The Bellsite complaint alleged breach of contract (count one); promissory estoppel (count two); and negligent misrepresentation (count three).

The town requested defense and indemnity from Discover, but the insurer denied coverage.

The town then retained counsel for the Bellsite case, and successfully obtained judgment in its favor on all three counts.

Thereafter, the town sued Discover.

Discover moved for summary judgment, alleging that the town could not prevail as a matter of law because the policy excluded coverage for the claims alleged in the Bellsite complaint.

The trial court granted Discover's motion, finding that Bellsite's allegations fell within the clause of the policy excluding coverage for contractual damages.

The town appealed, arguing that the trial court had erred in determining that the allegations of negligent misrepresentation in the Bellsite complaint fell within the policy's contract exclusion. Specifically, the town contended that the allegations of the Bellsite complaint could not support the finding of an enforceable contract, or of a procurement contract of any kind, and, therefore, it could not be proved that the negligent misrepresentation cause of action arose out of that contract.

The town also argued that even if the allegations supported the existence of a contract, Bellsite's negligent misrepresentation claim was a tort claim “separate and independent from” Bellsite's contractual claims, and coverage was not necessarily precluded by the policy's contract exclusion. Because the claims were not necessarily excluded by the policy language, the town argued, the defendant had a duty to defend.

In response, Discover contended that Bellsite's negligent misrepresentation claim did arise out of its breach of contract claim because count three incorporated all of the facts alleged in count one without including any additional facts. Discover also argued that “[n]egligent misrepresentation arises out of business transactions,” and that the “underlying business transaction that the negligent misrepresentation allegedly arose out of was the alleged underlying contract.” Discover maintained that because “the allegedly breached contract is the sole basis alleged in the underlying complaint for the misrepresentation,” the negligent misrepresentation claim had not triggered its duty to defend.

The Discover Policy

Section I (2) (d) (1) of the Discover policy excluded coverage for:

[a]ny claim … [b]ased upon, arising out of, directly or indirectly resulting from, or in consequence of construction, architectural or engineering contracts or any other procurement contract; or (2) [f]or which the insured has assumed the liability in a contract or agreement. 

The policy also stated in Section I (2) (d) (2) that:

[t]his exclusion does not apply to liability for damages that the insured would have in the absence of the contract or agreement. 

The appellate court reversed.

In its decision, the appellate court explained that the determinative issue was whether coverage for Bellsite's negligent misrepresentation claim outlined in count three of its complaint was negated by the policy's contract exclusion.

The appellate court then reasoned that, in count three of its complaint, which alleged negligent misrepresentation, Bellsite incorporated the allegation from count one that “it was promised that if Bellsite received the necessary approvals for construction of a tower, the town would locate its police communications systems on the tower.” Other allegations referred to this promise as “an agreement” that Bellsite had acted “in reliance on,” but there was no further description of the alleged contract between the parties, the appellate court pointed out.

It added that Bellsite also had alleged in count three that the town had made various “statements, representations, promises and assurances” that “constitute[d] negligent misrepresentation….”

The appellate court found that, depending on the evidence presented, a finder of fact “perhaps could find on these allegations” that a contract existed and that any alleged negligent misrepresentation “arose out of” that contract, but it “could also find” that regardless of whether an enforceable contract had been created, one or more negligent misrepresentations had been made in the course of discussions between the parties, and there was arguably no limiting language as to when such misrepresentations had been made.

The appellate court noted that Bellsite had separated its claims of breach of contract and negligent misrepresentation into separate counts in its complaint, and that the allegations of the third count “quite clearly” alleged negligent misrepresentation.

The appellate court acknowledged that the phrase “arose out of” was defined broadly in Connecticut. It concluded that because the Bellsite complaint left open the possibility that the alleged negligent misrepresentation did not arise out of a contract, Discover's duty to defend “was not precluded by the contract exclusion” in its policy.

The case is Town of Monroe v. Discover Property and Cas. Ins. Co., No. AC 38332 (Conn. Ct.App. Dec. 6, 2016). Attorneys involved include: Jeffrey J. Vita, with whom was Bethany L. Barrese, for the appellant (plaintiff); Paul G. Roche, with whom, on the brief, was Joseph H. Carlisle, for the appellee (defendant).