Town of Branford v. Arrowood Indemnity Co. et al. (2014)

MEMORANDUM OF DECISION RE STIPULATED TRIAL ON LIABILITY ISSUES

I. INTRODUCTION

This is a declaratory judgment action related to an insurance coverage dispute between the plaintiff, Town of Branford (hereinafter referred to as “the Town”), its primary insurer, Arrowood Indemnity Company (hereinafter referred to as “Arrowood”), and the Town's umbrella insurance carrier, American Alternative Insurance Company, (hereinafter referred to as “American Alternative”).   H.D. Segur Insurance Company (hereinafter referred to as “H.D. Segur”), the Town's insurance agent and broker, is an additional defendant in this action.

The Town claims that Arrowood and American Alternative were obligated under their policies to defend and indemnify the Town in connection with a lawsuit brought in Connecticut Superior Court in July of 2003, naming the Town and several of its elected officials as defendants.

After consulting with the court, the parties have agreed to a process where the threshold issue of Arrowood and American Alternative's duty to defend and indemnify the Town under the terms of their respective policies of insurance will be decided first, based on stipulated facts.   Other fact-based defenses, such as lack of notice or late notice, questions of damages, and claims against H.D. Segur (which are dependent upon a finding that the American Alternative insurance policy provides coverage to the Town) will be addressed, if necessary, in subsequent proceedings.

II. FACTS AND PROCEDURAL BACKGROUND

The Fire & Casualty Insurance Company of Connecticut (now known as Arrowood) issued policy number MTA 001000–01 (hereinafter referred to as the Arrowood policy”) to the Town of Branford for the policy period of July 1, 2003 through July 1, 2004, providing claims-made Public Entity Errors and Omissions Coverage, with a policy limit of $1 million.  (Joint Stip. ¶ 1, Exhibit A.)

American Alternative issued an umbrella insurance policy number 60–A2–UB–0000172–60 (hereinafter referred to as “the American Alternative Policy”) to the Town of Branford for the period from July 8, 2003 through July 1, 2004, 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 $10,000,000.   Coverage A provided excess coverage above underlying policies (including the Arrowood policy) subject to the same terms and conditions as the underlying policies.  (Joint Stip. ¶¶ 12–14, Exhibit B.)

In 2003, Thomas Santa Barbara Jr. and Frank Perrotti, Jr. (hereinafter referred to as “the Property Owners”) were the owners of a 77–acre parcel of property known as 48–86 Tabor Drive (hereinafter referred to as “the Property”) in the Town of Branford.   New England Estates, LLC (hereinafter referred to as “New England Estates”) was a real estate developer that had entered into an option contract with the Property Owners to purchase the Property for $4,850,000.   Since 2001, New England Estates had been engaged in an ongoing process of gaining the necessary approvals for development of the Property.

On May 30, 2003, New England Estates filed with the Branford PZC an application for a 354–unit residential development.   Thirty percent of the units would be set aside for a forty-year period to be occupied only by low to moderate income families.   The application requested a change in the Branford Zoning Regulations to create a special zone that would allow the affordable housing restriction.  (Joint Stip. Exhibit C;  July 18, 2003 Verified Complaint, ¶ 32.)

Three weeks later, on May 21, 2003, the Town of Branford 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.”  (Joint Stip. ¶ 26, Exhibit C, ¶ 33.)

On July 9, 2003, the Board voted to condemn the Property.  (Joint Stip. ¶ 28.)

On July 18, 2003, New England Estates commenced an action in Connecticut Superior Court (Docket No. CV–03–0183606–S) (hereinafter referred to as “the underlying action”) against the Town, Anthony DaRos, First Selectman, Francis Walsh, Second Selectman, Robert Denhardt, Jr., Third Selectman, and Georgette Laske, Town Clerk.  (Joint Stip. ¶ 29.)

The complaint in the underlying action includes four claims:

—The First Count, alleging an unlawful, “pretextual and bad faith exercise of the power of eminent domain” (¶ 63);

—The Second Count, alleging 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 (¶¶ 80–84);

—The Third Count, brought only against the First Selectman Anthony DaRos, alleging that he exceeded his lawful powers, misused his official powers to block development of the Property, violated the plaintiff's 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]” ¶ 87b;  and

—The Fourth Count, seeking indemnification from the Town for the actions of the Town officials.

(Joint Stip. ¶ 30, Exhibit C.)

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.”  (Joint Stip., Exhibit C, ¶ 46.)   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 NEE's development plan, and despite the lack of any prior plan, proceeding, or discussion about acquiring the subject property for public recreational use ․” (Joint Stip., Exhibit C, ¶ 33.)   In support of that claim it alleged that the Branford Plan of Conservation and Development had consistently identified the Property as planned for residential development and had never suggested that the Property should be devoted to recreational uses (Joint Stip., Exhibit C, ¶¶ 37–39), and that more than ten years of environmental testing at the Property had not demonstrated any significant soil, surface water or groundwater contamination (Joint Stip., Exhibit C, ¶¶ 52–55), and that the Town was aware of these facts when it condemned the property.  (Joint Stip., Exhibit C, ¶ 57).

