quotation marks omitted.) Zielinski v. Kotsoris, 279 Conn. 312, 318, 901 A.2d 1207 (2006). "Once the moving party has met its burden, however, the opposing party must present evidence that demonstrates The existence of some disputed factual issue . . ." (Internal quotation marks omitted.) Id., 319.
A declaratory judgment may be used to determine whether an insurer has a duty to defend and indemnify an insured. See Employers Reinsurance Corp. v. Muro, 86 Conn.App. 551, 555-56, 861 A.2d 1216 (2004), cert. denied, 273 Conn. 907, 868 A.2d 747 (2005). "The purpose of a declaratory judgment action . . . is to secure an adjudication of rights where there is a substantial question in dispute or a substantial uncertainty of legal relations between the parties . . . and to make certain that the declaration will conclusively settle the whole controversy." (Citations omitted; internal quotation marks omitted.) Mannweiler v. Laflamme, 232 Conn. 27, 33, 653 A.2d 168 (1995).
General Statutes § 52-29(a) provides: "The Superior Court in any action or proceeding may declare rights and other legal relations on request for such a declaration, whether or not further relief is or could be claimed. The declaration shall have the force of a final judgment." Additionally, Practice Book § 17-55 provides: "A declaratory judgment action may be maintained if all of the following conditions have been met: (1) The party seeking the declaratory judgment has an interest, legal or equitable, by reason of danger of loss or of uncertainty as to the party's rights or other jural relations; (2) There is an actual bona fide and substantial question or issue in dispute or substantial uncertainty of legal relations which requires settlement between the parties; and (3) In the event that there is another form of proceeding that can provide the party seeking the declaratory judgment immediate redress, the court is of the opinion that such party should be allowed to proceed with the claim for declaratory judgment despite the existence of such alternate procedure."
"The question of whether an insurer has a duty to defend its insured is purely a question of law, which is to be determined by comparing the allegations of [the] complaint [in the underlying action] with the terms of the insurance policy." Wentland v. American Equity Ins. Co., 267 Conn. 592, 600 n. 1, 840 A.2d 1158 (2004). "In contrast to the duty to defend, the duty to indemnify is narrower: while the duty to defend depends only on the allegations made against the insured, the duty to indemnify depends upon the facts established at trial and the theory under which judgment is actually entered in the case . . . Thus, the duty to defend is triggered whenever a complaint alleges facts that potentially could fall within the scope of coverage, whereas the duty to indemnify arises only if the evidence adduced at trial establishes that the conduct actually was covered by the policy." (Internal quotation marks omitted.) DaCruz v. State Farm Fire Casualty Co., 268 Conn. 675, 688, 846 A.2d 849 (2004).
B. Standard to Determine Applicability of Prior-Knowledge Exclusion
In this decision, the court must first consider an issue, it appears, that the Connecticut courts have yet to address and that is which standard to apply in order to determine the applicability of a prior-knowledge exclusion in an insurance policy. Given the modern trend, the sound public policy justifications, and the language of the insurance policy in the present case, the court concludes that the subjective-objective standard is the most appropriate standard to apply.
Philadelphia argues that the court should use the subjective-objective approach to determine whether the prior-knowledge exclusion is applicable because "[i]n recent cases, the overwhelming trend has been to apply" this approach. Clarendon argues that "Mr. Kieslich's knowledge of the occurrence of a [wrongful act] must be analyzed subjectively"; and "Mr. Kieslich believed that ARM had done a fine job and was clear of any claim or exposure."
"It is the function of the court to construe the provisions of the contract of insurance." (Internal quotation marks omitted.) Springdale Donuts, Inc. v. Aetna Casualty Surety Co. of Illinois, 247 Conn. 801, 805, 724 A.2d 1117 (1999). "An insurance policy is to be interpreted by the same general rules that govern the construction of any written contract and enforced in accordance with the real intent of the parties as expressed in the language employed in the policy." (Internal quotation marks omitted.) Hammer v. Lumberman's Mutual Casualty Co., 214 Conn. 573, 583, 573 A.2d 699 (1990).
"Claims-made professional liability policies often" contain "prior knowledge" exclusions, which "exclude coverage for claims arising out of facts or circumstances of which the policyholder was aware that might give rise to a claim." 23 E. Holmes, Appleman on Insurance 2d (2003) § 146.6[F], p. 114. The policy in the present case, which is attached to Philadelphia's motion for summary judgment, provides an exclusion for any claim based on a "[w]rongful act" committed prior to the effective date of the policy (January 1, 2005), unless ARM "had no basis to believe" that the act "might reasonably be expected to give rise to" a claim under the policy.
