In Town of Branford v. Arrowood Indem. Co., et al., 2014 WL 570906 (Superior Court, J.D. of Hartford, Jan. 14, 2014), the Connecticut Superior Court (Sheridan, J.) held that the defendant-insurers, Arrowood Indemnity Company and American Alternative Insurance Company, did not owe a duty to defend or indemnify their insured, the Town of Branford, under a public entity errors and omissions policy issued by Arrowood and an umbrella policy issued by American Alternative.
The Town brought this lawsuit alleging breach of contract and seeking a declaratory judgment that Arrowood and American Alternative were obligated to reimburse the Town for amounts expended for costs of defense and payment of damages in connection with the underlying action. The Town also sued H.D. Segur Insurance Company, its agent, for professional negligence and breach of contract.
Arrowood issued a policy to the Town, providing claims-made Public Entity Errors and Omissions Coverage, with a policy limit of $1 million. Id. at *1. American Alternative issued an umbrella insurance policy to the Town, providing Excess Following Form Liability Over Underlying Claims Made or Occurrence Coverage (Coverage A) and Umbrella Occurrence Based Liability Coverage Over Retained Limit (Coverage B), with a policy limit of $10 million. Id. Coverage A provided excess coverage above underlying policies (including the Arrowood policy) subject to the same terms and conditions as the underlying policies. Id.
By way of procedural background, the parties agreed to submit the case to the Court for a stipulated trial as to liability. To this end, the parties submitted a joint stipulation of facts, which the Court relied upon in rendering its decision. The parties stipulated, in pertinent part, as follows:
In 2003, Thomas Santa Barbara Jr. and Frank Perrotti, Jr. were the owners of a 77–acre parcel of property known as 48–86 Tabor Drive in the Town. Id. New England Estates, LLC was a real estate developer that had entered into an option contract with the Property Owners to purchase the Property for $4,850,000. Id. Since 2001, New England Estates had been engaged in an ongoing process of gaining the necessary approvals for development of the Property. Id.
On May 30, 2003, New England Estates filed with the Town Planning and Zoning Commission an application for a 354–unit residential development. Id. at *2. Thirty percent of the units would be set aside for a forty-year period to be occupied only by low to moderate income families. Id. The application requested a change in the Town Zoning Regulations to create a special zone that would allow the affordable housing restriction. Id.
Three weeks later, on May 21, 2003, the Town Board of Selectmen voted to recommend the condemnation of the Property by eminent domain “in order to investigate and remediate environmental contamination and possibly develop the property as playing fields.” Id. On July 9, 2003, the Board voted to condemn the Property. Id.
On July 18, 2003, New England Estates commenced an underlying action in Connecticut Superior Court (Docket No. CV03–0183606–S) against the Town, Anthony DaRos, First Selectman, Francis Walsh, Second Selectman, Robert Denhardt, Jr., Third Selectman and Georgette Laske, Town Clerk. Id. The complaint in the underlying action included four claims:
• The First Count alleged an unlawful, “pretextual and bad faith exercise of the power of eminent domain”;
• The Second Count alleged that the “proposed use of eminent domain, which is based in part on preventing families with school-aged children from moving into and residing in the Town of Branford, or to prevent the perceived fiscal consequences of such families moving to and residing in Branford,” was a violation of state and federal fair housing laws;
• The Third Count, brought only against the First Selectman Anthony DaRos, alleged that he exceeded his lawful powers, misused his official powers to block development of the Property, violated New England Estates’ constitutional rights and maliciously “distributed inaccurate or misleading information about the environmental condition of the … property for the purpose of halting the … development, promoting the condemnation, and interfering with the contract between [New England Estates] and [the Property Owners]”; and
• The Fourth Count sought indemnification from the Town for the actions of the Town officials.
Id.
