     10-4528-cv(L)
     Ryan v. National Union Fire Insurance Co. of Pittsburgh PA

 1                                     UNITED STATES COURT OF APPEALS
 2                                         FOR THE SECOND CIRCUIT

 3                                                       August Term, 2011
 4
 5                             (Argued: May 10, 2012                   Decided: August 27, 2012 )
 6
 7
 8                                    Docket Nos. 10-4528-cv(L), 10-4700-cv(XAP)
 9
10
11   - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -X

12   BRUCE CHARLES RYAN,

13                       Plaintiff-Counter-Defendant-Appellee-
14                       Cross-Appellant,

15   RUSSELL WILLIAM NEWTON, ROBERT
16   FITZPATRICK, MERIT CAPITAL ASSOCIATES, INC.,

17                       Plaintiffs-Appellees-Cross-Appellants,

18   DAVID W. GWYNN, RAQUEL GWYNN, GWYNN
19   FINANCIAL SVC. INC.,

20                       Consolidated Plaintiffs-Counter Defendants,

21   v.

22   NATIONAL UNION FIRE INSURANCE COMPANY
23   OF PITTSBURGH PA,

24                       Defendant-Counter-Claimant-Appellant-
25                       Cross-Appellee,

26   AIG TECH. SVC. INC., CHARTIS CLAIMS, INC.,

27                       Defendants.

28   ---------------------------------------X
 1   Before: WESLEY and LOHIER, Circuit Judges, and MURTHA, District Judge.*

 2           Appeal from a judgment of the United States District Court for the District of
 3   Connecticut (Droney, J.) awarding the plaintiffs consequential damages for the defendant’s
 4   breach of its duty as an insurer to defend them in a securities arbitration. On appeal, the
 5   defendant National Union Fire Insurance Company of Pittsburgh PA challenges the District
 6   Court’s ruling that it had a duty to defend the plaintiffs under the applicable insurance policy,
 7   and that consequential damages, including reputational damages, are available solely for an
 8   insurer’s breach of its duty to defend under Connecticut law. We conclude that the District
 9   Court properly determined that National Union breached its duty to defend. However, because
10   we conclude that the latter question regarding the availability of consequential damages has not
11   been decided under Connecticut law and is appropriate for certification, we certify this question
12   to the Supreme Court of Connecticut and stay resolution of this appeal and cross-appeal.

13                                                 PETER M. NOLIN, Sandak Hennessey & Greco, LLP
14                                                 (Stephanie A. McLaughlin, on the brief), Stamford,
15                                                 Conn., for Plaintiffs-Appellees-Cross-Appellants.

16                                                 DENNIS O. BROWN, Gordon & Rees LLP (Joseph R.
17                                                 Geoghegan, on the brief), Hartford, Conn., for
18                                                 Defendant-Counter-Claimant-Appellant-Cross-
19                                                 Appellee.
20

21   LOHIER, Circuit Judge:

22          This appeal requires us to consider whether consequential damages, which are

23   traditionally available for breach of contract claims, are also available for a claim of breach of a

24   duty to defend an insured under Connecticut law, and if so, whether they may include damages

25   for harm to reputation. The defendant National Union Fire Insurance Company of Pittsburgh PA

26   (“National Union”) appeals from a judgment of the United States District Court for the District

27   of Connecticut (Droney, J.) awarding the plaintiffs consequential damages, following a jury trial,

28   for National Union’s breach of its duty to defend the plaintiffs in a securities arbitration. The



            *
            The Honorable J. Garvan Murtha of the United States District Court for the District of
     Vermont, sitting by designation.

                                                       2
 1   District Court found that National Union had breached its duty to defend and concluded that, in

 2   addition to being liable for the defense costs and underlying settlement, which it had already

 3   paid, National Union could also be liable for consequential damages for the breach of the duty to

 4   defend, including damages for injury to professional reputation and loss of future earning

 5   potential. On appeal, National Union challenges the District Court’s determination that it

 6   breached its duty to defend, and also argues that consequential damages are not available in the

 7   context of an insurer’s breach of a duty to defend.