During the pendency of this action, New England Estates' complaint has been amended several times.   On September 10, 2003, New England Estates filed an Amended Verified Complaint, adding the Property Owners as defendants, and pleading a claim for deprivation of property without substantive due process in violation of the Fifth and Fourteenth Amendments and 42 U.S.C. § 1983 (new Second Count) (Joint Stip. ¶ 37, Exhibit F).  The September 10, 2003 Amended Verified Complaint makes several new factual allegations (e.g. ¶¶ 23, 25, 29, 48, 51, 62, 63, 64, and 65) but these allegations only add details and subordinate facts to the plaintiff's existing claims.

On August 1, 2006, New England Estates filed a Second Amended Complaint in the underlying action.   The Second Amended Complaint dropped the Town officials as defendants in the action and proceeded only against the Town and the Property Owners.   The original factual allegations appear to be edited and condensed, and some history and testimony from the injunction hearing is added (¶¶ 47–53), but overall the basic factual allegations are unchanged from the prior complaint.   On the basis of those factual allegations, the Second Amended Complaint includes three causes of action:  (1) bad faith use of eminent domain in violation of the Takings Clause of the Fifth Amendment and 42 U.S.C. § 1983;  (2) deprivation of property without substantive due process in violation of the Fifth and Fourteenth Amendments and 42 U.S.C. § 1983;  and (3) tortious interference with contractual relations by disseminating “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].”  (Joint Stip. ¶ 47, Exhibit K.)

On September 10, 2007, New England Estates filed a Third Amended Complaint against the Town in the underlying action.   The Third Amended Complaint includes the same factual allegations regarding the Town's “pretextual” taking of the Property by eminent domain and asserts 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.  (Joint Stip. ¶ 52, Exhibit M.)

On July 24, 2003, H.D. Segur forwarded a copy of the July 18, 2003 Verified Complaint, and the application for a temporary injunction to Arrowood's general agent, Massamont Insurance Agency.  (Joint Stip. ¶¶ 32–33, Exhibit D.) That was the only complaint forwarded to Arrowood on the Town's behalf.   The Town did not provide notice of or forward a copy of the subsequent September 10, 2003 Amended Verified Complaint, the August 1, 2006 Second Amended Complaint, or the September 10, 2007 Third Amended Complaint.  (Joint Stip. ¶¶ 45–46, 50–51.)

On August 29, 2003, Arrowood informed H.D. Segur and counsel for the Town that the Arrowood insurance policies did not provide coverage for the claims asserted in the verified complaint and informed the Town that Arrowood did not have obligation to defend or indemnify the Town in the underlying action.   Arrowood based its denial of coverage upon certain exclusions in the Arrowood Policy, including

—Inverse Condemnation;

—Civil Offenses;

—Dishonesty or Violation of Law;

—Bodily Injury and Property Damage;  and

—Non–Monetary Damages.

(Joint Stip. ¶ 34;  Exhibit E.)

On December 18, 2003, the Town filed its statement of compensation in the amount of $1,167,800 with the clerk of the court in connection with the taking of the Property.   On January 5, 2004, a Certificate of Taking was filed by the Town for the Property.  (Joint Stip. ¶ 39, Exhibit H.) Both New England Estates and the Property Owners appealed from the statement of compensation in separate actions, which subsequently were consolidated into a single action (hereinafter referred to as “the compensation appeal”).

On September 15, 2004, the Property Owners filed a Cross Complaint against the Town and the other defendants in the underlying action.   The Cross Complaint by the Property Owners makes the same basic factual allegations regarding the Town's actions in taking the Property and concludes 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.”  (Joint Stip. ¶ 42, Exhibit I, ¶ 22.)

Based on those allegations, the cross complaint asserts five causes of action:

—negligence, claiming the defendants acted negligently in condemning the Property (First Count ¶ 24);

—trespass, based on the Town “willfully and without color of right” taking possession of the Property by eminent domain (Second Count ¶ 21);

—a second count of trespass, based on contamination that “was caused by and flowed from the defendant Town's landfill onto the Property” (Third Count ¶ 21);

—tortious interference with business expectations, based on the Town's condemning the Property (Fourth Count, ¶ 22);  and

—nuisance, based on the Town's participation in and creation of the contaminated condition of the property (Fifth Count, ¶ 19).

In a fashion similar to New England Estates' complaint, the Property Owners also amended their Cross–Complaint on several occasions.   On February 2, 2005, the Property Owners filed an Amended Cross Complaint.   The factual allegations are virtually the same and the Amended Cross Complaint asserts the same five causes of action as the September 15, 2004 cross complaint.  (Joint Stip. ¶¶ 43, Exhibit J.)

On August 22, 2006, the Property Owners filed a Second Amended Cross Complaint.   The factual allegations are essentially unchanged, but two new causes of action are asserted:  bad faith use of eminent domain in violation of 42 U.S.C. § 1983, and deprivation of property without substantive due process in violation of the Fifth and Fourteenth Amendments and 42 U.S.C. § 1983.  (Joint Stip. ¶¶ 48–49, Exhibit L.)

