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Fireman's Fund Insurance Company v. Td Banknorth Insurance Agency Incorporated


April 29, 2011


The opinion of the court was delivered by: Dennis Jacobs, Chief Judge:


Fireman's Fund Ins. Co. v. TD Banknorth Ins. Agency Inc.

Argued: December 21, 2010


30 Before: DENNIS JACOBS, Chief Judge, 31 GUIDO CALABRESI, 32 ROBERT D. SACK, Circuit Judges.

A policyholder appeals from a declaratory judgment 35 entered in the United States District Court for the District 36 of Connecticut (Droney, J.), awarding to its insurer all 37 funds held in escrow as proceeds from settlement of the 38 policyholder's claims against third parties. The 1 policyholder, TD Banknorth Insurance Agency, Inc., 2 challenges the allocation of the escrowed funds on the 3 ground that Connecticut's common law "make whole" doctrine 4 entitles it to recover its deductible before its insurer, 5 Fireman's Fund Insurance Company, can collect as subrogee. 6 The district court concluded that the subrogation 7 clause in the contract between the two parties abrogated 8 Connecticut's make whole doctrine. We disagree. The 9 contract at issue did not abrogate Connecticut's make whole 10 doctrine; however, this conclusion raises the more basic 11 issue of whether Connecticut's make whole doctrine applies 12 to insurance deductibles at all. Because this question is 13 undecided under Connecticut law, we certify it to the 14 Supreme Court of Connecticut and stay resolution of this 15 case in the interval.

A policyholder appeals from a declaratory judgment 4 entered in the United States District Court for the District 5 of Connecticut (Droney, J.), awarding to its insurer all 6 funds held in escrow as proceeds from settlement of the 7 policyholder's claims against third parties. The 8 policyholder, TD Banknorth Insurance Agency, Inc. ("TD 9 Banknorth"), challenges the allocation of the escrowed funds 10 on the ground that Connecticut's common law "make whole" 11 doctrine entitles it to recover its deductible before its 12 insurer, Fireman's Fund Insurance Company ("Fireman's 13 Fund"), can collect as subrogee.

14 The district court concluded that the subrogation 15 clause in the contract between TD Banknorth and Fireman's 16 Fund abrogated Connecticut's make whole doctrine. We 17 disagree. The contract at issue did not abrogate 18 Connecticut's make whole doctrine; however, this conclusion 19 raises the more basic issue of whether Connecticut's make 20 whole doctrine applies to insurance deductibles at all. 21 Because this question is undecided under Connecticut law, we 22 certify it to the Supreme Court of Connecticut and stay 23 resolution of this case in the interval.


2 In 2005 Haynes Construction Company ("Haynes") began 3 work on a housing development and retained TD Banknorth as 4 its agent to arrange insurance. TD Banknorth procured a 5 Builder's Risk insurance policy from Peerless Insurance 6 Company ("Peerless") and an Inland Marine insurance policy 7 from Hartford Insurance Company ("Hartford"). In February 8 2006, a fire destroyed a house being built on Lot 14 of the 9 Haynes development. Peerless denied coverage of the loss 10 because Lot 14 was not listed in its Builder's Risk policy-- 11 an error of omission by TD Banknorth. Haynes thereupon 12 claimed against TD Banknorth for its negligent omission of 13 Lot 14.

14 To protect against the risk of such negligence, TD 15 Banknorth had purchased Errors & Omissions coverage with 16 Fireman's Fund ("E&O Contract"). Fireman's Fund undertook 17 to pay on TD Banknorth's behalf any sums TD Banknorth became 18 "legally obligated to pay as damages because of a negligent 19 act, error or omission in the performance of [TD 20 Banknorth's] professional services." The E&O Contract had a 21 deductible of $150,000 per claim. TD Banknorth gave timely 22 notice of the loss to Fireman's Fund.