 8           The Connecticut courts have said very little either way about whether consequential

 9   damages are available solely for such a breach. Nor have they determined whether reputational

10   damages, specifically, are compensable in an action predicated on an insurer’s breach of its duty

11   to defend. Although no case in Connecticut has awarded consequential damages solely for a

12   breach of a duty to defend, we hesitate to prohibit recovery of such damages, which are generally

13   permitted under contract law, when Connecticut has not clearly addressed the issue. Similarly,

14   absent a precedential decision from the Connecticut courts, we are reluctant to foreclose claims

15   for reputational damages in actions similar to this one. Accordingly, we certify the following

16   two questions to the Supreme Court of Connecticut and stay resolution of this appeal and cross-

17   appeal in the interim:1

18           (1) Does Connecticut law permit a policyholder to recover consequential damages in a

19   breach of contract action against an insurer predicated on the insurer’s breach of its duty to

20   defend?


             1
              National Union and the plaintiffs raise other issues in their appeal and cross-appeal,
     respectively, that are not relevant to the question certified in this opinion, but that this panel will
     consider once the Supreme Court of Connecticut has either provided us with guidance or
     declined certification.

                                                        3
 1          (2) If consequential damages are available, may such damages include damages for harm

 2   to reputation and loss of income?

 3                                            BACKGROUND

 4          Plaintiffs Bruce Ryan, Russell Newton, and Robert Fitzpatrick were executives of Merit

 5   Capital Associates, Inc. (“Merit”), a securities broker-dealer. All three were insured by National

 6   Union under a Securities Broker/Dealer Professional Liability Insurance Policy (the “Policy”),

 7   which covered losses up to $1 million for each loss and $2 million in the aggregate for the period

 8   from August 23, 1999 to September 23, 2001. In August 2001 Michael Sowell, Merit’s former

 9   client, filed a securities arbitration claim before the National Association of Securities Dealers

10   (“NASD”) against the plaintiffs and David Gwynn, a registered representative working for

11   Merit. In his Amended Statement of Claim (the “Sowell Claim”), Sowell claimed approximately

12   $1 million in damages arising from Gwynn’s mismanagement of his Merit account, which was

13   opened in May 1998. Sowell alleged that Gwynn had “churned” his account by trading

14   excessively for the sole purpose of generating commissions, fraudulently and negligently

15   managed the account, and unlawfully solicited investments for some sham charter school

16   businesses owned by Gwynn. He also alleged that the other Merit executives had negligently

17   supervised Gwynn.

18          Plaintiffs submitted the Sowell Claim to National Union, seeking a defense and coverage

19   under the Policy, which included three exclusions relevant to this appeal. First, exclusion (f)

20   exempted coverage for losses arising out of wrongful acts or interrelated wrongful acts occurring

21   prior to August 23, 1999. Second, exclusion (s) precluded coverage of discretionary accounts.

22   Third, exclusion (t) barred coverage of claims involving entities outside of Merit.



                                                      4
 1          Several months after initiating an investigation to confirm Sowell’s allegation that he had

 2   given Gwynn discretionary control over his account, and after also arranging for separate

 3   counsel to represent Gwynn, National Union withdrew its defense. Although it subsequently

 4   received documents showing that Sowell’s account was in fact not discretionary, National Union

 5   continued to deny the plaintiffs a defense. Meanwhile, the plaintiffs obtained replacement

 6   counsel, and Gwynn proceeded pro se in the NASD arbitration, although he borrowed funds to

 7   retain counsel to pursue coverage under the Policy. A few days before the arbitration, Gwynn,

 8   through counsel, again sought coverage from National Union, warning the insurer that he might

 9   allow the arbitration panel to enter a default judgment against him and assign his claims against

