Assessing whether the duty to defend terminates on policy exhaustion can become a complex analysis when a claim involves multiple plaintiffs and exposure unquestionably exceeds the policy limits, yet the insured desires a continuing defense.

A common policy provision provides that an insurer has a duty to “settle or defend” a covered claim but that upon payment of the policy limits for “judgment or settlement” the insurer no longer has an obligation to provide a defense. Connecticut appellate courts have not squarely addressed in what circumstances exhaustion of policy limits will terminate the duty to defend, but at least one Connecticut Superior Court has recognized that exhaustion of policy limits would terminate the duty to defend based on the following policy language in a commercial policy: In Aetna Life & Cas. Co. v. Gentile, No. 0122259, 1995 Conn. Super. LEXIS 3444, 5 (Dec. 12, 1995), the insurer sought a declaratory judgment that it did not have a duty to defend following payment of the policy limits in response to seven separate claims. Id. at 4, 6. The court ultimately concluded that the payment was not the result of a “settlement” because the insurer failed to obtain a full release of the insured for one of the seven claims. Id. at 6-7. Despite its conclusion, the court plainly recognized that “if [the payment was a “settlement”] the policy limits are exhausted and there is no further duty to defend.” Id. at 7. The court concluded that the failure to obtain a release as to one of the claims precluded a finding that the payment was the result of a “settlement.” Id. at 9, 11. Thus, even though the insurer had made a payment in the amount of policy limits, the duty to defend was not terminated. Id.

Though the Gentile court initially acknowledged the potential enforceability of the exhaustion provision to terminate the duty to defend, the fact that the insurer left the insured to face excess exposure resulted in a finding that it had a continuing duty to defend and indemnify. Id. at 13. Notably, the court denied declaratory relief to the insured and awarded attorneys’ fees to the insured for both the underlying action and the declaratory judgment action. Id. at 13, 17.

Another instructive case is Chicago Title Insurance Company v. Kent School Corporation, 361 F. Supp. 2d 4, 7 (D. Conn. 2005). In that case, the United States District Court for the District of Connecticut addressed whether a policy of title insurance permitted the insurer to tender its policy limits to its insured and thereby terminate its duty to defend. The policy provided that the insurer “may terminate its liability hereunder by paying or tendering the full amount of this policy.” Id. at 8. Despite this clause, because the policy provided that “the costs and expenses of defending the title” were in addition to the policy limits and the policy was ambiguous in its failure to define the term “liability,” the court found that the insurer had a continuing duty to defend. Id. at 9-10. In so concluding, however, the court did not rule out a different conclusion based on clearer policy language.

While it does not appear that any Connecticut court has actually applied the rule permitting an insurer to terminate its duty to defend by making full payment of policy limits to enforce such a result, both the Gentile court and Chicago Title court clearly recognize this rule and the enforceability of exhaustion clauses. Gentile, 1995 Conn. Super. LEXIS 3444, 7; Chicago Title, 361 F. Supp. 2d 4, 9. Such recognition is found in other jurisdictions, as well. Further, though such decisions are presently absent from Connecticut jurisprudence, courts in other jurisdictions have allowed an insurer to exhaust limits and terminate its duty to defend. Seem e.g. In Re: East 51st Street Crane Collapse Litigation, No. 769000/08, 2010 N.Y. Misc. LEXIS 6310 (N.Y. Sup. Ct. Feb. 18, 2010).

For an expanded analysis, click here.