The Connecticut Supreme Court recently held that an insurer has standing to pursue a declaratory judgment action against another insurer of a common insured to determine the existence of a duty to defend and the allocation of defense costs among them.  Travelers Cas. & Sur. Co. of America, et al. v. The Netherlands Ins. Co., et al., No. S.C. 19089, -- Conn. -- (Conn. Aug. 5, 2014).  A copy of the decision is available here.

The coverage action was prompted by an underlying civil suit that sought $18 million in damages in connection with the allegedly defective construction of the library for the University of Connecticut School of Law, which resulted in continuing and progressive water intrusion over a number of years.  From approximately 1994 through 2006, the contractor who participated in the construction of the library (the “Insured”) maintained coverage with different insurers, each during different coverage periods.  When the Insured provided its insurers notice of the State’s claim, the plaintiff insurer, which had issued policies covering the first four years of the risk, assumed the investigation and defense.  The insurers that issued policies for the remaining period refused to participate in the investigation and defense, later arguing that coverage was excluded by virtue of the Insured’s prior knowledge of the occurrence.

Once the underlying lawsuit was brought, the defending insurer brought a declaratory judgment action against the non-defending insurers and the Insured seeking, among other things, a declaration that the non-defending insurers were “obligated to pay their pro rata shares of the costs of [the Insured’s] defense” and that the Insured was required to pay its pro rata share of defense costs allocated to any uninsured period.  One of the non-defending insurers moved to dismiss the case for lack of subject matter jurisdiction, claiming that the defending insurers were not party to the Insured’s policies with the non-defending insurer and, as a result, lacked standing to seek a coverage declaration.  The trial court denied the motion to dismiss, finding that the defending insurer had standing to pursue its action and that the non-defending insurer had a duty to defend.

On appeal, the non-defending insurer maintained that the trial court, among other things, improperly concluded that the plaintiff insurer had standing to bring the declaratory judgment action because it was neither a party to, nor a third-party beneficiary of, the insurance contracts between the non-defending insurer and the Insured.  The defending insurer claimed that it was “classically aggrieved” by virtue of having paid all of the Insured’s defense costs, which provided it with the standing to pursue a declaratory judgment action under Connecticut law.

Siding with the majority of federal and state courts to have considered the question, the Supreme Court held that the defending insurer had standing to bring a declaratory judgment action against a fellow insurer because the controversy between them was “real and ongoing” and the defending insurer had more than a colorable claim of injury because it had paid all of the Insured’s defense costs.