In Connecticut Ins. Guar. Ass’n v. Drown, 314 Conn. 161 (2014), the Connecticut Supreme Court affirmed the Appellate Court’s ruling that the Connecticut Insurance Guaranty Association (the “Association”) “cannot be held liable on account of acts or omissions of the insolvent insurer where there is no covered claim.” The underlying facts of the decision involved the case of a newborn, Joshua Drown, who was found to have suffered brain damage due to an undiagnosed placental abruption. The family of the newborn alleged that the injury resulted from the negligent failure of their physician and/or the practice, Associate Women’s Health Specialists (“Health Specialists”), to diagnose the condition. The insurer for Health Specialists, Medical Inter-Insurance Exchange (“Exchange"), provided a defense to these claims for approximately six years. In providing the defense, Exchange did not assert any reservation of rights under the relevant policy.

The issues at bar began to manifest when, in September of 2006, Exchange derogated a court order to appear for a scheduled mediation session. The following month, Exchange wrote a letter to Health Specialists in which it claimed that coverage for “vicarious liability for the acts of individual physicians” was excluded by Health Specialists’ policy. In December of the same year, Exchange once again derogated the court’s orders by failing to send a representative to another scheduled mediation session. As a result of this conduct, the trial court rendered a default judgment against Health Specialists on the issue of liability. The Drown family subsequently executed a settlement agreement whereby Health Specialists agreed that it was liable for the full $2 million policy amount and that it would assign its right to recover against Exchange to the Drowns. About a year later, however, Exchange was declared insolvent and the Association assumed liability for Exchange’s obligations “to the extent that claims under its policies were covered under the guaranty act” of Conn. Gen. Stat. §§ 38a-836 et. seq. 1

After analyzing the extent of its obligations, the Association sought a declaratory judgment stating that the claim against Health Specialists was not covered by the policy. Besides filing counterclaims seeking a declaratory judgment that the claim was covered by the policy, the defendants also argued that the Association was estopped from denying coverage by virtue of Exchange’s breach of its duty to defend, failure to reserve its rights, and failure to honor its contractual obligations. The trial court found in favor of the Drowns, but the Appellate Court reversed and the Supreme Court ultimately granted certification and thereafter found in favor of the Association on all counts.

Insurers or clients of insurers may find the Court’s holdings regarding the issue of estoppel and policy interpretation to be of particular interest. With regard to the former, the holding itself is a two-part holding. Not only did the Court find that the Association cannot be held liable “on account of acts or omissions of the insolvent insurer where there is no covered claim,” but the Court also held that “the [A]ssociation is not estopped from challenging the existence of a covered claim, even when the insolvent insurer would otherwise have been bound to pay that claim because of a breach of its coverage obligation.” What is especially interesting about this holding is the Court’s recognition of the policy concerns in its discussion leading up to its decision.

The Court pointed out that the Association itself is a “creature of statute” (and not a full-service insurer) and so, as a matter of policy, “any basis for liability must be found within the provisions of [its enabling statute,] the guaranty act.” That act, the Court further opined, was created for “the limited purpose of paying only ‘covered’ claims on behalf of insolvent insurers . . . .” As such, the Association is only obligated to pay for claims within the coverage of a relevant insurance policy and not for claims which originate from the conduct of the insolvent insurer; such as the default judgment entered against Exchange and the related sanctions levied upon it.2

This rationale provides some relief for insurers and their clients because, as the Court pointed out, “[Conn. Gen. Stat.] § 38a-849 provides that insurers may pass on the costs of the assessments made against them by the [A]ssociation.” As such, it is “policyholders who [ultimately] pay for the protections afforded by the association.” The limitations upheld by the Court’s ruling in Drown help stabilize premiums by ensuring that policyholders “pay only for protection for fellow policyholders and claimants in the event that an insurer becomes insolvent” without opening the door to additional liabilities that could cause unpredictable fluctuations in the Association’s assessments against insurers.

As to the merits of the coverage issue, the Supreme Court utilized basic rules of contract and policy interpretation to find that the policy unambiguously excluded the contested claim. The insurance policy maintained by Health Specialists excluded from coverage any “injury arising solely out of acts or omissions in the rendering or failure to render professional services by individual physicians or nurse anesthetists, or by any paramedical for whom a premium charge is shown on the declarations page.” The defendants argued that, in the context of the policy as a whole, this language was either ambiguous or gave rise to illusory coverage because of an additional provision which excluded coverage for claims arising out of the acts or omissions of individual physicians, nurse anesthetists, partners, officers, directors, or shareholders of Health Specialists unless the individual in question was covered by separate professional liability insurance at the time of an incident.

Relying on the holding in Connecticut Ins. Guaranty Assn. v. Fontaine, 278 Conn. 779 (2006), which found that the rule of contra proferentem—that ambiguity in insurance contracts are read in favor of the insured—continues to apply to policies which the Association has taken over (including cases in which the Association is challenging a coverage obligation), the Drowns argued that the Court should render judgment in their favor due to the alleged ambiguities. The Drowns claimed that policy was illusory because it seemed to deny the proffered vicarious liability coverage to the very sorts of employees for which Health Specialists would need it most. Additionally, the Drowns argued that the claim was covered because the physician involved did not have her name listed on the declarations page. In other words, the Drowns argued that the policy should be read as applying the name-listing requirement to the “physician[s]” and “nurse anesthetist[s]” mentioned in the exclusion clause and not solely to “paramedical[s].”
The Court applied the “last antecedent rule” to address both arguments. The last antecedent rule provides that “qualifying phrases, absent a contrary intention, refer solely to the last antecedent in a sentence.” This meant that the phrase “for whom a premium charge is shown on the declarations page” was clearly only applicable to “paramedicals.” Furthermore, the Court explained that this did not lead to upholding an illusory promise for coverage because injuries resulting from actions that were not “solely” caused by a physician, nurse anesthetist, or unscheduled paramedical would still be covered. Likewise, the Court pointed out, this sort of policy makes sense because statutory licensing requirements for physicians and nurse anesthetists who practice under a physician require these practitioners to carry malpractice insurance. For these reasons, the Court found that the policy language “clearly and unambiguously” stated its coverage exceptions and to legitimate effect.

1 Specifically Conn. Gen. Stat. § 38a-841.
2 The court did note that such liability would be covered if it was provided for within the terms of an apposite insurance policy.