Fireman’s Fund Ins. Co. v. TD Banknorth Ins. Agency Inc. 1

10-0797-cv
Fireman’s Fund Ins. Co. v. TD Banknorth Ins. Agency Inc.
1
UNITED STATES COURT OF APPEALS 2
3
FOR THE SECOND CIRCUIT 4
5
August Term, 2010 6
7
(Argued: December 21, 2010 Decided: April 29, 2011) 8
9
Docket No. 10-0797-cv 10
11
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13
FIREMAN’S FUND INSURANCE COMPANY, 14
15
Plaintiff-Counter-Defendant- 16
Appellee, 17
18
-v.- 10-0797-cv 19
20
TD BANKNORTH INSURANCE AGENCY 21
INCORPORATED, f/k/a MORSE, PAYSON & 22
NOYES INSURANCE, 23
24
Defendant-Counter-Claimant- 25
Appellant. 26
27
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29
Before: DENNIS JACOBS, Chief Judge, 30
GUIDO CALABRESI, 31
ROBERT D. SACK, Circuit Judges. 32
33
A policyholder appeals from a declaratory judgment 34
entered in the United States District Court for the District 35
of Connecticut (Droney, J.), awarding to its insurer all 36
funds held in escrow as proceeds from settlement of the 37
policyholder’s claims against third parties. The 38

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2
policyholder, TD Banknorth Insurance Agency, Inc., 1
challenges the allocation of the escrowed funds on the 2
ground that Connecticut’s common law “make whole” doctrine 3
entitles it to recover its deductible before its insurer, 4
Fireman’s Fund Insurance Company, can collect as subrogee. 5
The district court concluded that the subrogation 6
clause in the contract between the two parties abrogated 7
Connecticut’s make whole doctrine. We disagree. The 8
contract at issue did not abrogate Connecticut’s make whole 9
doctrine; however, this conclusion raises the more basic 10
issue of whether Connecticut’s make whole doctrine applies 11
to insurance deductibles at all. Because this question is 12
undecided under Connecticut law, we certify it to the 13
Supreme Court of Connecticut and stay resolution of this 14
case in the interval. 15
16
FOR APPELLANT: Robert M. Sullivan 17
Frederick M. Klein 18
The Sullivan Law Group, LLP 19
New York, NY 20
21
FOR APPELLEE: Christopher B. Weldon 22
Darren P. Renner 23
Debra M. Krebs 24
Keidel, Weldon & Cunningham, LLP 25
White Plains, NY 26
27
28

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3
DENNIS JACOBS, Chief Judge: 1
2
A policyholder appeals from a declaratory judgment 3
entered in the United States District Court for the District 4
of Connecticut (Droney, J.), awarding to its insurer all 5
funds held in escrow as proceeds from settlement of the 6
policyholder’s claims against third parties. The 7
policyholder, TD Banknorth Insurance Agency, Inc. (“TD 8
Banknorth”), challenges the allocation of the escrowed funds 9
on the ground that Connecticut’s common law “make whole” 10
doctrine entitles it to recover its deductible before its 11
insurer, Fireman’s Fund Insurance Company (“Fireman’s 12
Fund”), can collect as subrogee. 13
The district court concluded that the subrogation 14
clause in the contract between TD Banknorth and Fireman’s 15
Fund abrogated Connecticut’s make whole doctrine. We 16
disagree. The contract at issue did not abrogate 17
Connecticut’s make whole doctrine; however, this conclusion 18
raises the more basic issue of whether Connecticut’s make 19
whole doctrine applies to insurance deductibles at all. 20
Because this question is undecided under Connecticut law, we 21
certify it to the Supreme Court of Connecticut and stay 22
resolution of this case in the interval. 23

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4
BACKGROUND 1
In 2005 Haynes Construction Company (“Haynes”) began 2
work on a housing development and retained TD Banknorth as 3
its agent to arrange insurance. TD Banknorth procured a 4
Builder’s Risk insurance policy from Peerless Insurance 5
Company (“Peerless”) and an Inland Marine insurance policy 6
from Hartford Insurance Company (“Hartford”). In February 7
2006, a fire destroyed a house being built on Lot 14 of the 8
Haynes development. Peerless denied coverage of the loss 9
because Lot 14 was not listed in its Builder’s Risk policy-- 10
an error of omission by TD Banknorth. Haynes thereupon 11
claimed against TD Banknorth for its negligent omission of 12
Lot 14. 13
To protect against the risk of such negligence, TD 14
Banknorth had purchased Errors & Omissions coverage with 15
Fireman’s Fund (“E&O Contract”). Fireman’s Fund undertook 16
to pay on TD Banknorth’s behalf any sums TD Banknorth became 17
“legally obligated to pay as damages because of a negligent 18
act, error or omission in the performance of [TD 19
Banknorth’s] professional services.” The E&O Contract had a 20
deductible of $150,000 per claim. TD Banknorth gave timely 21
notice of the loss to Fireman’s Fund. 22