On September 10, 2007, the Property Owners filed a Third Amended Cross Complaint.   The Third Amended Cross Complaint contains factual allegations similar to those made by New England Estates in its September 10, 2007 Third Amended Complaint, and asserts a single cause of action for bad faith use of eminent domain in violation of 42 U.S.C. § 1983.  (Joint Stip. ¶ 55, Exhibit N.)

The Town did not provide notice or a copy of any of the Cross Complaints filed by the Property Owners to H.D. Segur or Arrowood.  (Joint Stip. ¶¶ 40–41, 43–44, 48–49, and 53–54.)

The compensation appeal was tried to the court in June 2007, and the court determined that the fair market value of the Property was $4.6 million.

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.  (Joint Stip. ¶¶ 56–57, Exhibit P.) The court entered a post-verdict award of attorneys fees to the Property Owners in the amount of $275,979 and an award of attorneys fees to New England Estates in the amount of $1,488,587 in attorneys fees.  (Joint Stip. ¶¶ 64–65, Exhibit V.)

The Town appealed from the judgments in both the underlying action and the compensation appeal.   The Property Owners appealed the court's ruling as to the award of attorneys fees.  (Joint Stip. ¶¶ 59, 66–67, Exhibits Q, W and X.)

American Alternative first received notice of the underlying claims on June 12, 2008.   Attached to the June 12, 2008 letter, and delivered to American Alternative for the first time, were the Verified Complaint, Third Amended Complaint and Third Amended Cross Complaint from the underlying action.  (Joint Stip. ¶ 61, Exhibit S.)

On July 1, 2008, American Alternative disclaimed any obligation under the Umbrella Policy to defend or indemnify the Town in the underlying action on the basis of late notice, as well as various provisions, exclusions and endorsements contained in the Umbrella Policy.  (Joint Stip. ¶ 63, Exhibit U.)

On February 16, 2010, the Connecticut Supreme Court affirmed the Court's ruling in the compensation appeal.   On the same date, the Connecticut Supreme Court decided the Town's appeal of the jury's verdict in the underlying action.   The Supreme Court affirmed the $340,000 judgment and award of attorneys fees to the Property Owners, but reversed the entire judgment and the entire award of attorneys fees in favor of New England Estates, wiping out all of the approximately $14 million dollar verdict.  (Joint Stip. ¶¶ 73–74.)   The Supreme Court reversed the verdict and award of attorneys fees in favor of New England Estates because New England Estates did not have an interest in the property that is compensable under the takings clause of the Fifth Amendment.   New England Estates, LLC v. Branford, 294 Conn. 817, 837 and 861, 988 A.2d 229 (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., 294 Conn. 840.

In October of 2010, the Town settled the underlying action.   The Town has paid the settlement to the Property Owners in connection with the underlying action and has received a satisfaction of judgment.  (Joint Stip. ¶ 75.)

The Town brings this lawsuit alleging breach of contract and seeking a judgment that Arrowood is obligated to reimburse the Town for amounts expended for costs of defense and payment of damages in connection with the underlying action.   The operative complaint is dated March 5, 2009 and is in four counts.   Count I alleges breach of insurance contract against Arrowood;  Count II alleges breach of insurance contract against American Alternative;  Count III seeks to recover for professional negligence by H.D. Segur;  and Count IV alleges breach of contract against H.D. Segur.

In connection with the coverage determination presently before the court, the parties provided a joint stipulation of facts, extensively briefed the issues, and were heard at oral argument on September 18, 2013.

III. ANALYSIS

Under Connecticut law, an insurer has a duty to defend if a complaint states facts that brings its claim or claims within the policy coverage.  Misiti, LLC v. Travelers Property Casualty Company of America, 308 Conn. 146, 155–56 (2013).  “On the other hand, if the complaint alleges a liability which the policy does not cover, the insurer is not required to defend.”  Community Action For Greater Middlesex County, Inc. v. American Alliance Ins. Co., 254 Conn. 387, 399, 757 A.2d 1074 (2000) (quoting Springdale Donuts, Inc. v. Aetna Casualty & Surety Co. of Illinois, 247 Conn. 801, 807, 724 A.2d 1117 (1999)).   Similarly, “a policy exclusion will relieve an insurer of the duty to defend for claims falling within the exclusion.”  Hermitage Ins. Co. v. Sportsmen's Athletic Club, 578 F.Sup.2d 399, 404 (D.Conn.2008).

