Insurer Has Duty to Defend Sub-Contractor

    Interpreting Connecticut law, the federal district court had that the insured sub-contractor was entitled to a defense. County Wide Mech. Servs. LLC v. Regent Ins. Co., 2022 U.S. Dist. LEXIS 86726 (D. Conn. May 13, 2022).

    The underlying plaintiff, The Saybrook at Haddam, entered a contract with PAC Group to serve as general contractor for construction of an addition to The Saybrook’s facility. PAC Group sub-contracted with County Wide Mechanical Services to install the HVAC system.

    The HVAC system was put into service on November 14, 2014. In October 2019, The Saybrook filed the underlying action against PAC group, County Wide, and others. The underlying complaint alleged that there had been at least seven “critical failures” of the HVAC system. As a result, The Seabrook had to replace multiple compressors and several circuit boards, valves, and other components. Further, the entire system had to be replaced. The underlying complaint alleged breach of contract against PAC Group and County Wide. In addition to the alleged breach of contract between The Saybrook and County Wide, the Saybrook also alleged it was a third-party beneficiary of PAC Group’s contract with County Wide regarding installation of the HVAC system. PAC Group cross-claimed against County Wide, asserting one count of contractual indemnification and one count of breach of contract under the PAC Group’s contract with County Wide.

    County Wide tendered to its insurer, Regent. Coverage was denied based on there being no “property damage” caused by an “occurrence.” Country Wide sued for breach of contract and bad faith. Regent moved for judgment on the pleadlngs.

    County Wide argued that a reasonable reading of the underlying complaint potentially included damage beyond the HVAC system itself, triggering Regent’s duty to defend. The court agreed with County Wide. The Saybrook alleged that, as a result of the HVAC system’s critical failures, it had to replace multiple compressors in the HVAC system and several circuit boards, valves and other components. The underlying complaint was silent as to whether the circuit boards, valves and other components were part of the HVAC system. Therefore, the allegations plausibly stated that the allegedly damaged circuit board, valves, and other components were external to the HVAC system. 

    The court then considered Excision (b), which provided an exclusion for contractual liability. The exclusion provided exceptions for “liability for damages . . . [a]ssumed in a contract or agreement that is an insured contract.” “Insured contract” was defined, in part, as “That part of any other contract or agreement pertaining to our business . . . under which you assume the tort liability of another party to pay for ‘bodily injury’ . . . to a third person or organisation. Tort liability means a liability that would be imposed by law in the absence of any contract or agreement.”

    The Saybrook complaint alleged that County Wide was directly liable for breaching the contract between Country Wide and PAC group because The Seabrook was an intended third-party beneficiary of that contract. The district court was unaware of an interpretation of the assumption of liability exclusion by the Connecticut Supreme Court. PAC Group’s cross-claim alleged additional theories of liability against County Wide. First, PAC Group claimed that if it was liable to The Seabrook for the HVAC system, County Wide should indemnity PAC Group. Second, PAC Group claimed that County Wide was direct liable it for breaching the contract between them. 

    The court found the assumption of liability exclusion ambiguous. The phrase “assumption of liability” did not convey a definite and precise intent either to apply narrowly to only an insured’s indemnification agreements or to apply broadly to all of an insured’s contractual obligations. The exclusion did not unambiguously preclude coverage for County Wide as to all of the theories of liability that County Wide faced in the underlying suit. Because the phrase was ambiguous, Regent had a duty to defend.

    Regent also moved to dismiss the bad faith count. The court ruled that this was premature on a judgment on the pleadings. Whether County Wide had suffered damages arising from Regent’s refusal of coverage was not yet determined.