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1 All dollar amounts in this opinion (other than the
deductible) are rounded to the nearest thousand.
5
In July 2006, TD Banknorth and Fireman’s Fund settled 1
with Haynes for $354,000. 1 Of that, TD Banknorth 2
contributed $150,000 (its single claim deductible) and 3
Fireman’s Fund contributed the $204,000 remainder. In the 4
settlement, Haynes assigned its rights against Peerless and 5
Hartford to Fireman’s Fund and TD Banknorth collectively. 6
TD Banknorth--and Fireman’s Fund as subrogee--then 7
proceeded against Peerless and Hartford for the $354,000. 8
In the ensuing settlement, Peerless paid $88,000 and 9
Hartford paid $120,100 in exchange for complete releases. 10
TD Banknorth and Fireman’s Fund “reserve[d] all rights that 11
they may have against each other relating to the allocation 12
of the [settlement funds] held in escrow.” The $208,000 was 13
deposited in an escrow account. 14
In March 2008, Fireman’s Fund commenced this action 15
against TD Banknorth in the District of Connecticut, seeking 16
a declaratory judgment that it was entitled to all of the 17
escrow funds. Fireman’s Fund claimed $10,000 in defense 18
costs (incurred on TD Banknorth’s behalf) in addition to the 19
$204,000 it had paid Haynes: a total of $214,000. TD 20
Banknorth counterclaimed for a declaratory judgment that, 21

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2 On March 31, 2010, TD Banknorth moved this Court to
certify several questions to the Connecticut Supreme Court,
including a question similar to the one we certify here. We
denied this motion on May 18, 2010, but we did so “without
prejudice to a renewal of the motion before the panel that
hears the merits of the appeal.”
6
under Connecticut’s make whole doctrine, it was entitled to 1
recover its $150,000 deductible from the escrow funds. 2
Both parties moved for summary judgment. The district 3
court found that the subrogation clause in the E&O Contract 4
abrogated Connecticut’s make whole doctrine, and accordingly 5
granted summary judgment in favor of Fireman’s Fund. 6
Fireman’s Fund Ins. Co. v. TD Banknorth Ins. Agency, Inc., 7
No. 3:08-cv-364, 2010 WL 420041, at *4 (D. Conn. Feb. 1, 8
2010). TD Banknorth appeals. 2
9
10
DISCUSSION 11
TD Banknorth is a Maine corporation, and Fireman’s Fund 12
is a California corporation. The amount in dispute is 13
greater than $75,000. Therefore, we have subject-matter 14
jurisdiction over their dispute under 28 U.S.C. § 1332 15
(diversity jurisdiction). 16
“We review the district court’s ruling on cross-motions 17
for summary judgment de novo, in each case construing the 18
evidence in the light most favorable to the non-moving 19

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7
party.” Nat’l Res. Def. Council, Inc. v. U.S. Dep’t of 1
Agric., 613 F.3d 76, 83 (2d Cir. 2010). We review de novo a 2
district court’s interpretation of the terms of a contract. 3
ReliaStar Life Ins. Co. of N.Y. v. Home Depot U.S.A., Inc., 4
570 F.3d 513, 517 (2d Cir. 2009). 5
This appeal turns on a single question of law: Is TD 6
Banknorth entitled to recoup the $150,000 deductible by 7
virtue of Connecticut’s make whole doctrine? 8
9
I. 10
The district court concluded that the make whole 11
doctrine does not apply to the $150,000 deductible because 12
the terms of the E&O Contract abrogated the doctrine. We 13
disagree. 14
In Connecticut, insurance companies have an equitable 15
right of subrogation at common law even in the absence of 16
express contract terms to that effect. Wasko v. Manella, 17
849 A.2d 777, 781 (Conn. 2004) (“[T]he right of legal or 18
equitable subrogation is not a matter of contract; it does 19
not arise from any contractual relationship between the 20
parties, but takes place as a matter of equity, with or 21
without an agreement to that effect.” (brackets and internal 22