The interpretation of an insurance contract to determine an insurer's duty to defend is a question of law to be decided by the court.  “The question of whether an insurer has a duty to defend its insured is purely a question of law, which is to be determined by comparing the allegations of the [injured party's] complaint with the terms of the insurance policy.”  (Internal quotation marks omitted.)  Misiti, LLC v. Travelers Property Casualty Company of America, 308 Conn. 146, 154, 61 A.3d 485 (2013).¹

“[T]o prevail on ․ a declaratory judgment that it has no duty to defend in the underlying action, the insurer must establish that there is no genuine issue of material fact either that no allegation of the underlying complaint falls even possibly within the scope of the insuring agreement or, even if it might, that any claim based on such an allegation is excluded from coverage under an applicable policy exclusion ․ [T]he insurer ․ is only entitled to prevail under a policy exclusion if the allegations of the complaint clearly and unambiguously establish the applicability of the exclusion to each and every claim for which there might otherwise be coverage under the policy.”   New London County Mutual Insurance Company v. Bialobrodec, 137 Conn.App. 474, 479, 48 A.3d 742 (2012);  Lancia v. State National Ins. Co., 134 Conn.App. 682, 691, cert. denied, 305 Conn. 904 (2012).

A determination that there is no duty to defend also determines the issue of whether there is a duty to indemnify.  “[W]here there is no duty to defend, there is no duty to indemnify ․” DaCruz v. State Farm Fire & Casualty Co., 268 Conn. 675, 688, 846 A.2d 849 (2004).

The burden of proving a claim against an insured falls within a policy's coverage is on the insured while the burden of proving that a claim falls within a policy's exclusion is on the insurer.  Lancia v. State National Ins. Co., supra, p. 690.

The governing rule is that “[i]f an allegation of the complaint falls even possibly within the coverage, then the insurance company must defend the insured.”  (Internal quotation marks omitted.)  DaCruz v. State Farm Fire & Casualty Co., 268 Conn. 675, 688, 846 A.2d 849 (2004).  “[T]he duty to defend must be determined by the allegations set forth in the underlying complaint itself, with reliance on extrinsic facts being permitted only if those facts support the duty to defend.”  Misiti, LLC v. Travelers Property Casualty Co., 308 Conn. 146, 161, 61 A.3d 485 (2013).

A. Eminent Domain Policy Exclusion in Arrowood Policy

The parties generally agree that the primary issue in this case is 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.   If so, the exclusion would relieve the defendants of any obligation to defend or indemnify the Town of Branford in the underlying action.

The exclusion, entitled “Inverse Condemnation,” provides as follows:

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.

(Joint Stip. ¶ 4.)

The Town argues that the language in the eminent domain exclusion is ambiguous.  (June 28, 2010 Memorandum of Law in Opposition to Summary Judgment, Docket Entry # 193, p. 17.)   However, the “ambiguity” of which the Town complains is not a lack of clarity or a difficulty of comprehension of meaning, but a lack of specificity as to the intended scope of the words “any claim arising out of” in the exclusion.   The Town suggests that, despite its wording, the exclusion is not meant to be read broadly in terms of the required connection between the injury and the exercise of eminent domain.  Id., p. 20.²  If that was the intent of the exclusion, the Town argues, the insurer could have utilized “broader language to make the breadth of the exclusion clear, but did not.”  Id., p. 19.

The court's focus here is not upon what could have been written, but what was in fact written.  “[A]ny ambiguity in a contract must emanate from the language used by the parties.”  Smithfield Associates, LLC v. Tolland Bank, 86 Conn.App. 14, 18–19, 860 A.2d 738 (2004), cert. denied, 273 Conn. 901, 867 A.2d 839 (2005).   Words and phrases in an insurance policy “must be accorded their natural and ordinary meaning ․ [and] any ambiguity in the terms of an insurance policy must be construed in favor of the insured because the insurance company drafted the policy ․ A necessary predicate to this rule of construction, however, is a determination that the terms of the insurance policy are indeed ambiguous.”  (Citation omitted.)  Mallozzi v. Nationwide Mutual Ins. Co., 72 Conn.App. 620, 624–25, 869 A.2d 97, cert. denied, 262 Conn. 915, 811 A.2d 1292 (2002).  “[A] court will not torture words to import ambiguity, where the ordinary meaning leaves no room for ambiguity and words do not become ambiguous simply because lawyers or laymen contend for different meanings.   The fact that the parties advocate different meanings of the exclusion clause does not necessitate a conclusion that the language is ambiguous.   There is no presumption that language in insurance contracts is inherently ambiguous.”  Buell Indus. v. Greater N.Y. Mut. Ins. Co., 259 Conn. 527, 545 791 A.2d 489 (2002) (internal citations and quotations omitted).

In the present case, the court finds that the challenged language (“[a]ny claim arising out of ․ eminent domain”) is not ambiguous such that it must be construed against the insurer.   The words “arising out of” are well-recognized as being broadly construed.   See Misiti, LLC v Travelers Property Casualty Co., 308 Conn. 146, 158, n.9, 61 A.3d 485 (2013) (the term “arising out of” is “very broad” and it is sufficient to show that the injury “was connected with, had its origins in, grew out of, flowed from, or was incident to” an occurrence).   See also New London County Mutual Insurance Company v. Nantes, 303 Conn. 737, 754–55 (2012);  Hogle v. Hogle, 167 Conn. 572, 577, 356 A.2d 172 (1975);  Board of Education v. St. Paul Fire & Marine Ins. Co., 261 Conn. 37, 48, 801 A.2d 752 (2002).   Further, in the context of this insurance policy, there is no reason to construe the language narrowly.³

Therefore, the question is whether each and every claim in the underlying action, for which there might otherwise be coverage under the policy, clearly and unquestionably “arises out of” the Town's use of eminent domain.