“New England Estates alleged generally that the Town ‘was using eminent domain in bad faith, in order to stop residential development or affordable housing, and without any planning for playing fields, investigation of the environmental condition of the site, or identified public use or purpose.’” Id. “New England Estates alleged that the condemnation was ‘pretextual’ because the Town voted to condemn the property without any evidence that it ‘was unsafe for or unsuited to [New England Estates’] development plan, and despite the lack of any prior plan, proceeding, or discussion about acquiring the subject property for public recreational use …’” Id.
New England Estates’ complaint was amended several times. The third amended complaint included only one cause of action: bad faith use of eminent domain in violation of the Takings Clause of the Fifth Amendment and 42 U.S.C. § 1983. Id. at *3.
On September 15, 2004, the Property Owners filed a cross complaint against the Town and the other defendants in the underlying action. Id. at *4. The cross complaint by the Property Owners contained the same basic factual allegations regarding the Town’s actions in taking the Property and concluded that “[t]he Town’s use of eminent domain to take the 77 acres was a bad faith exercise of the power of eminent domain in that it was pretextual or unreasonable or an abuse of power and not for a public use or purpose.” Id. The cross complaint alleged causes of action of negligence, trespass, tortious interference with business relations and nuisance. Id. Like the underlying complaint, the cross complaint was amended on several occasions and ultimately contained a single cause of action for bad faith use of eminent domain. Id.
“The underlying action was tried to a jury and, on September 12, 2007, the jury found in favor of the Property Owners and New England Estates and awarded the Property Owners a total of $340,000 in damages and New England Estates a total of $12,435,914.78 in damages.” Id. at *5. “The court entered a post-verdict award of attorney’s fees to the Property Owners in the amount of $275,979 and an award of attorney’s fees to New England Estates in the amount of $1,488,587 in attorney’s fees.” Id. Both the Town and the Property Owners appealed from the judgment. Id.
On February 16, 2010, the Connecticut Supreme Court affirmed the $340,000 judgment and award of attorney’s fees to the Property Owners, but reversed the judgment and the award of attorney’s fees in favor of New England Estates, wiping out the approximately $14 million dollar verdict that had been rendered in favor of New England Estates. Id. (citing New England Estates, LLC v. Branford, 294 Conn. 817, 861 (2010)). In its opinion, the Supreme Court stated that the issue in the underlying action was “whether the town, by acting in bad faith in exercising its eminent domain power, violated the public use requirement of the taking clause.” Id. (citing New England Estates, LLC, 294 Conn. at 840).
In October of 2010, the Town settled the underlying action. The Town then sought to recover the amounts it expended in the defense and settlement of the underlying action from the defendants in this action.
The Court began its analysis with a recitation of Connecticut law with respect to the duty to defend. The Court stated that “if any allegation of the complaint falls even possibly within the coverage, then the insurance company must defend the insured.” Id. at *6 (quoting DaCruz v. State Farm Fire & Cas. Co., 268 Conn. 675 (2004)). Thus, “the primary issue in this case [was] whether the eminent domain exclusion in the Arrowood policy clearly and unambiguously applies to each and every claim in the underlying complaint for which there might otherwise be coverage under the policy.” Id. The exclusion, which was entitled “Inverse Condemnation” provided, in pertinent part:
This insurance does not apply to
* * *
w. Inverse Condemnation
Any claim arising out of inverse condemnation, adverse possession, dedication by adverse use or eminent domain.
Id. at *7.
At the outset, the Court rejected the Town’s argument that this exclusion is ambiguous, recognizing that the phrase “arising out of” is broadly construed under Connecticut law. Id. The Court then turned to the question of whether the allegations in the underlying complaint arose out of the Town’s improper use of its eminent domain power. In this regard, Arrowood and American Alternative argued that the “factual predicate laid out in all the counts in all the complaints in the underlying action stem from the Town’s use of eminent domain in an improper fashion to prevent New England Estates from purchasing the Property and developing it for low-income housing.” Id. at *8. In sum, Arrowood and American Alternative pointed out that, without the taking, New England Estates and the Property Owners would have no injury and, therefore, no case. Id. In response, the Town argued that “because the plaintiff in the underlying action alleges that the [T]own’s ‘motivation’ for exercise of eminent domain was to avoid construction of affordable housing, the claim does not arise out of eminent domain.” Id. at *9. The Town pointed specifically to the tortious interference claims against First Selectman Anthony DaRos and the allegations that he “distributed or disseminated inaccurate or misleading information about the environmental condition of the property for the purpose of halting the development, promoting the condemnation, and interfering with the contract between New England Estates and the Property Owners.” Id.
