FIREMAN'S FUND INSURANCE COMPANY v. TD BANKNORTH INSURANCE AGENCY, INCORPORATED, F/K/A MORSE, PAYSON & NOYES

INSURANCE, SC 18796

United States Court of Appeals for the Second Circuit

 Insurance; Whether Insurance Policy Deductibles are Subject to Connecticut's "Make Whole" Doctrine.  In 2005, Haynes Construction Company (Haynes) began work on a housing development and retained TD Banknorth Insurance Agency, Inc. (TD Banknorth), as its insurance agent.  On behalf of Haynes, TD Banknorth procured insurance policies from Peerless Insurance Company (Peerless) and Hartford Insurance Company (Hartford).  To protect against the risk of its own negligence, TD Banknorth also obtained coverage from Fireman's Fund Insurance Company (Fireman's Fund), which had a deductible of $150,000 per claim.  Thereafter, a fire destroyed a house that was being built in the development.  After Peerless denied coverage of the loss, Haynes asserted a claim against TD Banknorth, which Fireman's Fund and TD Banknorth settled for $354,000.  Of that amount, TD Banknorth agreed to contribute its $150,000 deductible.  TD Banknorth and Fireman's Fund subsequently recovered $208,000 from Peerless and Hartford, which was deposited in an escrow account.  Fireman's Fund then commenced an action against TD Banknorth in the United States District Court for the District of Connecticut, seeking a declaratory judgment that it was entitled to all of the escrow funds.  TD Banknorth counterclaimed for a declaratory judgment that it was entitled to recover its $150,000 deductible.  The District Court rendered summary judgment in favor of Fireman's Fund.  On appeal, TD Banknorth argued that it was entitled to recoup the $150,000 deductible pursuant to Connecticut's "make whole" doctrine, which provides that the insurer may enforce its subrogation rights only after the insured has been fully compensated for all of its loss.  Fireman's Fund countered that the make whole doctrine does not apply to deductibles.  The United States Court of Appeals for the Second Circuit opined that making a policyholder truly "whole" so that the policyholder suffers no net loss would require compensating it for the loss of the deductible.  It acknowledged, however, that the equitable principle that underlies the make whole doctrine is that a loss should be borne according to the allocation of risk in the insurance contract and that because the risk of the deductible is specifically allocated to the policyholder, the equitable principle behind the make whole doctrine would be undermined if the doctrine is applied to deductibles.  The court ultimately determined that, because Connecticut law is silent on the issue, it would be prudent to certify the following question, which the Supreme Court subsequently accepted pursuant to General Statutes § 51-199b: "Are insurance policy deductibles subject to Connecticut's make whole doctrine?"