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8
quotation marks omitted) (quoting Westchester Fire Ins. Co. 1
v. Allstate Ins. Co., 672 A.2d 939, 944 (Conn. 1996))). 2
This equitable right of subrogation is subject to the “make 3
whole doctrine,” which provides that “the insurer may 4
enforce its subrogation rights only after the insured has 5
been fully compensated for all of its loss.” United States 6
v. Lara, No. 3:08-cr-00169, 2009 WL 3754069, at *2 (D. Conn. 7
Nov. 6, 2009). Thus, when insurance coverage compensates a 8
policyholder for less than the full loss, the insurer must 9
first use any recovery from a third-party to compensate the 10
policyholder for the remainder of its loss before keeping 11
anything for itself. 12
Under Connecticut common law, the make whole doctrine 13
is a default rule; the parties may abrogate it with express 14
contract terms to that effect. See Lara, 2009 WL 3754069, 15
at *2 (“The make whole principle is a ‘rule of 16
interpretation’ that can be signed away; it is thus a ‘gap- 17
filler’ that ‘only exists when the parties are silent.’” 18
(quoting Barnes v. Indep. Auto. Dealers Ass’n of Cal. Health 19
& Benefit Welfare Plan, 64 F.3d 1389, 1394 (9th Cir. 20
1995))). The district court concluded that the subrogation 21

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9
clause in the E&O Contract abrogated the make whole 1
doctrine. Reviewing this conclusion de novo, we disagree. 2
3
II 4
The subrogation clause in the E&O Contract states: 5
If any insured [TD Banknorth] has rights to 6
recover all or part of any payment we [Fireman’s 7
Fund] have made under this policy, those rights 8
are transferred to us. The insured must do 9
nothing after loss to impair them. At our 10
request, the insured will bring suit or transfer 11
those rights to us and help us enforce them. 12
Under Connecticut law, boilerplate subrogation clauses 13
incorporate default common law subrogation rules, and do not 14
modify or abrogate them: 15
In sum, while a right of true equitable 16
subrogation may be provided for in a contract, the 17
exercise of the right will have its basis in 18
general principles of equity rather than in the 19
contract, which will be treated as being merely a 20
declaration of principles of law already 21
existing....[A]lthough insurers may place 22
subrogation clauses in their policies...those 23
provisions typically are general and add nothing 24
to the rights of subrogation arising by law.... 25
26
Wasko, 849 A.2d at 781-82, 786 (brackets, ellipses, 27
quotation marks, and citations in original omitted). The 28
make whole doctrine, as part of the common law equitable 29
right of subrogation, is likewise not abrogated by generic 30
or boilerplate subrogation clauses. If parties desire to 31

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10
contract around the make whole clause, they must state 1
expressly that the doctrine is not to apply. Silence is not 2
enough. 3
The subrogation clause in the E&O contract is 4
boilerplate and materially indistinguishable from the 5
subrogation clause in Wasko, which the Connecticut Supreme 6
Court concluded did not abrogate the make whole doctrine. 7
The district court concluded that the subrogation clause in 8
Wasko was distinguishable, locating a closer analog in 9
American International Specialty Lines v. United States, No. 10
05-1020 C, 2008 WL 1990859 (Fed. Cl. Jan. 31, 2008), in 11
which a general subrogation clause was read to abrogate the 12
make whole doctrine: “The fact that [insurer’s] subrogation 13
rights arise upon ‘any’ payment clearly contradicts the 14
make-whole rule.” Id. at *11. We follow Wasko instead, for 15
several reasons. 16
First, Specialty Lines was not a decision by a 17
Connecticut court and did not undertake to construe 18
Connecticut law. Second, Specialty Lines is an outlier. 19
Several cases have examined contracts that contain 20
boilerplate subrogation clauses, but lack any express 21
language giving the insurer priority regardless of whether 22

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the policyholder has been made whole. See, e.g., Sapiano v. 1
Williamsburg Nat’l Ins. Co., 33 Cal. Rptr. 2d 659, 660, 28 2
Cal. App. 4th 533, 535-36 (1994); Progressive W. Ins. Co. v. 3
Yolo Cnty. Sup. Ct., 37 Cal. Rptr. 3d 434, 443, 125 Cal. 4
App. 4th 263, 274 (2005); In re DeLucia, 261 B.R. 561, 567 5
(Bankr. D. Conn. 2001) (holding that language in an 6
insurance contract stating that the insurer “shall be 7
subrogated to all rights of recovery of such person against 8
any and all persons or organizations arising out of the 9
condition, illness or injury with respect to which such 10
payments were made” did not override the make whole doctrine 11
(emphasis removed)); cf. Lara, 2009 WL 3754069, at *1 12
(holding that an agreement which specifically details the 13
order of precedence of recovery overrides the make whole 14
doctrine). In these cases, boilerplate subrogation language 15
was found insufficient to displace the make whole doctrine 16
and give the insurer priority recovery. 17
Taken together, these cases suggest that a boilerplate 18
subrogation clause does not displace the make whole 19
doctrine; displacement requires wording that speaks 20
specifically to the priority of recovery. This is 21
consistent with Wasko, as well as with a leading treatise. 22