The Court rejected the Town’s argument, describing it as “the sort of conceivable, but tortured and unreasonable reading of a complaint and policy language that the case law cautions against.” Id. The Court held, as a matter of law, that the “‘eminent domain” exclusion in the Arrowood policy would apply to, and preclude coverage for, all of the claims against the Town in the underlying action with the exception of the claims for trespass (based upon environmental contamination) and the nuisance claims made by the Property Owners in their cross complaint. Id. at *10.
The Court next addressed the Property Owners’ claims for contamination or pollution of the property. The Town argued that the trespass and nuisance claims did not arise out of the exercise of eminent domain and that these claims were not precluded by the eminent domain exclusion. Id. Arrowood and American Alternative, in turn, argued that even if the eminent domain exclusion did not apply to these claims, these claims were excluded by the pollution exclusion in the Arrowood policy. Id.
The pollution exclusion provided:
This insurance does not apply to:
* * *
q. Pollution
(1)Any claim which would not have occurred in whole or in part but for the actual, alleged or threatened discharge, dispersal, seepage, migration, release or escape of pollutants at any time;…
Id.
In analyzing the terms of this exclusion, the Court noted that this exclusion was an “absolute” pollution exclusion, to which no exceptions applied. Similar exclusions have been uniformly held to be clear and unambiguous by Connecticut courts. Id. (citing Heyman Assoc. No. 1 v. Ins. Co. of Pa., 230 Conn. 756, 773 (1995)). In this case, looking to the allegations in the Property Owner’s cross complaint, the Court held that the “complaints of trespass and nuisance unquestionably [fell] within the absolute pollution exclusion of the Arrowood policy.” Id. at *11.
On the basis of the foregoing, the Court held that Arrowood and American Alternative did not have a duty to defend the Town against those claims.
Looking specifically to the American Alternative policy, the Court held that because the American Alternative policy followed form to the underlying Arrowood policy, its determination that the eminent domain and pollution exclusions precluded coverage for the Town’s claims against Arrowood applied equally to the Town’s claims against American Alternative. Id. at *12. Furthermore, the Court held that because the American Alternative policy was an excess policy “it is clear that American Alternative, as the excess insurer, only had a duty to defend the Town once the Arrowood policy was exhausted by the payment of claims.” Id. at *13. Therefore, American Alternative, as an excess insurer, had no duty to defend the Town in the underlying action.1
On the basis of the foregoing, the Court entered judgment in favor of the Arrowood and American Alternative and found that neither insurer had a duty to defend or indemnify the Town.2 Further, since the claims against H.D. Segur were dependent upon a finding of coverage under the relevant insurance policies, the Court also entered judgment in favor of H.D. Segur.
American Alternative Insurance Company was represented by Daniel P. Scapellati, partner in Halloran & Sage’s Insurance Law Group.
1 American Alternative also argued that it had no duty to defend or indemnify the Town on the basis of the Municipal Amendatory Endorsement in its policy. This endorsement provided: “This insurance does not apply to any liability arising out of… The operation of the principles of eminent domain, condemnation proceedings, or inverse condemnation, by whatever name called, whether such liability accrues directly against the insured or by virtue of any agreement entered by or on behalf of the insured.” For the same reasons as enunciated by the Court with respect to the eminent domain exclusion in the Arrowood policy, the Court similarly found that the Municipal Amendatory Endorsement precluded coverage for all claims against the Town except for the claims for trespass (based upon environmental contamination) and the nuisance claims made by the Property Owners in their cross complaint.
2 An appeal of this decision was filed by the Town and later withdrawn.