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Addressing an issue of first impression, Connecticut Supreme Court concludes that Insurance Guaranty Association is not estopped by the sins of its insolvent charge

In Connecticut Ins. Guaranty Association v. Joshua Drown, the Connecticut Supreme Court addressed, as an issue of first impression, whether an insurer's preinsolvency breach of its duty to defend a claim during an underlying litigation estopped the plaintiff Connecticut Insurance Guaranty Association from contesting its obligation under the Guaranty Act to pay a claim under the insolvent insurer's policy.

The Court concluded that an insurer's preinsolvency conduct does not estop the Association from challenging its obligation to pay under the policy even when the insolvent insurer would have been bound to pay that claim because of a breach of its coverage obligation. In doing so, the Court noted that the Guaranty Association is a creature of statute and any basis for liability must be found within the provisions of the Act, which defines the scope and extent of the Association's liability. Under the Act, the Association's liability is limited to "covered claims."

The Court relied on its decision in Potvin v. Lincoln Service & Equipment Co., 298 Conn. 620 (2010), where it concluded, in construing the meaning of "covered claim" in the Act, that the Association was not liable to the same extent as an insolvent insurer for sanctions imposed by the Workers' Compensation Commissioner. The relevant part of the Guaranty Act "confine[d] the extent of a covered claim to that 'which arises out of and is within' the coverage of the underlying policy..." Liabilities arising from conduct in handling the claim, in the Court's view, do not fall within the definition of a "covered claim."

Again, relying on Potvin, the Court emphasized that its conclusion that an insurer's preinsolvency conduct does not estop the Association from challenging its obligation to pay under the terms of the policy is consistent with the association's "limited purpose of paying only 'covered' claims on behalf of insolvent insurers to insureds who otherwise would be left with a limited recovery, if any following the insolvency of their insurer ... The association does not replace the insolvent insurer and does not assume all of the insolvent insurer's responsibilities and obligations."

Since insurers may pass on the costs of any assessments made against them by the Association to policyholders, it is policyholders who, in reality, pay for the protections afforded by the Association, which the Court concluded further supported limiting the Association's obligations.

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