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12
See 16 Lee R. Russ, Couch on Insurance § 223:145 (3d ed. 1
2010) (“[A]n insurance contract providing generally that the 2
insurer is subrogated to the rights of the insured does not 3
itself permit an insurer to recover from a third-party 4
tortfeasor until the insured has been made whole by the 5
combination of insurance payments and the amount recovered 6
from the tortfeasor; there must be specific language to the 7
contrary to avoid the make whole rule.”). We conclude that 8
the subrogation clause in this case does not abrogate 9
Connecticut’s make whole doctrine. 10
Furthermore, even if the subrogation clause in this 11
case did abrogate Connecticut’s make whole doctrine, such 12
abrogation would not apply to the $150,000 deductible. By 13
its own express terms, the E&O contract’s subrogation clause 14
concerns only the sums that Fireman’s Fund pays on behalf of 15
its insureds. This allocation of rights does not apply to 16
the $150,000 deductible, which was paid by TD Banknorth and 17
not by Fireman’s Fund. 18
19
III. 20
In the alternative, Fireman’s Fund argues that 21
Connecticut’s make whole doctrine is inapplicable to 22

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13
liability insurance. In support of this assertion, 1
Fireman’s Fund observes that all recent make whole doctrine 2
cases in Connecticut (in state and federal courts) involve 3
first-party losses. 4
We conclude that Connecticut’s make whole doctrine 5
applies equally to insurance for first-party loss and third- 6
party liability. No case cited by Fireman’s Fund or found 7
by this Court remotely suggests that the doctrine is 8
confined to first-party coverage. See Wasko, 849 A.2d 777; 9
Lara, 2009 WL 3754069; In re DeLucia, 261 B.R. 561. True, 10
the recent cases on Connecticut’s make whole doctrine all 11
involve first-party losses, not liability insurance, but 12
that would seem to be a function of the doctrine being 13
infrequently litigated. There are no more than a handful of 14
recent cases; that none involves a liability contract is not 15
a basis for inferring an implicit limitation. 16
The equitable principle underlying the make whole 17
doctrine applies with equal force to liability insurance: 18
If the recovery from a third party is insufficient to fully 19
compensate both the policyholder and the insurer, the 20
resulting loss should be borne by the insurer because the 21
risk of this loss is precisely the risk that the 22

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14
policyholder paid the insurer to assume. See Wasko, 849 1
A.3d at 784 n.8; Wine v. Globe Am. Cas. Co., 917 S.W.2d 558, 2
561-62 (Ky. 1996). The source of the loss has no evident 3
bearing on this equitable principle. We therefore reject 4
Fireman’s Fund’s contention that the make whole doctrine is 5
inapplicable in the context of liability insurance. 6
7
IV. 8
Fireman’s Fund’s final argument is that it is entitled 9
to the escrow funds because the make whole doctrine does not 10
apply to deductibles. There are strong arguments on both 11
sides of this issue. 12
TD Banknorth’s claim to the funds finds its strongest 13
support in the straightforward reading of the make whole 14
doctrine. By both its name and definition, the make whole 15
doctrine admits no exceptions. See Lara, 2009 WL 3754069, 16
at *2 (explaining Connecticut’s make whole doctrine without 17
indicating any exceptions or carve-outs). Under the 18
traditional canon that a rule means what it says, the 19
doctrine applies to deductibles. If the make whole doctrine 20
means what it literally says--if it intends to make the 21

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15
policyholder truly whole--then it would apply to deductibles 1
just as it does to non-deductible losses. 2
Nor does the basic purpose behind the doctrine--to 3
insulate fully the insured against injury--suggest that 4
exceptions are warranted. Even when a policyholder is made 5
whole for a loss in excess of all coverage, the policyholder 6
still remains out-of-pocket to the extent of the deductible. 7
Making the policyholder truly “whole,” so that the 8
policyholder suffers no net loss to the benefit of the 9
insurance company, would therefore require compensating him 10
for the deductible as well. 11
While a straightforward reading of the make whole 12
doctrine appears to admit no exception, Fireman’s Fund has 13
strong countervailing support for its position that 14
deductibles are unaffected by the doctrine. The equitable 15
principle that underlies the make whole doctrine is that a 16
loss should be borne according to the allocation of risk in 17
the insurance contract. Muller v. Soc’y Ins., 750 N.W.2d 1, 18
23 (Wis. 2008) (Abrahamson, C.J., dissenting) (“The made 19
whole doctrine...rests upon the equitable principle that 20
[w]here either the insurer or the insured must to some 21
extent go unpaid, the loss should be borne by the insurer 22