Arrowood argues without qualification that all the claims against the Town in the underlying action “arise solely out of the Town's eminent domain proceedings” and thus they “fall within the eminent domain exclusion and are not covered under the Arrowood policy.”  (May 21, 2010 Memorandum in Support of Motion for Summary Judgment, p. 9.) Arrowood asserts that under Connecticut law the term “arising out of” is to be given a broad interpretation to mean “was connected with,” “had its origins in,” “grew out of,” “flowed from,” or “was incident to.”   See Misiti, LLC v. Travelers Property Casualty Company of America, supra, p. 172.   Arrowood argues that the “factual predicate” laid out in all the counts in all complaints in the underlying action is that the Town used eminent domain in an improper fashion to prevent New England Estates from purchasing the Property and developing it for low-income housing.   Arrowood maintains that it would be a “tortured construction” to say that all the claims in the underlying action are not “connected with,” do not “grow out of,” do not “flow from,” or are not “incident to,” the Town's exercise of eminent domain.   In Arrowood's view, without the act of taking the Property by eminent domain, New England Estates and the Property Owners have no injury and no case.

The Town itself has alleged in the present action that the “primary basis for [the underlying action] was [New England Estates' and the Property Owners'] theory that the Town and certain of its officials and employees violated their civil rights through the alleged unconstitutional taking of [the Property] in a manner that was in bad faith, pretextual, unreasonable or an abuse of power, and not for a public use or purpose.   In other words, the theory of [the underlying action] was that the Town of Branford and certain of its officials and employees did not take [the Property] through the proper use of governmental powers, but instead through improper means that violated [New England Estates' and the Property Owners'] rights.”  (See March 5, 2009 Amended Complaint in this action, ¶ 15).

Nonetheless, the Town takes the position that, because the plaintiff in the underlying action alleges that the town's “motivation” for exercise of eminent domain was to avoid construction of affordable housing, the claim does not “arise out of” eminent domain.   In effect, the Town argues that the eminent domain exclusion does not apply because the underlying claim is that eminent domain was “pretextual” and was in fact for improper or unlawful purposes.   This is the sort of “conceivable, but tortured and unreasonable” reading of a complaint and policy language that the case law cautions against.   See, Misiti, LLC v. Travelers Property Casualty Company of America, supra, p. 156.   A reasonable reading of the policy exclusion is that it applies to all claims arising out of the exercise of eminent domain, regardless of the municipality's “motivation.”

The Town also asserts that Arrowood has not met its burden of showing that the eminent domain exclusion clearly and unambiguously applies to each and every claim in the underlying complaint.   Specifically, it points to the claim for tortious interference with a business expectancy that was brought against First Selectman Anthony DaRos individually in the initial verified complaint (see Joint Stip. ¶¶ 29–30, Exhibit C, Third Count) and later reasserted against the Town in the Second Amended Complaint (see Joint Stip. ¶ 47, Exhibit K, Third Count).   The core allegation in those counts is that DaRos or the Town 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.

The Town claims that this claim is independent of and unrelated to any claims arising from the Town's taking of the property by eminent domain, because the cause of action for tortious interference with business expectations can be proven without the need to establish a taking of the property by eminent domain.

The court disagrees.  “A claim for tortious interference with contractual relations requires the plaintiff to establish (1) the existence of a contractual or beneficial relationship, (2) the defendants' knowledge of that relationship, (3) the defendants' intent to interfere with the relationship, (4) the interference was tortious, and (5) a loss suffered by the plaintiff was caused by the tortious conduct.”  Loiselle v. Browning and Browning Real Estate, LLC, 147 Conn.App. 246 (2013), citing Appleton v. Board of Education, 254 Conn. 205, 212–13, 757 A.2d 1059 (2000).   The loss suffered by New England Estates was the inability to purchase and develop the Property.   The loss suffered by the Property Owners was the inability to sell the Property.   The tortious conduct that prevented the purchase and sale of the Property was the Town's alleged “pretextual” exercise of eminent domain, which vested title to the Property in the Town, making fulfillment of the contract between the parties impossible.⁴  The dissemination of misleading and inaccurate information was for the purpose of “promoting the condemnation” and was not the “tortious conduct” that caused injury or loss to the Property Owners or New England Estates by interfering with their contractual relations.

Having reviewed all the allegations of the complaints and cross complaints in the underlying action and having compared them to the relevant policy language, the court concludes, 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 trespass (based on environmental contamination) and nuisance claims made by the Property Owners in their cross complaint.   Those claims are dealt with elsewhere in this decision.

B. The Property Owners' Claims for Contamination or Pollution of the Property

The Property Owners assert two causes of action in their cross complaint alleging that, if there is any pollution or contamination of the Property emanating from the Town's nearby operation of a landfill, the movement of those contaminants from the Town's property on to, in to and through the land of the Property Owners constitutes a trespass, and a nuisance.   The Town argues that these claims are separate from and independent of the other claims in the complaint, and do not “arise out of” the exercise of eminent domain.   Arrowood responds that, even if that is the case, coverage for those claims would be excluded by the “pollution exclusion” in the Arrowood policy, which provides as follows:

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”;  ․

(Joint Stip. ¶ 7.)