10   National Union to Sowell.

11          By the time National Union provided Gwynn with defense counsel, it was too late.

12   Although he had not agreed to a default judgment, Gwynn had already appeared pro se at the

13   arbitration and compromised the plaintiffs’ defense. The arbitration panel found Gwynn and the

14   plaintiffs jointly and severally liable and awarded Sowell $1.125 million in damages. Gwynn

15   and the plaintiffs requested that National Union settle with Sowell before the arbitration award

16   was confirmed. When National Union failed to respond, the plaintiffs commenced this action

17   alleging that National Union had breached its duties to defend and indemnify, acted in bad faith,

18   and violated various provisions of Connecticut law not relevant to the question certified in this

19   opinion. The plaintiffs sought to recover their “costs connected with the Sowell arbitration,

20   damages related to regulatory proceedings initiated as a result of the Sowell arbitration award,

21   and damage to the plaintiffs’ reputations, earning potential, ability to conduct business and

22   obtain certain licenses.” S.P.A. 5. Soon after the plaintiffs filed this lawsuit, National Union

23   negotiated a $1 million settlement with Sowell, as part of which Sowell agreed to vacate the

                                                      5
1    arbitration award and enter into a covenant not to sue National Union, the plaintiffs, or Gwynn.

2    National Union then filed counterclaims against the plaintiffs seeking to recover these costs and

3    alleging unjust enrichment, among other claims.

4           Arguing that it had no duty to defend because Sowell’s allegations clearly fell within

5    exclusions (s), (f), and (t) of the Policy, National Union moved for summary judgment to dismiss

6    the plaintiffs’ claims. The District Court denied the motion because it concluded that those

7    exclusions did not preclude coverage under the Policy for all of the claims in the underlying

 8   Sowell Claim.2

 9          The plaintiffs’ claims then proceeded to a jury trial. During the trial, the court

10   determined that National Union had breached its duty to defend the Sowell Claim and granted

11   the plaintiffs’ motion for judgment as a matter of law on National Union’s counterclaim of unjust

12   enrichment. The court further concluded that by breaching its duty to defend, National Union

13   was liable to indemnify the plaintiffs.

14          The District Court found that National Union had already paid the plaintiffs’ attorneys’

15   fees incurred in defending the Sowell arbitration and also paid to settle the arbitration.

16   Accordingly, the only remaining issues for the jury to determine were: (1) whether the plaintiffs

17   had proven that they had suffered “reasonably foreseeable” consequential damages from

18   National Union’s breach of its duty to defend, and (2) whether National Union had acted in bad

19   faith and, therefore, whether the plaintiffs were entitled to compensatory and punitive damages.

20   The plaintiffs contended that they had suffered consequential damages “in the form of injury to



            2
                Although it may have been able to do so, National Union did not argue before the
     District Court that the claims in the underlying Sowell Claim were segregable for the purposes of
     its duty to defend.

                                                       6
 1   their professional reputations and future earning potential, as well as continued costs in

 2   addressing regulatory proceedings.” J.A. 584. They relied on evidence from an expert who

 3   testified that broker/dealers who have paid significant sanctions have trouble finding work, and

 4   on testimony from plaintiff Newton, who described his professional difficulties following the

 5   Sowell award.

 6           In response, National Union argued that consequential damages were not available under

 7   Connecticut law. The District Court rejected National Union’s argument and charged the jury

 8   that it could award consequential damages to the plaintiffs above the limits set forth in the

 9   Policy. The jury found that National Union had not acted in bad faith and thus awarded only

10   consequential damages in the amounts of $350,000 for Ryan, $325,000 for Newton, $200,000 for

11   Fitzpatrick, and $0 for Merit. In a post-trial motion, National Union insisted that consequential

12   damages should be denied as a matter of law, as the plaintiffs had failed to prove that the

13   damages were foreseeable and had failed to provide a sufficient evidentiary basis for the jury’s

14   damages calculation. The District Court denied the motion and entered judgment in favor of the

15   plaintiffs.