Paragraph M of the "DEFINITIONS" section (part IV under "INSURING AGREEMENTS") defines a "Wrongful Act" as "a negligent act, error, or omission committed or alleged to have been committed by the `Insured' or any person for whom the `Insured' is legally liable in the rendering of `Professional Services.'"
The "COMMON POLICY DECLARATIONS" page provides as follows: "Policy Period From: 01/01/2005 To: 01/01/2006."
More specifically, the policy requires that Philadelphia "shall pay on behalf of the `Insured' all sums . . . for which the `Insured' shall become legally obligated to pay as `Damages' resulting from any `Claim' first made against the `Insured' and reported to [Philadelphia] by written notice during the `Policy Period;' PROVIDED ALWAYS THAT such `Claim' is by reason of a `Wrongful Act' committed:
1. During the `Policy Period,' or
2. Prior to the `Policy Period' and subsequent to the Retroactive Date stated in Item 7 of the Declarations [01/01/1998] provided that prior to the effective date of this Policy:
i. The `Insured' did not give notice of any such `Wrongful Act' under any prior insurance policy; and
ii. The `Insured' had no basis to believe that such `Wrongful Act' might reasonably be expected to give rise to a `Claim' under this Policy."
The Connecticut courts have not considered the issue of which standard to apply to determine the applicability of prior-knowledge exclusions. However, the Supreme Court of Kansas recently provided a comprehensive, well-researched discussion of the three standards that courts throughout the country have applied: (1) a "subjective standard"; (2) an "objective standard"; and (3) a "two-prong subjective-objective standard." American Special Risk Management Corp. v. Cahow, 286 Kan. 1134, 1150-53, 192 P.3d 614 (2008).
There are two cases applying Connecticut law to determine the applicability of prior knowledge exclusions: Coregis Ins. Co. v. Goldstein, 32 F.Sup.2d 508 (D.Conn. 1998); and Napolitano v. Coregis Ins. Co., United States District Court, Docket No. 3:01-CV-34 EBB, 2002 WL 34159094 (D.Conn. Aug. 27, 2002). However, both decisions seemed to apply different standards, neither decision explicitly considered which standard to apply, and neither decision is binding upon this court. Although the Goldstein court seemed to reject the purely objective standard, it did not indicate which standard it was applying. See Coregis Ins. Co. v. Goldstein, supra, 32 F.Sup.2d 513. Rather, it denied the insurer's motion for summary judgment on the ground that there was "a genuine issue of material fact in regard to whether [the policyholder] could have reasonably foreseen that his acts, errors and/or omissions might be expected to be the basis of a claim." Id., 513-14. In addition, the Napolitano court appeared, without giving much consideration to the issue, to apply the purely objective standard. See Napolitano v. Coregis Ins. Co., supra, Docket No. 3:01-CV-34 EBB, 2002 WL 34159094, *3 (applying "`reasonable attorney' standard" and stating "it matters not that [the attorney] thought that Plaintiffs' claim had no merit"). However, the court granted the insurer's motion to summary judgment, primarily on the ground that the prior-knowledge exclusion was not ambiguous. See id., *5 ("The Court declines the [plaintiff's] invitation" "to rewrite Exclusion B by finding it ambiguous," "finding it is not ambiguous and [that it] bars coverage because [the attorney policyholder] did not comply with the policy provisions.")
Courts in a "minority of jurisdictions" have applied the subjective standard, which "examines what facts the insured knew and whether he or she subjectively believed a claim would result." 23 E. Holmes, supra, § 146.6[F]. This approach is most persuasively applied where the policy language "calls for a purely subjective inquiry into the actual beliefs of" the policyholder. American Guarantee Liability Ins. Co. v. Fojanini, 90 F.Sup.2d 615, 620 n. 9 (E.D. Pa. 2000). "In contrast to the relatively small number of courts that have adopted the subjective standard, most of the courts considering the issue have adopted the objective approach," which focuses on what a reasonable insured knew or should have known. American Special Risk Management Corp. v. Cahow, supra, 286 Kan. 1149.