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16
for that is a risk the insured has paid it to assume.” 1
(internal quotation marks omitted)). The insurance company 2
must bear the unreimbursed amount of such loss as it was 3
paid to assume. The risk of the deductible, however, is 4
specifically allocated to the policyholder, not the insurer. 5
It would therefore disserve the equitable principle behind 6
the make whole doctrine--that a loss should be borne by the 7
party to whom the risk of such loss was allocated under the 8
contract--to apply the make whole doctrine to deductibles. 9
Applying the make whole doctrine to deductibles also 10
creates an unhealthy incentive: The sooner an insurer 11
reimburses its policyholder, the more it pays. The facts of 12
this case are illustrative. If the make whole doctrine were 13
applied to deductibles, then TD Banknorth would collect 14
$150,000 from the escrow funds in this case, and Fireman’s 15
Fund would be left with a loss of almost $150,000. However, 16
if Fireman’s Fund had delayed paying TD Banknorth’s claim 17
until after TD Banknorth collected from Peerless and 18
Hartford, TD Banknorth’s claim would have been for less than 19
the $150,000 deductible, and Fireman’s Fund would not have 20
had to pay anything. This difference in treatment based on 21
timing makes no sense. 22

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17
Including deductibles in the make whole doctrine also 1
impairs the usefulness of deductibles in general. If an 2
insurer is bound to refund the deductible when collection is 3
made from third-parties through subrogation (even where this 4
results in a loss to the insurer), the deductible does not 5
operate reliably to allocate to the policyholder the risk 6
that the policyholder contracted to bear. Instead, whenever 7
the amount of the deductible is recovered from a third-party 8
tortfeasor, the insurer still effectively bears the risk of 9
the entire loss notwithstanding the deductible. This 10
eliminates one ordinary means by which the insurer and the 11
policyholder allocate risk between themselves, thereby 12
reducing their flexibility in designing their contractual 13
arrangement--and incrementally increasing moral hazard. By 14
allocating the first portion of a loss to the policyholder, 15
the deductible encourages the policyholder to take adequate 16
precautions to avoid the loss in the first place; this 17
incentive is diminished if the policyholder believes that 18
the deductible may be reimbursed by the insurance company. 19
All this said, there is no statutory or precedential 20
support for either position in Connecticut law--though 21
either position, being a default rule, can be modified (and 22

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18
its attendant problems dealt with) by contract. Whether the 1
make whole doctrine applies to deductibles is a matter of 2
Connecticut law, and Connecticut law is currently silent on 3
the matter. Insurance is an important industry in 4
Connecticut, and Connecticut’s Supreme Court is one of the 5
leading authorities in this area. We therefore think it 6
prudent to certify this question to the Connecticut Supreme 7
Court. 8
9
CONCLUSION 10
For the reasons stated above, we hereby CERTIFY the 11
following question to the Connecticut Supreme Court: Are 12
insurance policy deductibles subject to Connecticut’s make 13
whole doctrine? We STAY ADJUDICATION of this dispute until 14
we receive guidance from the Connecticut Supreme Court. The 15
Connecticut Supreme Court may modify this question as it 16
sees fit and add any pertinent questions of Connecticut law 17
involved in this appeal that the Court chooses to answer. 18
This panel retains jurisdiction over this case and will 19
decide it once the Connecticut Supreme Court has either 20
provided us with its guidance or declined certification. 21

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It is therefore ORDERED that the Clerk of this Court 1
transmit to the Clerk of the Connecticut Supreme Court a 2
Certificate, as set forth below, together with this decision 3
and a complete set of the briefs, appendices, and record 4
filed in this Court by the parties. 5
6
CERTIFICATE 7
The foregoing is hereby certified to the Connecticut 8
Supreme Court, pursuant to Conn. Gen. Stat. Ann. § 51-199b 9
and 2d Cir. R. 0.27, as ordered by the United States Court 10
of Appeals for the Second Circuit. 11
12
13
14
15
16

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