16           This appeal followed.

17                                             DISCUSSION

18           On appeal, National Union argues principally that it had no duty to defend the Sowell

19   Claim, and that, even if it had breached its duty, consequential damages are not available under

20   Connecticut law for such a breach. With respect to both issues, “[w]e review de novo the district

21   court’s interpretation of [state] law.” Amerex Grp., Inc. v. Lexington Ins. Co., 678 F.3d 193,

22   199 (2d Cir. 2012). We conclude that National Union had a duty to defend the Sowell Claim and



                                                      7
 1   that it breached that duty when it declined to defend the action as a whole.3 See Sec. Ins. Co. of

 2   Hartford v. Lumbermens Mut. Cas. Co., 826 A.2d 107, 120 (Conn. 2003) (“An insurer must bear

 3   the entire cost of defense when there is no reasonable means of prorating the costs of defense

 4   between the covered and the not-covered items. . . .” (alteration and quotation mark omitted));

 5   Lancia v. State Nat’l Ins. Co., 41 A.3d 308, 314 (Conn. App. Ct. 2012). As we explain below,

 6   however, we certify the question of whether consequential damages are available under

 7   Connecticut law for an insurer’s breach of its duty to defend and, if so, whether the insured may

 8   recover reputational damages.

 9          1. Duty To Defend

10          National Union relies on exclusion (f) of the Policy to contend that it had no duty to

11   defend the Sowell Claim.4 This exclusion states:

12          The Insurer shall not be liable for Loss in connection with any Claim made
13          against an Insured:



            3
               On appeal, the plaintiffs do not contest the District Court’s finding that exclusion (t) of
     the Policy applied to Sowell’s claims relating to Gwynn’s charter school businesses. For its part,
     National Union has abandoned the argument that exclusion (s) (which relates to discretionary
     control) absolves it of the duty to defend Sowell’s thirteen claims of churning, fraud, negligence,
     and violation of various NASD rules.
            4
               National Union could not have appealed the denial of its motion for summary
     judgment, because such a denial is not a final judgment and is not ordinarily appealable. See 28
     U.S.C. § 1291. Thus, insofar as National Union appeals the District Court’s denial of National
     Union’s summary judgment motion, that appeal is improper. See Pahuta v. Massey-Ferguson,
     Inc., 170 F.3d 125, 132 (2d Cir. 1999). The District Court entered its final judgment on the
     applicability of exclusion (f) when it disposed of the plaintiffs’ Rule 50 motion, concluding that
     “because a reasonable jury would not have a legally sufficient evidentiary basis to find for
     National Union on the issue of breach of duty to defend, judgment as a matter of law is entered
     for the plaintiffs on that count against National Union.” J.A. 533. Accordingly, we construe
     National Union’s appeal as an appeal from the District Court’s ruling on the plaintiffs’ Rule 50
     motion, rather than as an appeal from its denial of summary judgment. Because we conclude
     below that the District Court ruling on that legal question was correct, we affirm the court’s
     entry of judgment for the plaintiffs on that issue.
                                                       8
 1          f) alleging, arising out of, based upon or attributable to any Wrongful Act
 2          occurring prior to [August 23, 1999] or arising out of any subsequent Interrelated
 3          Wrongful Act .

 4   J.A. 725-26.

 5          Under Connecticut law, “‘[i]t is well established . . . that a liability insurer has a duty to

 6   defend its insured . . . if the pleadings allege a covered occurrence, even though facts outside the

 7   four corners of those pleadings indicate that the claim may be meritless or not covered.’”