"Despite the widespread use of the objective standard, more recently some courts have [applied] an `intermediate' standard utilizing a two-prong, subjective-objective test," under which the court "asks the subjective question of whether the insured knew of certain facts and then asks the objective question of whether such facts could reasonably have been expected to give rise to a claim." American Special Risk Management Corp. v. Cahow, supra, 286 Kan. 1151.
The language of the insurance policy in the present case — which provides an exclusion for any claim based on a wrongful act committed prior to the effective date of the policy, unless ARM "had no basis to believe" that the act "might reasonably be expected to give rise to" a claim under the policy — indicates that the court should apply the subjective-objective approach. See Selko v. Home Ins. Co., 139 F.3d 146, 151 (3d Cir. 1998) ("the `basis to believe' clause requires a determination" based on the subjective-objective standard); see also Executive Risk Indemnity, Inc. v. Pepper Hamilton LLP, 865 N.Y.S.2d 25, 29, 56 A.D.3d 196, 2008 NY Slip Op 7044 (N.Y.App.Div. 2008) (applying "mixed subjective/objective standard" where prior knowledge exclusion contained "might reasonably be expected" language); cf. Westport Ins. Corp. v. Lilley, 292 F.Sup.2d 165, 171 (D.Me. 2003) (applying subjective-objective standard where exclusion contained "could have reasonably foreseen" language); Westport Ins. Corp. v. Atchley, Russell, Waldrop Hlavinka, L.L.P., 267 F.Sup.2d 601, 607-08 (E.D.Tex. 2003) (same).
Moreover, the subjective-objective approach is sensible because it avoids the problems that might result from applying a purely subjective approach (e.g., "encouraging disingenuous, after-the-fact justifications") or a purely objective approach (e.g., making a policyholder "accountable for matters he did not know about"). Selko v. Home Ins. Co., supra, 139 F.3d 152. Given the modern trend, the sound public policy justifications, and the language of the insurance policy in the present case, the court will apply the subjective-objective approach to determine whether the prior-knowledge exclusion applies.
The court notes that, in Coregis Ins. Co. v. Goldstein, 32 F.Sup.2d 508 (D.Conn. 1998), Judge Nevas of the United States District Court for the District of Connecticut rejected the reasoning of cases adopting the objective approach where the prior-knowledge exclusion contained "could have reasonably foreseen" language. Id., 510, 513 ("the Court declines to follow these decisions because the Court does not find their reasoning persuasive, but instead, believes they give too expansive of a reading to the exclusion provisions of the contracts they interpreted"). However, two Connecticut Superior Court decisions interpreting similar language, albeit in the context of intentional/criminal act exclusions, have applied an objective standard. See Allstate Ins. Co. v. Simansky, 45 Conn.Sup. 623, 624-25, 738 A.2d 231 (1998) [ 23 Conn. L. Rptr. 307] (holding language "may reasonably be expected to result from the intentional or criminal acts" implicates objective standard); Allstate Ins. Co. v. Linarte, Superior Court, judicial district of New Britain, Docket No. CV 05 4005150 (May 24, 2007, Shapiro, J.) [ 43 Conn. L. Rptr. 664] (same).
C. Arguments and Evidence Offered on Issue of Whether Prior-Knowledge Exclusion Applies
Philadelphia argues that the prior-knowledge exclusion in the insurance policy applies because "prior to the effective date of the policy, ARM [had] a basis to believe that its role in the denial of coverage to Kephart for the Pittenger action could reasonably be expected to give rise to a claim under its professional liability policy." More specifically, Philadelphia contends that "[t]op level ARM personnel, including its president Otto Kieslich, knew in 2003 and 2004 that Kephart considered ARM to be responsible for the wrongful denial of coverage that resulted in a judgment against Kephart and that ARM had agreed to indemnify Clarendon"; and that, "[i]n this case, the wrongful act that gave rise to Clarendon's claim against ARM was ARM's handling in 2003 of the Pittenger claim against Kephart Trucking," in particular, "allowing a default to enter and then disclaiming coverage under both the trucker's policy and the general liability policy." To its burden, Philadelphia primarily relies upon copies of three documents which are attached to its motion: (1) a February 26, 2003 email from Thomas Moore of ARM to Kieslich; (2) ARM's adjuster note logs for the Kephart claim; and (3) the transcript from the deposition of Otto Kieslich, a president of ARM.