1 In July 2006, TD Banknorth and Fireman's Fund settled 2 with Haynes for $354,000.*fn1 Of that, TD Banknorth 3 contributed $150,000 (its single claim deductible) and 4 Fireman's Fund contributed the $204,000 remainder. In the 5 settlement, Haynes assigned its rights against Peerless and 6 Hartford to Fireman's Fund and TD Banknorth collectively. 7 TD Banknorth--and Fireman's Fund as subrogee--then 8 proceeded against Peerless and Hartford for the $354,000. 9 In the ensuing settlement, Peerless paid $88,000 and 10 Hartford paid $120,100 in exchange for complete releases. 11 TD Banknorth and Fireman's Fund "reserve[d] all rights that 12 they may have against each other relating to the allocation 13 of the [settlement funds] held in escrow." The $208,000 was 14 deposited in an escrow account.

15 In March 2008, Fireman's Fund commenced this action 16 against TD Banknorth in the District of Connecticut, seeking 17 a declaratory judgment that it was entitled to all of the 18 escrow funds. Fireman's Fund claimed $10,000 in defense 19 costs (incurred on TD Banknorth's behalf) in addition to the 20 $204,000 it had paid Haynes: a total of $214,000. TD 21 Banknorth counterclaimed for a declaratory judgment that, 1 under Connecticut's make whole doctrine, it was entitled to 2 recover its $150,000 deductible from the escrow funds. 3 Both parties moved for summary judgment. The district 4 court found that the subrogation clause in the E&O Contract 5 abrogated Connecticut's make whole doctrine, and accordingly 6 granted summary judgment in favor of Fireman's Fund.

7 Fireman's Fund Ins. Co. v. TD Banknorth Ins. Agency, Inc., 8 No. 3:08-cv-364, 2010 WL 420041, at *4 (D. Conn. Feb. 1, 9 2010). TD Banknorth appeals.*fn2


12 TD Banknorth is a Maine corporation, and Fireman's Fund 13 is a California corporation. The amount in dispute is 14 greater than $75,000. Therefore, we have subject-matter 15 jurisdiction over their dispute under 28 U.S.C. § 1332 16 (diversity jurisdiction).

17 "We review the district court's ruling on cross-motions 18 for summary judgment de novo, in each case construing the 19 evidence in the light most favorable to the non-moving 1 party." Nat'l Res. Def. Council, Inc. v. U.S. Dep't of 2 Agric., 613 F.3d 76, 83 (2d Cir. 2010). We review de novo a 3 district court's interpretation of the terms of a contract.

4 ReliaStar Life Ins. Co. of N.Y. v. Home Depot U.S.A., Inc., 5 570 F.3d 513, 517 (2d Cir. 2009). 6 This appeal turns on a single question of law: Is TD 7 Banknorth entitled to recoup the $150,000 deductible by 8 virtue of Connecticut's make whole doctrine?


11 The district court concluded that the make whole 12 doctrine does not apply to the $150,000 deductible because 13 the terms of the E&O Contract abrogated the doctrine. We 14 disagree.

15 In Connecticut, insurance companies have an equitable 16 right of subrogation at common law even in the absence of 17 express contract terms to that effect. Wasko v. Manella, 18 849 A.2d 777, 781 (Conn. 2004) ("[T]he right of legal or 19 equitable subrogation is not a matter of contract; it does 20 not arise from any contractual relationship between the 21 parties, but takes place as a matter of equity, with or 22 without an agreement to that effect." (brackets and internal 7 1 quotation marks omitted) (quoting Westchester Fire Ins. Co. 2 v. Allstate Ins. Co., 672 A.2d 939, 944 (Conn. 1996))). 3 This equitable right of subrogation is subject to the "make 4 whole doctrine," which provides that "the insurer may 5 enforce its subrogation rights only after the insured has 6 been fully compensated for all of its loss." United States 7 v. Lara, No. 3:08-cr-00169, 2009 WL 3754069, at *2 (D. Conn. 8 Nov. 6, 2009). Thus, when insurance coverage compensates a 9 policyholder for less than the full loss, the insurer must 10 first use any recovery from a third-party to compensate the 11 policyholder for the remainder of its loss before keeping 12 anything for itself.

