A heavyweight insurer is asking a federal court to let it off the hook for covering Spokane in two headline-grabbing lawsuits over city water surcharges.
On Aug. 28, the Insurance Company of the State of Pennsylvania (ICSOP) filed a complaint in the US District Court for the Eastern District of Washington, seeking a clear ruling that it doesn’t have to defend or pay out for the City of Spokane in two ongoing legal battles. At the heart of the dispute are claims that the city imposed unlawful and excessive water surcharges on customers located outside its limits – sometimes up to 100 percent more than what in-city users paid.
One of the lawsuits, brought by West Terrace Golf, LLC, centers on allegations that the city imposed a water services surcharge requiring businesses and residents outside city limits to pay significantly higher rates. According to the complaint, after years of surcharges and unsuccessful attempts to resolve the issue, the city disconnected water service to the golf course on May 30, 2017. West Terrace claims this move led to property damage and lost revenue, and it is seeking declaratory judgment, injunctive relief, restitution, damages, interest, attorney fees, and costs.
The other case, a putative class action led by John E. Durgan, Tawndi L. Sargent, and Kristopher J. Kallem, involves residents and businesses who say they were also charged higher water rates than those inside city limits. The proposed class seeks reimbursement of excess amounts paid in the past, totaling an estimated $30 million, as well as damages, refunds, interest, attorneys’ fees, and costs.
ICSOP’s position is that its special excess liability policies for public entities do not cover the claims being made in these lawsuits. The insurer states that its coverage is limited to bodily injury or property damage arising from an “occurrence” during the policy period, or losses from wrongful acts in the performance of public duties. ICSOP asserts that neither lawsuit alleges bodily injury or property damage as defined by the policies, nor do they involve covered wrongful acts.
The complaint also points to several exclusions in the policies. ICSOP says it does not cover claims arising out of the failure or inability to supply water, wrongful acts for gain, profit, or advantage to which the insured is not legally entitled, refunds of taxes, fees, or assessments, or claims seeking injunctions or equitable relief rather than payment of money damages. ICSOP also invokes the “known loss doctrine,” stating that the city was aware of the alleged discriminatory rate structure before the relevant policy periods.
ICSOP is asking the court to declare it has no duty to defend or indemnify the city in the Durgan lawsuit or the West Terrace lawsuit, and that any defense costs incurred by the city in the Durgan lawsuit do not exhaust the applicable retained limit. ICSOP also seeks a declaration that it is not liable for any damages or restitution related to the alleged overcharges or property damage in the West Terrace case.
For insurance professionals, this case highlights the complexities of insurance coverage disputes involving public entities and class actions. The outcome may affect how insurers interpret policy exclusions and coverage for municipal clients facing claims for restitution or equitable relief. As litigation proceeds, the industry will be watching for how the court interprets the policy language and exclusions in the context of these municipal liability claims.