The pollution exclusion in the Arrowood policy is what is known as an “absolute pollution exclusion,” in that it excludes from coverage “any claims” based on discharge, dispersal, seepage, migration, release or escape of pollutants.   It makes no exception (as certain other policies may do) for a discharge, dispersal, release or escape of pollutants that is “sudden and accidental.”   See Darks Construction v. Shelby Ins Co., Superior Court, Judicial District of Litchfield at Litchfield, Docket No. CV 01 0085072S (Dec. 4, 2002, Pickard, J.) [33 Conn. L. Rptr. 498] (contrasting absolute pollution exclusion and “sudden and accidental” pollution exclusion).

In Heyman Assoc.   No. 1 v. Insurance Co. of Pennsylvania, 231 Conn. 756, 773, 653 A.2d 122 (1995), the Connecticut Supreme Court held that an absolute pollution exclusion employing language similar to the Arrowood exclusion was clear and unambiguous.   Subsequent cases following Heyman have consistently held that groundwater and soil pollution claims fall within the absolute pollution exclusion.   See, e.g., Schilberg Integrated Metals Corp. v. Continental Casualty Co., 263 Conn. 245, 819 A.2d 773 (2003). (absolute pollution exclusion clauses were clear and unambiguous and precluded coverage for liability that the plaintiff might incur in connection with its discharge of pollutants).   See also FJS Corporation v. United National Insurance Company, Superior Court, Judicial District of Danbury, Docket No. 32 64 50 (March 19, 1998, Leheny, J.) (absolute exclusion bars coverage for claim relating to the presence of hazardous materials on property);  Thompson v. Merchant's Mutual Ins. Co., Superior Court, Judicial District of Litchfield, Docket No. CV 93 0064014 (February 17, 1995, Pickett, J.) [13 Conn. L. Rptr. 484] (there is no coverage for claims seeking cleanup costs and damages as a result of insured's alleged contamination of surrounding soil and well contamination).

The allegations in the Property Owners' cross complaints of trespass and nuisance (based on the migration of contaminants from the Town's property) unquestionably fall within the absolute pollution exclusion of the Arrowood policy.   Accordingly, the policy provides no coverage and there is no duty to defend the Town against those claims.

C. Abuse of Process Exclusion in Arrowood Policy

As a practical matter, the court's decision that the eminent domain and pollution exclusions apply to the claims in the underlying action obviates any consideration of certain other exclusions.   However, given the age of this case and the potential for appeal, the court will state its findings and conclusions as to the other stated reasons for denial of coverage so that, should an appeal be taken, all potentially dispositive issues might be considered.

As a separate and independent ground for denial of coverage, Arrowood cites an exclusion contained in its policy entitled “Civil Offenses,” which provides as follows:

This insurance does not apply to

* * *

b. Civil Offenses

Any claim arising out of false arrest, false imprisonment, libel, slander, defamation, invasion of privacy, wrongful eviction, assault, battery, malicious prosecution, or abuse of process.

(Joint Stip. ¶ 5.)

Arrowood argues that New England Estates' complaint alleges the ultra vires use of the governmental power of eminent domain, which equates to abuse of process.   The court disagrees.   The tort of abuse of process is based on the accomplishment of a result that could not be achieved by the proper and successful use of process.   Restatement Second (1977) of Torts, § 682 emphasizes that the gravamen of the action for abuse of process is the use of “a legal process ․ against another primarily to accomplish a purpose for which it is not designed ․” The complaint does not allege that legal process of eminent domain was used for some other purpose than to acquire property.   The complaint alleges that the stated purpose of the taking was “pretextual” and that the taking was not in fact for a legitimate “public use,” but there is no question that the legal process of eminent domain was used to accomplish exactly the result for which it is designed—a taking of private property, with just compensation and a right of judicial appeal as to the amount of compensation.

Accordingly, the court finds that the abuse of process clause in the “Civil Offenses” exclusion does not apply to the claims against the Town in the underlying action

D. Bad Faith Exclusion in Arrowood Policy

As a separate and independent ground for denial of coverage, Arrowood cites an exclusion contained in its policy entitled “Dishonesty or Violation of Law,” which provides as follows:

This insurance does not apply to

* * *

d. Dishonesty or Violation of Law

Any claim

(1) arising out of any act of dishonesty, fraud, or bad faith committed by or at the direction of the insured, or

(2) arising out of willful violation of any federal, state, or local law or regulation by, or with the knowledge and consent of, the insured.

(Joint Stip. ¶ 6.)

Arrowood argues that New England Estates' complaint alleges that the Town utilized eminent domain “in bad faith,” not for any legitimate public purpose, but to take the property from New England Estates and thereby prevent low-income housing from being built in Branford.