 8   Hartford Cas. Ins. Co. v. Litchfield Mut. Fire Ins. Co., 876 A.2d 1139, 1144 (Conn. 2005) (first

 9   two alterations in original) (quoting QSP, Inc. v. Aetna Cas. & Sur. Co., 773 A.2d 906, 914

10   (Conn. 2001)). Connecticut also requires that the insurer “‘provide a defense when it has actual

11   knowledge of facts establishing a reasonable possibility of coverage,’” even if such facts lie

12   outside the “four corners of the complaint.” Id. at 1146 (quoting Fitzpatrick v. Am. Honda

13   Motor Co., 575 N.E.2d 90, 93 (N.Y. 1991)). In determining whether a claim falls within the

14   scope of an insurance policy, the Supreme Court of Connecticut “construes broad policy

15   language in favor of imposing a duty to defend on the insurer,” id. at 1145, and requires a

16   defense “[i]f an allegation of the complaint falls even possibly within the coverage,” id. at 1144

17   (emphasis in original) (quotation mark omitted).

18          With these principles in mind, we affirm the District Court’s determination that National

19   Union had a duty to defend the Sowell Claim. Although the Sowell Claim alleges that Gwynn’s

20   investment relationship with Sowell began in February 1998, several allegations of wrongful acts

21   are either undated or occurred after August 23, 1999. For example, Sowell’s claim of churning

22   did not identify when Gwynn conducted his “excessive, in-and-out trading in technology stocks”

23   or his “trad[ing] extensively on margin,” J.A. 992, and whenever Sowell alleged that certain

24   misconduct occurred “during this timeframe,” he referenced dates after August 1999. More

                                                       9
 1   particularly, Sowell claimed that when his account experienced significant gains in December

 2   1999 and early 2000, it was “[d]uring this timeframe” that Gwynn had refused his requests “to

 3   sell at least half of his stock and put the profits in cash” and instead “continued [the] hyperactive

4    trading.” J.A. 993. Sowell also alleged that when his account began losing value from April

5    2000 to 2001, he attempted “during this timeframe” to contact Gwynn, who advised him “that

6    the account was fine” and “not to watch the account.” J.A. 993-94. Similarly, Sowell did not

7    identify a time frame for the negligence, fraud, and failure to supervise causes of action –

8    although these presumably occurred after Sowell opened his account in 1998, but before he filed

9    his complaint in 2001. Given the ambiguity in the timing of the alleged wrongful acts within the

10   four corners of the complaint, it is possible that these claims were based on conduct that

11   occurred after August 1999.

12          National Union argues that exclusion (f) nonetheless precludes coverage because all of

13   the alleged losses “arose out of” two alleged primary wrongful acts that occurred prior to August

14   23, 1999: (1) Gwynn directing Sowell to sign a power of attorney and give Gwynn discretionary

15   control over the account, and (2) Gwynn’s improper solicitation of investments for charter

16   school businesses. We disagree. For the reasons discussed above, given our duty to construe a

17   policy governed by Connecticut law broadly in favor of imposing a duty to defend, it is not clear

18   from the face of the Sowell Claim that all of the alleged losses “arose out of” these two wrongful

19   acts within the meaning of the Policy. Cf. U.S. Auto. Ass’n v. Kaschel, 851 A.2d 1257, 1261

20   (Conn. App. Ct. 2004) (finding that injuries arose out of an automobile accident because the

21   “accident was the operative event giving rise to the injuries”). Therefore, the Sowell Claim’s

22   allegations possibly fell within the scope of the Policy’s coverage. Furthermore, National Union

23   did not contest that it received information that Gwynn did not in fact have discretionary control

24   over Sowell’s account.
                                                      10
 1          Accordingly, the District Court properly determined that National Union had a duty to

 2   defend the Sowell Claim, and that it breached that duty. Because we conclude that National

 3   Union breached its duty to defend, we now address whether Connecticut law permits the

 4   plaintiffs to recover consequential damages for National Union’s breach of that duty.