Philadelphia notes that, in the email, which was marked "High" importance, Moore explained the following to Kieslich: "I see all kinds of problems on [the Kephart] loss . . . The fact that default has been entered [in the Underlying Action] makes things worse." Additionally, Philadelphia references the adjuster log notes, which show that, on September 17, 2003, Kieslich noted that the "[i]nsured is raising issue with denial of coverage"; and on April 9, 2004, Kieslich noted that Kephart had filed a counterclaim challenging the coverage denial based on Clarendon's alleged mishandling and wrongful denial of coverage in a separate lawsuit. Furthermore, Philadelphia notes that the transcript of the deposition reveals that, in 2003 and 2004, Kieslich was aware of Kephart's counterclaim, that Kieslich had discussed the substance of the counterclaim with Clarendon's counsel, and that he was named as a witness to testify in defense of the counterclaim.
Philadelphia attached Kephart's counterclaim as an exhibit to its motion for summary judgment. The counterclaim was made in a premium collection action in the Court of Common Pleas of Philadelphia County, Pennsylvania, entitled William H. Martoccia, Inc. v. Kephart Trucking Co., Docket No. 218 (January 6, 2003). Clarendon attached the complaint from this case as an exhibit to its objection. In the complaint, the plaintiffs, William H. Martoccia, Inc. (WHM) and Clarendon brought claims against Kephart Trucking Co. for collection of premiums and deductibles. Kephart's allegations in the counterclaim indicate that WHM is "a managing general agent for Clarendon National Insurance Company Truckers Program authorized to collect premiums on policies issued under that program"; that Kaytes Cooperman Insurance, Inc., a.k.a. KCI Insurance Agency, Inc. (KCI) was added as an additional defendant in the premium collection action; that KCI was an "an insurance agency and brokerage company that acts as an authorized agent of WHM"; and that Kephart's counterclaim brought counts against WHM, Clarendon, and KCI.
Clarendon responds that, before the policy period began on January 1, 2005, ARM had no basis to believe that a wrongful act would result in a claim because ARM/Kielsich did not know of a wrongful act. In Clarendon's objection, it primarily relies upon Kieslich's deposition transcript that Philadelphia attached to its motion, but it also references the email and adjuster note logs that Philadelphia attached to its motion.
None of these documents relied upon by both parties have been properly authenticated, and generally, "[o]nly evidence that would be admissible at trial may be used to support or oppose a motion for summary judgment." (Internal quotation marks omitted.) Rockwell v. Quinter, 96 Conn.App. 221, 233 n. 10, 899 A.2d 738, cert. denied, 280 Conn. 917, 908 A.2d 538 (2006). Nevertheless, the court will consider this evidence because neither party objected to its admission and both parties relied upon it to support their arguments. See Barlow v. Palmer, 96 Conn.App. 88, 92 (2006) (holding court may consider "uncertified deposition transcripts" that both parties submitted where neither party objected to their admission); Holmes v. John M. Glover Agency, Inc., Superior Court, judicial district of Fairfield at Bridgeport, Docket No. CV 07 5006575 (January 29, 2009, Bellis, J.) ("Uncertified documents may be `admitted at trial without objection to create an evidentiary foundation for the determination that a genuine issue of material fact exists . . .'").
Clarendon advances several arguments, accompanied by evidence, in its objection. First, Clarendon argues, quoting Moore's February 26, 2003 email to Kieslich, that this "very early email" that Philadelphia references in support of its motion does not demonstrate that the objective prong of the subjective-objective standard is met because the email "conveys primarily Moore's concern about the delay occasioned by Kephart's reporting to KCI instead of ARM, the default and the fact that a coverage denial needed to be issued because the matter `should have been reported to the [workers' compensation] carrier.'"
Second, Clarendon points out that the April 15, 2003 adjuster log notes state that, following the February 26, 2003 email, ARM sent Kephart a letter denying coverage for the Pittenger claim under the trucker's policy; and the June 11, 2003 adjuster log notes state that Kephart did not respond to ARM's "4/15/03 formal denial of coverage" and thus, ARM closed the file "this day without payment." Third, Clarendon argues that Kieslich's September 17, 2003 adjuster log notes indicating that the "[i]nsured is raising issue with denial of coverage," which Philadelphia relies upon, do not establish that Kieslich might have expected a claim to arise. In support of this argument, Clarendon explains, quoting Kieslich's deposition transcript, that Kephart was not "disputing the denial but was saying that he wanted `the claim submitted under the general liability policy.'"