Extensive discussion of this exclusion is unnecessary, because in the court's view, Arrowood has not sustained its burden of showing “the applicability of the exclusion to each and every claim for which there might otherwise be coverage under the policy.”  Lancia v. State National Ins. Co., 134 Conn.App. 682, 691, cert. denied, 305 Conn. 904 (2012).   There are certainly allegations of the complaint which support a finding of bad faith.   But there are also allegations of the complaint that describe a municipal government made up of various agencies and numerous individuals, engaged in a wide range of operations and making a series of decisions that could possibly be the legitimate exercise of a governmental function.   The duty to defend is broader than the duty to indemnify and encompasses claims that might possibly fall within the coverage.   In the present case, the court finds that the “bad faith” exclusion in the policy would not relieve Arrowood of its duty to defend the Town against the claims made in the underlying action.

E. Coverage Under the American Alternative Policy

As an initial point, American Alternative argues that any coverage under its policy is excluded based on any applicable exclusions in the Arrowood policy.   The policy provides:

This insurance is subject to the same terms, conditions, agreements, exclusions and definitions as the Underlying Insurance except as otherwise provided in this policy, provided, however, that in no event will this insurance apply unless the Underlying Insurance applies or would apply but for the exhaustion of its applicable Limit of Liability.

(Joint Stip. ¶ 15).

A reasonable insured would read this language as meaning that if the underlying insurance contains exclusions that preclude coverage, there is no coverage under the American Alternative Policy.   Since the court has determined that the eminent domain and pollution exclusions in the Arrowood policy preclude coverage for the claims in the underlying action, that determination also precludes any coverage under the American Alternative policy.

F. American Alternative's Duty to Defend

As with the Arrowood policy, the court's decision that based on the exclusions in the underlying insurance the American Alternative policy does not provide any coverage for claims in the underlying action obviates any consideration of other grounds for denying coverage advanced by American Alternative.   However, for the same reasons previously given, the court will present its findings and conclusions as to the other stated reasons for denial of coverage.

The American Alternative policy provides:

III. DEFENSE PROVISIONS

A.  We will assume charge of the settlement or defense of any claim or suit against the insured when

1. the aggregate Limit of Liability of the applicable Scheduled Underlying Policy has been exhausted by payment of claims, or

2. damages are sought for bodily injury, personal injury, property damage, or advertising injury covered by this policy and to which no Underlying Insurance or other insurance applies

Provided there is no duty to defend under any Underlying Policy

* * *

D. In all circumstances for which Paragraph A above is not applicable, we will NOT be obligated to assume charge or pay the expenses for the investigations, settlement or defense of any claim made, or suit brought, or proceedings instituted against any insured.   We will, however, have the right in our sole discretion to participate in the defense and trial of any claims, suits or proceedings which relate to any occurrence that may involve this policy.   If we avail ourselves of this right, we will do so at our expense.

(Joint Stip. ¶ 19.)

The Town argues that “American had a duty to provide a defense to the Town when Arrowood refused to do so.”  (July 11, 2013 Memorandum of Law, Docket Entry # 331, p. 3.) The Town provides no persuasive case authority for this proposition and it finds no support in the language of the policy itself.⁵

The plain language of the “Defense Provisions” clause in the American Alternative policy and relevant case law make it 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.   Furthermore, it had no duty to defend any suit for damages not “covered by this policy.”   The unambiguous language admits no other conclusion.   American Alternative had no duty to defend the Town for claims asserted in the underlying action.

G. Municipality Amendatory Endorsement to American Alternative Policy

The “Municipality Amendatory Endorsement” to the American Alternative Policy provides in relevant part as follows:

With respect to Coverage A and Coverage B:

1.  This insurance does not apply to any liability arising out of:

* * *

d. 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.

(Joint Stip. ¶ 22.)

American Alternative suggests that this exclusion is “similar” to the eminent domain exclusion in the Arrowood policy and therefore subject to the same analysis.   In response, the Town—attaching some significance to use of the term “operation of the principles of eminent domain,” rather than just “eminent domain”—suggests that the exclusion should be narrowly interpreted.

The court disagrees, since it sees no meaningful distinction between the term “arising out of ․ The operation of the principles of eminent domain” as used in the American Alternative policy and the term “any claim arising out of ․ eminent domain” in the Arrowood policy.   Furthermore, the American Alternative exclusion also refers to “condemnation proceedings ․ by whatever name called ․” suggesting that a broad interpretation based on the nature of the activity, not the label of the activity, is intended.

For the reasons previously stated with respect to the Arrowood eminent domain exclusion, the court concludes that “Municipality Amendatory Endorsement” in the American Alternative policy would apply to, and preclude coverage for, all of the claims against the Town in the underlying action with the exception of the trespass (based on environmental contamination) and nuisance claims made by the Property Owners in their cross complaint.

IV. CONCLUSION

On the basis of the foregoing stipulations of fact and conclusions of law, the court finds, and enters judgment in this action to declare,

1.  That the insurance policy number MTA 001000–01 issued by Fire & Casualty Insurance Company of Connecticut (now known as Arrowood Indemnity Company) to the Town of Branford for the policy period of July 1, 2003 through July 1, 2004, does not create a duty to defend or indemnify the Town of Branford in connection with claims made in a lawsuit filed in Connecticut Superior Court and captioned New England Estates v. Branford, Docket No. CV–03–0183606–S.