 5          2. Consequential Damages

 6          The parties rely on competing interpretations of Missionaries of the Company of Mary,

 7   Inc. v. Aetna Casualty & Surety Co., 230 A.2d 21 (Conn. 1967), in arguing their respective

 8   positions on the availability of consequential damages for breach of a duty to defend. The

 9   plaintiff insured in Missionaries sued the insurer for breaching its duties to defend and indemnify

10   the plaintiff in a negligence action brought by a person who had been injured on the plaintiff’s

11   property. Missionaries, 230 A.2d at 22. After determining that the insurer had breached its duty

12   to defend the plaintiff, the Supreme Court of Connecticut reasoned that the plaintiff was entitled

13   to recover the amount of the settlement between the plaintiff and the injured party, without

14   having to prove a causal relationship between the breach and the negative result of the

15   negligence action that “flowed from” the breach. Id. at 26. Thus the court established that

16   “[w]here an insurer is guilty of a breach of its contract to defend, it is liable to pay to the insured

17   not only his reasonable expenses in conducting his own defense but, in the absence of fraud or

18   collusion, the amount of a judgment obtained against the insured up to the limit of liability fixed

19   by its policy.” Keithan v. Mass. Bonding & Ins. Co., 267 A.2d 660, 666 (Conn. 1970) (citing

20   Missionaries, 230 A.2d at 26).

21          The court in Missionaries reached this conclusion despite the possibility that the injury

22   that occurred on the plaintiff’s property fell within an exclusion from the insurer’s duty to

23   indemnify. Missionaries, 230 A.2d at 25. It appears to have concluded that the insurer, having
                                                       11
 1   breached its duty to defend, was estopped from invoking the indemnity coverage exclusion:

 2   “[t]he defendant, after breaking the contract by its unqualified refusal to defend, should not

 3   thereafter be permitted to seek the protection of that contract in avoidance of its indemnity

 4   provisions.” Id. at 26.

 5          Pointing to the absence of any subsequent case law permitting a policyholder to recover

 6   consequential damages for its insurer’s breach of a duty to defend under Connecticut law,

7    National Union urges us to conclude that the measure of damages applied in Missionaries is the

 8   only permissible measure for damages in cases involving a breach of a duty to defend. The

 9   plaintiffs respond that a breach of a duty to defend is really no more than a breach of a

10   contractual duty, and that neither Missionaries nor any of the cases cited by National Union

11   expressly precludes the availability of traditional contract remedies, including consequential

12   damages.

13          Connecticut courts have offered virtually no guidance on this issue. In L.F. Pace & Sons,

14   Inc. v. Travelers Indemnity Co., 514 A.2d 766 (Conn. App. Ct. 1986), a Connecticut

15   intermediate appellate court declined to distinguish insurance claims from other contract claims

16   as they relate to the recovery of consequential damages. See id. at 772-74 (affirming jury award

17   of consequential damages for breach of implied contract to act as surety). And in City of West

18   Haven v. Liberty Mutual Insurance Co., CIV. No. N-87-68 (PCD), 1989 WL 190242 (D. Conn.

19   June 1, 1989), a federal district court in Connecticut suggested in dictum that consequential

20   damages may be available based on the facts of that case. The court cited a treatise for the

21   proposition that “[d]amages for wrongful refusal to defend a claim include the negotiated or

22   adjudicated amount of the claim, the insured’s expenses in resisting the claim and any additional

23   loss legally traceable to the breach in order that the insured may be made whole.” Id. at *2
                                                     12
 1   (emphasis added) (quoting 7C Appleman, Insurance Law and Practice, § 4689).5 At issue in City

 2   of West Haven, however, was the recovery of attorneys’ fees for the duty to defend action, which

 3   the court regarded as a form of punitive or exemplary damages. Id.