Clarendon also references a June 17, 2003 closing report prepared by Kieslich indicating that, as of that time, ARM had "received no response from the named insured to our formal denial of coverage in this matter thus, we have now closed all direct lines without payment." Although this document is unauthenticated, given that no objection has been made and that it simply provides further corroboration of other evidence, the court will consider it.
Clarendon also presents a letter from Timothy L. Kephart, the president of Kephart, to Kieslich in which he requests "that the claim be processed under the general liability insurance policy." As with the closing report referenced above, in the absence of an objection, the court will consider this unauthenticated document.
Fourth, with regard to Philadelphia's arguments that Kieslich was aware of Kephart's counterclaim, that Kieslich had discussed the substance of the counterclaim with Clarendon's counsel, and that he was named as a witness to testify in defense of the counterclaim, Clarendon argues: (1) quoting the April 9, 2004 adjuster log notes, that Kieslich "knew of the counterclaim . . . but understood that it was merely an attempt to `cloud the premium issue'"; (2) quoting Kieslich's deposition transcript, that Clarendon's counsel "agreed with the coverage denials and convinced Mr. Kieslich `that there was no exposure to worry about'"; and (3) quoting Kieslich's deposition transcript, that "Mr. Kieslich actually testified that he didn't know what was filed or the details or allegations it contained: `Again, I don't know the substance of the Pittenger allegation, but I know there was some sort of disagreement.'"
Moreover, when asked at his deposition if he knew that Kephart had made a "legal claim . . . in a lawsuit alleging that the Pittenger claim had been wrongfully denied," Kieslich replied that he did not "know the level of detail of that information" regarding the counterclaim and that he knew that "some type of allegation" was made, but that he did not "know the details of that."
Finally, Clarendon explains, quoting Kieslich's deposition, that "[d]uring a claim audit performed at ARM's offices in 2005, Mr. Kieslich" "became aware of a change in the law that made it possible for Mr. Pittenger to `be a claimant . . . under the auto policy" and that this "led him, for the first time, to conclude that ARM had botched the coverage determination and that the Pittenger claim should have been covered under the Trucker's Policy."
D. Analysis Applying the Subjective-Objective Standard
Philadelphia correctly notes that, under the subjective-objective test, "the proper inquiry is the objective question of whether the facts indisputably known to Otto Kieslich prior to January 2005 were such as to put an experienced insurance claims handler on notice that a claim was reasonably possible." When applying the subjective-objective test, the court must first ask "the subjective question of whether the insured had knowledge of the relevant facts." Executive Risk Indemnity, Inc. v. Pepper Hamilton LLP, 865 N.Y.S.2d 25, 29, 56 A.D.3d 196, 2008 NY Slip Op 7044 (N.Y.App.Div. 2008).
The subjective prong of the subjective-objective test is met in the present case because the evidence Philadelphia presented indicates that Kieslich knew that a default had entered in the Underlying Action, that Kephart raised an issue regarding the coverage denial, and that Kephart had filed a counterclaim challenging the coverage denial. The court must now ask "the objective question of whether such facts could reasonably have been expected to give rise to a claim." American Special Risk Management Corp. v. Cahow, 286 Kan. 1134, 1150, 192 P.3d 614 (2008).
Philadelphia presents extensive evidence indicating that a reasonable insurance adjuster in Kieslich's position might have expected a claim to arise under these circumstances, the most significant of which is Moore's February 26, 2003 email stating that he saw "all kinds of problems on [the Kephart] loss"; the adjuster log notes showing that Kieslich knew, on September 17, 2003, that Kephart was "raising issue with denial of coverage"; and Kieslich's deposition testimony indicating that Kieslich was aware of Kephart's counterclaim alleging that the Pittenger claim was wrongfully handled and that coverage was wrongfully denied.
However, Clarendon offers the following arguments and supporting evidence, which contradict the evidence Philadelphia has presented: (1) the adjuster log notes reveal that, following the February 26, 2003 email, ARM denied coverage, Kephart did not respond to ARM's "4/15/03 formal denial of coverage," and ARM subsequently closed the file without payment; (2) the adjuster log notes indicating that the "[i]nsured is raising issue with denial of coverage" do not support Philadelphia's argument because Kieslich's deposition transcript reveals that Kephart was not "disputing the denial but was saying that he wanted `the claim submitted under the general liability policy'"; and (3) Kieslich's deposition transcript reveals that he testified that he did not know the details of Kephart's counterclaim or the allegations it contained.