13 Under Connecticut common law, the make whole doctrine 14 is a default rule; the parties may abrogate it with express 15 contract terms to that effect. See Lara, 2009 WL 3754069, 16 at *2 ("The make whole principle is a 'rule of 17 interpretation' that can be signed away; it is thus a 'gap- 18 filler' that 'only exists when the parties are silent.'" 19 (quoting Barnes v. Indep. Auto. Dealers Ass'n of Cal. Health 20 & Benefit Welfare Plan, 64 F.3d 1389, 1394 (9th Cir. 21 1995))). The district court concluded that the subrogation 8 1 clause in the E&O Contract abrogated the make whole 2 doctrine. Reviewing this conclusion de novo, we disagree.


5 The subrogation clause in the E&O Contract states: 6 If any insured [TD Banknorth] has rights to 7 recover all or part of any payment we [Fireman's 8 Fund] have made under this policy, those rights 9 are transferred to us. The insured must do 10 nothing after loss to impair them. At our 11 request, the insured will bring suit or transfer 12 those rights to us and help us enforce them. 13 Under Connecticut law, boilerplate subrogation clauses 14 incorporate default common law subrogation rules, and do not 15 modify or abrogate them:

16 In sum, while a right of true equitable 17 subrogation may be provided for in a contract, the 18 exercise of the right will have its basis in 19 general principles of equity rather than in the 20 contract, which will be treated as being merely a 21 declaration of principles of law already 22 existing....[A]lthough insurers may place 23 subrogation clauses in their policies...those 24 provisions typically are general and add nothing 25 to the rights of subrogation arising by law... 26 27 Wasko, 849 A.2d at 781-82, 786 (brackets, ellipses, 28 quotation marks, and citations in original omitted). The 29 make whole doctrine, as part of the common law equitable 30 right of subrogation, is likewise not abrogated by generic 31 or boilerplate subrogation clauses. If parties desire to 9 1 contract around the make whole clause, they must state 2 expressly that the doctrine is not to apply. Silence is not 3 enough.

4 The subrogation clause in the E&O contract is 5 boilerplate and materially indistinguishable from the 6 subrogation clause in Wasko, which the Connecticut Supreme 7 Court concluded did not abrogate the make whole doctrine. 8 The district court concluded that the subrogation clause in 9 Wasko was distinguishable, locating a closer analog in 10 American International Specialty Lines v. United States, No. 11 05-1020 C, 2008 WL 1990859 (Fed. Cl. Jan. 31, 2008), in 12 which a general subrogation clause was read to abrogate the 13 make whole doctrine: "The fact that [insurer's] subrogation 14 rights arise upon 'any' payment clearly contradicts the 15 make-whole rule." Id. at *11. We follow Wasko instead, for 16 several reasons.

17 First, Specialty Lines was not a decision by a 18 Connecticut court and did not undertake to construe 19 Connecticut law. Second, Specialty Lines is an outlier.

20 Several cases have examined contracts that contain 21 boilerplate subrogation clauses, but lack any express 22 language giving the insurer priority regardless of whether 1 the policyholder has been made whole. See, e.g., Sapiano v. 2 Williamsburg Nat'l Ins. Co., 33 Cal. Rptr. 2d 659, 660, 28 3 Cal. App. 4th 533, 535-36 (1994); Progressive W. Ins. Co. v. 4 Yolo Cnty. Sup. Ct., 37 Cal. Rptr. 3d 434, 443, 125 Cal. 5 App. 4th 263, 274 (2005); In re DeLucia, 261 B.R. 561, 567 6 (Bankr. D. Conn. 2001) (holding that language in an 7 insurance contract stating that the insurer "shall be 8 subrogated to all rights of recovery of such person against 9 any and all persons or organizations arising out of the 10 condition, illness or injury with respect to which such 11 payments were made" did not override the make whole doctrine 12 (emphasis removed)); cf. Lara, 2009 WL 3754069, at *1 13 (holding that an agreement which specifically details the 14 order of precedence of recovery overrides the make whole 15 doctrine). In these cases, boilerplate subrogation language 16 was found insufficient to displace the make whole doctrine 17 and give the insurer priority recovery.

18 Taken together, these cases suggest that a boilerplate 19 subrogation clause does not displace the make whole 20 doctrine; displacement requires wording that speaks 21 specifically to the priority of recovery. This is 22 consistent with Wasko, as well as with a leading treatise.