 4          National Union asserts that City of West Haven supports its narrow interpretation of

 5   Missionaries by limiting the award of attorneys’ fees to situations in which “the breach of

 6   contract is motivated by bad faith, malice or reckless indifference.” Id. We find this argument

 7   unpersuasive, if for no other reason than that the court in City of West Haven determined that

 8   Missionaries was irrelevant because the plaintiff in that case had withdrawn its request for

 9   similar attorneys’ fees. Id. In short, no Connecticut decision appears to answer the specific

10   dispositive question presented by this appeal.

11          Nor do the policy considerations underlying Missionaries compel a decision one way or

12   the other on the availability of consequential damages. We recognize that what appears to be the

13   estoppel rule adopted in Missionaries reflects a preference under Connecticut law for an insurer

14   to provide a defense for claims that are even potentially covered by the relevant policy, under a

15   reservation of rights. See Missionaries, 230 A.2d at 26. The estoppel rule prompts insurers to

16   err on the side of providing a defense. See Keithan, 267 A.2d at 666-67. But contract remedies,

17   which would ordinarily include consequential damages, see Sullivan v. Thorndike, 934 A.2d

18   827, 833 (Conn. App. Ct. 2007), would also encourage insurers to defend the insured. And the

19   breach of a duty to defend seems fundamentally to be a breach of a contractual duty. Indeed,

20   courts in other states have relied on traditional breach of contract principles to express a similar




            5
              The treatise upon which City of West Haven relied for this proposition, Insurance Law
     and Practice, itself cites a federal district court case that merely recites the rule in Missionaries.
     See United Servs. Auto. Ass’n v. Glens Falls Ins. Co., 350 F. Supp. 869 (D. Conn. 1972).
                                                         13
 1   preference to motivate insurers to provide a defense. See, e.g., Bainbridge, Inc. v. Travelers Cas.

 2   Co. of Conn., 159 P.3d 748, 751 (Colo. App. 2006) (“Generally, the appropriate course of action

 3   for an insurer who believes it has no duty to defend is to provide a defense . . . under a

 4   reservation of its rights to seek reimbursement, or to file a declaratory judgment action after the

5    underlying case has been adjudicated.”); Newhouse v. Citizens Sec. Mut. Ins. Co., 501 N.W.2d

6    1, 6 (Wis. 1993) (“The best approach is for the insurance company to defend under a reservation

7    of rights.”).

8            In sum, Connecticut cases are silent on the availability of these damages in duty to

9    defend cases, a lone federal district court in Connecticut addressed the issue only in dicta, and

10   policy considerations underlying Missionaries fail to provide a decisive answer. Under these

11   circumstances, we are unable to conclude with confidence that Missionaries precludes

12   consequential damages arising out of a breach of the duty to defend.

13           3. Reputational Damages

14           Even if consequential damages are available, it is not clear that Connecticut law permits

15   plaintiffs to recover reputational damages for breach of a contractual duty to defend.

16   Connecticut appellate courts have not addressed whether such reputational damages are available

17   in a breach of contract action.6 It is true that some courts in other jurisdictions have held that

18   reputational damages arising from a breach of contract are typically not compensable, as they are

19   “too speculative and could not reasonably be presumed to have been contemplated by the parties

20   when they formed the contract.” Rice v. Community Health Ass'n, 203 F.3d 283, 288 (4th Cir.




             6
              At least one Connecticut trial court has suggested that recovery for loss of reputation
     arising out of a breach of contract is ordinarily not allowed. See Sutera v. Estate of Washton,
     No. 556177, 2003 WL 1478788, at *8 (Conn. Super. Ct. Mar. 14, 2003).
                                                       14
1    2000); see Flynn v. AK Peters, Ltd., 377 F.3d 13, 22 (1st Cir. 2004); Smith v. Positive Prods.,

 2   419 F. Supp. 2d 437, 453 (S.D.N.Y. 2005); O'Leary v. Sterling Extruder Corp., 533 F. Supp.