Thus, while Philadelphia has presented evidence supporting its argument that the objective prong of the subjective-objective test is met, Clarendon has demonstrated that genuine issues of material fact exist with regard to this issue. The court is aware that Kieslich's deposition testimony indicating that he lacked subjective knowledge (that would put a reasonable insurance adjuster in his position on notice of the counterclaim) may constitute "disingenuous, after-the-fact justifications." Selko v. Home Ins. Co., 139 F.3d 146, 152 (3d Cir. 1998). Nevertheless, credibility issues are not appropriately resolved on summary judgment and must be decided by a jury. See State v. Beavers, 290 Conn. 386, 414, 963 A.2d 956 (2009) ("The determination of the credibility of a witness is solely the function of the jury"); Wason v. Myer, Superior Court, judicial district of Stamford-Norwalk, Docket No. CV 98 0164806 (January 6, 2003, Lewis, J.) (denying motion for summary judgment and holding "this court cannot `substitute its own judgment concerning the credibility of [the witness] for that of the jury'"). "[B]ecause the jury has the opportunity to observe the conduct, demeanor and attitude of the witnesses and to gauge their credibility, it is axiomatic that evidentiary inconsistencies are for the jury to resolve, and it is within the province of the jury to believe all or only part of a witness' testimony." (Internal quotation marks omitted.) State v. Morgan, 274 Conn. 790, 800, 877 A.2d 739 (2005).
Kieslich's deposition testimony appears to be somewhat inconsistent. For example, when asked whether he had been "made aware" of Kephart's counterclaim, he emphasized that he did not "know the details" of the counterclaim; however, he subsequently responded affirmatively when asked whether he was "personally . . . expressly aware that Kephart had brought a claim with regard to . . . what they alleged to have been a wrongful handling of the Pittenger claim."
"Issues of fact necessary to the determination of [a declaratory judgment action] may be submitted to the jury as in other actions." Practice Book § 17-56(a)(6).
Moreover, on a motion for summary judgment, "[t]he courts hold the movant to a strict standard"; "[t]o satisfy his burden the movant must make a showing that it is quite clear what the truth is, and that excludes any real doubt as to the existence of any genuine issue of material fact." (Internal quotation marks omitted.) Zielinski v. Kotsoris, 279 Conn. 312, 318, 901 A.2d 1207 (2006). Accordingly, viewing the evidence in the light most favorable to Clarendon, the court concludes that Philadelphia has failed to meet its burden of demonstrating that there are no genuine issues of material fact as to whether the prior-knowledge exclusion applies, and Philadelphia's motion for summary judgment as to the duty to indemnify must be denied. See Coregis Ins. Co. v. Goldstein, 32 F.Sup.2d 508, 513-14 (D.Conn. 1998) (denying plaintiff insurance company's motion for summary judgment in declaratory judgment action based on existence of "a genuine issue of material fact in regard to whether [the policyholder] could have reasonably foreseen that" a claim might arise); James F. O'Connell Associates v. Transamerica Indemnity Co., 61 Wn.App. 103, 111, 809 P.2d 231 (Wash.Ct.App. 1991) (holding "[s]ummary judgment was improperly granted in favor of" professional liability insurer because whether the knowledge of the facts "would give rise to a reasonable expectation of a claim is an issue for the trier of fact").
The parties in the present case offer several other arguments and supporting evidence relating to the applicability of the prior-knowledge exclusion. However, given that the court need only find one dispositive issue of material fact to deny summary judgment, the court has only addressed the most relevant arguments. In addition, while Clarendon argues that "Philadelphia's position . . . would require a departure from Connecticut law, [under which] an insured's alleged misrepresentation does not abrogate coverage unless intentionally made," the court need not address this argument because the court denies summary judgment on other grounds.
Our Supreme Court has held that "where there is no duty to defend, there is no duty to indemnify, given the fact that the duty to defend is broader than the duty to indemnify." QSP, Inc. v. Aetna Casualty Surety Co., 256 Conn. 343, 382, 773 A.2d 906 (2001). Applying this logic, where there might be a duty to indemnify, there necessarily also might be a duty to defend. Therefore, because the court denies Philadelphia's motion for summary judgment as to the duty to indemnify, the court must also deny its motion for summary judgment as to the duty to defend.
CONCLUSION
Based on the foregoing, the court denies Philadelphia's motion for summary judgment, as it has failed to meet its burden of demonstrating that there are no genuine issues of material fact as to whether the prior-knowledge exclusion applies and that it is entitled to judgment as a matter of law.