1 See 16 Lee R. Russ, Couch on Insurance § 223:145 (3d ed. 2 2010) ("[A]n insurance contract providing generally that the 3 insurer is subrogated to the rights of the insured does not 4 itself permit an insurer to recover from a third-party 5 tortfeasor until the insured has been made whole by the 6 combination of insurance payments and the amount recovered 7 from the tortfeasor; there must be specific language to the 8 contrary to avoid the make whole rule."). We conclude that 9 the subrogation clause in this case does not abrogate 10 Connecticut's make whole doctrine.

11 Furthermore, even if the subrogation clause in this 12 case did abrogate Connecticut's make whole doctrine, such 13 abrogation would not apply to the $150,000 deductible. By 14 its own express terms, the E&O contract's subrogation clause 15 concerns only the sums that Fireman's Fund pays on behalf of 16 its insureds. This allocation of rights does not apply to 17 the $150,000 deductible, which was paid by TD Banknorth and 18 not by Fireman's Fund.


In the alternative, Fireman's Fund argues that 22 Connecticut's make whole doctrine is inapplicable to 12 1 liability insurance. In support of this assertion, 2 Fireman's Fund observes that all recent make whole doctrine 3 cases in Connecticut (in state and federal courts) involve 4 first-party losses.

5 We conclude that Connecticut's make whole doctrine 6 applies equally to insurance for first-party loss and third- 7 party liability. No case cited by Fireman's Fund or found 8 by this Court remotely suggests that the doctrine is 9 confined to first-party coverage. See Wasko, 849 A.2d 777; 10 Lara, 2009 WL 3754069; In re DeLucia, 261 B.R. 561. True, 11 the recent cases on Connecticut's make whole doctrine all 12 involve first-party losses, not liability insurance, but 13 that would seem to be a function of the doctrine being 14 infrequently litigated. There are no more than a handful of 15 recent cases; that none involves a liability contract is not 16 a basis for inferring an implicit limitation.

17 The equitable principle underlying the make whole 18 doctrine applies with equal force to liability insurance: 19 If the recovery from a third party is insufficient to fully 20 compensate both the policyholder and the insurer, the 21 resulting loss should be borne by the insurer because the 22 risk of this loss is precisely the risk that the 13 1 policyholder paid the insurer to assume. See Wasko, 849 2 A.3d at 784 n.8; Wine v. Globe Am. Cas. Co., 917 S.W.2d 558, 3 561-62 (Ky. 1996). The source of the loss has no evident 4 bearing on this equitable principle. We therefore reject 5 Fireman's Fund's contention that the make whole doctrine is 6 inapplicable in the context of liability insurance.


Fireman's Fund's final argument is that it is entitled 10 to the escrow funds because the make whole doctrine does not 11 apply to deductibles. There are strong arguments on both 12 sides of this issue.

13 TD Banknorth's claim to the funds finds its strongest 14 support in the straightforward reading of the make whole 15 doctrine. By both its name and definition, the make whole 16 doctrine admits no exceptions. See Lara, 2009 WL 3754069, 17 at *2 (explaining Connecticut's make whole doctrine without 18 indicating any exceptions or carve-outs). Under the 19 traditional canon that a rule means what it says, the 20 doctrine applies to deductibles. If the make whole doctrine 21 means what it literally says--if it intends to make the 14 1 policyholder truly whole--then it would apply to deductibles 2 just as it does to non-deductible losses.

3 Nor does the basic purpose behind the doctrine--to 4 insulate fully the insured against injury--suggest that 5 exceptions are warranted. Even when a policyholder is made 6 whole for a loss in excess of all coverage, the policyholder 7 still remains out-of-pocket to the extent of the deductible. 8 Making the policyholder truly "whole," so that the 9 policyholder suffers no net loss to the benefit of the 10 insurance company, would therefore require compensating him 11 for the deductible as well.