 3   1205, 1209-10 (D. Wis. 1982). But here, the District Court specifically instructed the jury that it

4    should award consequential damages only if the plaintiff proved those damages would have been

5    contemplated by the parties at the time they agreed to the Policy. Without more guidance from

6    the Connecticut courts on this important issue, we are reluctant to decide one way or the other

7    whether a plaintiff can recover reputational damages in such actions under Connecticut law, even

8    when a jury finds that the damages are not speculative and were contemplated at the time the

9    contract was formed.

10          4. Certification

11          Under the rules of this Court and Connecticut law, we may certify a question to the

12   Supreme Court of Connecticut “if the answer may be determinative of an issue” in a pending

13   case before us “and if there is no controlling appellate decision, constitutional provision or

14   statute.” See Conn. Gen. Stat. § 51-199b(d); 2d Cir. Local R. 27.2. We conclude that

15   certification is warranted in this case for at least three reasons. First, “no Connecticut court has

16   ever provided an authoritative answer” to the dispositive questions in this appeal, Caruso v.

17   Siemens Bus. Commc’ns Sys., Inc., 392 F.3d 66, 71 (2d Cir. 2004), and there is no statute that

18   addresses the issues. We have “long recognized that state courts should be accorded the first

19   opportunity to decide significant issues of state law through the certification process.” Parrot v.

20   Guardian Life Ins. Co. of Am., 338 F.3d 140, 144 (2d Cir. 2003). Second, an answer to the

21   questions we certify will be determinative of the principal issues on appeal. Third, “[i]nsurance

22   is an important industry in Connecticut,” Fireman’s Fund Ins. Co. v. TD Banknorth Ins. Agency

23   Inc., 644 F.3d 166, 172 (2d Cir. 2011), and the availability of consequential damages in this
                                                      15
 1   context implicates significant public policy considerations such that “Connecticut has a strong

 2   interest in deciding the issue[s] certified rather than having the only precedent on point be that of

 3   the federal court,” Parrot, 338 F.3d at 145 (alteration in original) (quotation mark omitted); see

 4   Arrowood Indem. Co. v. King, 605 F.3d 62, 79-80 (2d Cir. 2010) (“The case for certification to

 5   the Connecticut Supreme Court is especially compelling when the uncertainty pertains to an

 6   insurance dispute, given the ‘established preeminence’ of that court in the field of insurance

 7   law.”). Under these circumstances, it would be prudent and “in the interest of simplicity,

 8   directness and economy of judicial action” to certify the questions presented by this case. Conn.

 9   R. App. P. § 82-3.

10                                            CONCLUSION

11          For the reasons set forth above, we respectfully certify the following questions to the

12   Supreme Court of Connecticut:

13          (1) Does Connecticut law permit a policyholder to recover consequential damages in a

14   breach of contract action against an insurer predicated on the insurer’s breach of its duty to

15   defend?

16          (2) If consequential damages are available, may such damages include damages for harm

17   to reputation and loss of income?

18          The Supreme Court of Connecticut may reformulate this question and address any

19   additional questions that it deems pertinent to this appeal. See Conn. Gen. Stat. § 51-199b(k);

20   Conn. R. App. P. § 82-3.

21          It is hereby Ordered that the Clerk of Court transmit to the Clerk of the Supreme Court of

22   Connecticut a Certificate, together with this decision and a complete set of the briefs,

23   appendices, and record filed in this Court by the parties. The parties are directed to bear equally
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1   such fees and costs that may be required by the Supreme Court of Connecticut. This panel will

2   retain jurisdiction to consider all issues that remain on this appeal and cross-appeal (including

3   issues not discussed in this opinion) once the Supreme Court of Connecticut has either provided

4   us with its guidance or declined certification.

5                                            CERTIFICATE

6          The foregoing is hereby certified to the Supreme Court of Connecticut pursuant to

7   Connecticut General Statute § 51-199b and Second Circuit Local Rule 27.2, as ordered by the

8   United States Court of Appeals for the Second Circuit.




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