12 While a straightforward reading of the make whole 13 doctrine appears to admit no exception, Fireman's Fund has 14 strong countervailing support for its position that 15 deductibles are unaffected by the doctrine. The equitable 16 principle that underlies the make whole doctrine is that a 17 loss should be borne according to the allocation of risk in 18 the insurance contract. Muller v. Soc'y Ins., 750 N.W.2d 1, 19 23 (Wis. 2008) (Abrahamson, C.J., dissenting) ("The made 20 whole doctrine...rests upon the equitable principle that 21 [w]here either the insurer or the insured must to some 22 extent go unpaid, the loss should be borne by the insurer 15 1 for that is a risk the insured has paid it to assume." 2 (internal quotation marks omitted)). The insurance company 3 must bear the unreimbursed amount of such loss as it was 4 paid to assume. The risk of the deductible, however, is 5 specifically allocated to the policyholder, not the insurer. 6 It would therefore disserve the equitable principle behind 7 the make whole doctrine--that a loss should be borne by the 8 party to whom the risk of such loss was allocated under the 9 contract--to apply the make whole doctrine to deductibles.

10 Applying the make whole doctrine to deductibles also 11 creates an unhealthy incentive: The sooner an insurer 12 reimburses its policyholder, the more it pays. The facts of 13 this case are illustrative. If the make whole doctrine were 14 applied to deductibles, then TD Banknorth would collect 15 $150,000 from the escrow funds in this case, and Fireman's 16 Fund would be left with a loss of almost $150,000. However, 17 if Fireman's Fund had delayed paying TD Banknorth's claim 18 until after TD Banknorth collected from Peerless and 19 Hartford, TD Banknorth's claim would have been for less than 20 the $150,000 deductible, and Fireman's Fund would not have 21 had to pay anything. This difference in treatment based on 22 timing makes no sense.

Including deductibles in the make whole doctrine also 2 impairs the usefulness of deductibles in general. If an 3 insurer is bound to refund the deductible when collection is 4 made from third-parties through subrogation (even where this 5 results in a loss to the insurer), the deductible does not 6 operate reliably to allocate to the policyholder the risk 7 that the policyholder contracted to bear. Instead, whenever 8 the amount of the deductible is recovered from a third-party 9 tortfeasor, the insurer still effectively bears the risk of 10 the entire loss notwithstanding the deductible. This 11 eliminates one ordinary means by which the insurer and the 12 policyholder allocate risk between themselves, thereby 13 reducing their flexibility in designing their contractual 14 arrangement--and incrementally increasing moral hazard. By 15 allocating the first portion of a loss to the policyholder, 16 the deductible encourages the policyholder to take adequate 17 precautions to avoid the loss in the first place; this 18 incentive is diminished if the policyholder believes that 19 the deductible may be reimbursed by the insurance company.

20 All this said, there is no statutory or precedential 21 support for either position in Connecticut law--though 22 either position, being a default rule, can be modified (and its attendant problems dealt with) by contract. Whether the 2 make whole doctrine applies to deductibles is a matter of 3 Connecticut law, and Connecticut law is currently silent on 4 the matter. Insurance is an important industry in 5 Connecticut, and Connecticut's Supreme Court is one of the 6 leading authorities in this area. We therefore think it 7 prudent to certify this question to the Connecticut Supreme 8 Court.


For the reasons stated above, we hereby CERTIFY the 12 following question to the Connecticut Supreme Court: Are 13 insurance policy deductibles subject to Connecticut's make 14 whole doctrine? We STAY ADJUDICATION of this dispute until 15 we receive guidance from the Connecticut Supreme Court. The 16 Connecticut Supreme Court may modify this question as it 17 sees fit and add any pertinent questions of Connecticut law 18 involved in this appeal that the Court chooses to answer.

This panel retains jurisdiction over this case and will 20 decide it once the Connecticut Supreme Court has either 21 provided us with its guidance or declined certification.

It is therefore ORDERED that the Clerk of this Court 2 transmit to the Clerk of the Connecticut Supreme Court a 3 Certificate, as set forth below, together with this decision 4 and a complete set of the briefs, appendices, and record 5 filed in this Court by the parties.


8 The foregoing is hereby certified to the Connecticut 9 Supreme Court, pursuant to Conn. Gen. Stat. Ann. § 51-199b 10 and 2d Cir. R. 0.27, as ordered by the United States Court 11 of Appeals for the Second Circuit.

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