2.  That insurance policy number 60–A2–UB–0000172–60 issued by American Alternative Insurance Company to the Town of Branford for the period from July 8, 2003 through July 1, 2004, does not create a duty to defend or indemnify the Town of Branford in connection with claims made in a lawsuit filed in Connecticut Superior Court and captioned New England Estates v. Branford, Docket No. CV–03–0183606–S.

Since the breach of insurance contract counts against Arrowood (Count I) and American Alternative (Count II), as well as the professional negligence and breach of contract claims against H.D. Segur (Counts III and IV) are dependent upon a finding of coverage under the relevant policies of insurance, judgment will enter in favor of the defendants on all counts.   Each party shall bear its own costs.

BY THE COURT,

Sheridan, J.

FOOTNOTES

FN1. As the parties point out, there is no controlling appellate authority within Connecticut as to which version of the complaint should be examined to determine an insurer's duty to defend.   Some courts insist that the court should refer only to the latest-filed complaint, other courts maintain just as strongly that the obligation to defend is determined by the allegations of the initial complaint.   Without taking a view as to which position should control, or how the Connecticut appellate courts would decide the issue, this court has reviewed the allegations contained in the July 18, 2003 (initial) verified complaint and all of its amendments, as well as the September 15, 2004 (initial) cross complaint and all of its amendments, to determine if any allegation of those pleadings falls even possibly within the coverage..  FN1. As the parties point out, there is no controlling appellate authority within Connecticut as to which version of the complaint should be examined to determine an insurer's duty to defend.   Some courts insist that the court should refer only to the latest-filed complaint, other courts maintain just as strongly that the obligation to defend is determined by the allegations of the initial complaint.   Without taking a view as to which position should control, or how the Connecticut appellate courts would decide the issue, this court has reviewed the allegations contained in the July 18, 2003 (initial) verified complaint and all of its amendments, as well as the September 15, 2004 (initial) cross complaint and all of its amendments, to determine if any allegation of those pleadings falls even possibly within the coverage.

FN2. The Town has also argued for the narrowest possible interpretation of the term “arising from,” suggesting that the exclusion only applies to the proper use of eminent domain and is intended to preclude the insurer from being required to pay compensation to a property owner for a municipality's acquisition of property by eminent domain.   That interpretation finds no support in the plain language of the exclusion (i.e., “any claim ․”) or in the relevant case authority..  FN2. The Town has also argued for the narrowest possible interpretation of the term “arising from,” suggesting that the exclusion only applies to the proper use of eminent domain and is intended to preclude the insurer from being required to pay compensation to a property owner for a municipality's acquisition of property by eminent domain.   That interpretation finds no support in the plain language of the exclusion (i.e., “any claim ․”) or in the relevant case authority.

FN3. The Town suggests that the term “arising out of” should be afforded a different, narrower meaning if it is used in a policy exclusion as opposed to a policy coverage provision.   This proposition finds no support in any case authority.   Generally, language in an insurance policy exclusion is construed the same way as if used in any other provision of an insurance contract.   It is not logical that the words “claims arising out of” could have a dual meaning, depending on where they are found in the policy..  FN3. The Town suggests that the term “arising out of” should be afforded a different, narrower meaning if it is used in a policy exclusion as opposed to a policy coverage provision.   This proposition finds no support in any case authority.   Generally, language in an insurance policy exclusion is construed the same way as if used in any other provision of an insurance contract.   It is not logical that the words “claims arising out of” could have a dual meaning, depending on where they are found in the policy.

FN4. See Joint Stip., Exhibit M (September 10, 2007 Third Amended Complaint), ¶ 23.  “Had the Town not used eminent domain to take the 77 acres, plaintiff [New England Estates] would have received ․ the necessary permits and approvals to construct and sell the residential development plan that was pending before the Branford PZC in January 2004, when the land was taken and would have exercised its option to purchase the Property.”   See also Joint Stip., Exhibit N (September 10, 2007 Third Amended Cross Complaint), ¶ 23 (same)..  FN4. See Joint Stip., Exhibit M (September 10, 2007 Third Amended Complaint), ¶ 23.  “Had the Town not used eminent domain to take the 77 acres, plaintiff [New England Estates] would have received ․ the necessary permits and approvals to construct and sell the residential development plan that was pending before the Branford PZC in January 2004, when the land was taken and would have exercised its option to purchase the Property.”   See also Joint Stip., Exhibit N (September 10, 2007 Third Amended Cross Complaint), ¶ 23 (same).

FN5. The Town relies on Judge Quinn's decision in Fortin v. Harford Underwriters Ins., Superior Court, Judicial District of Middlesex, Complex Litigation Docket at Middletown, Docket No. No. X04–CV–03–0103483 S (April 6, 2005, Quinn, J.).   Although that decision is well reasoned, it interprets policy language that is significantly and substantively different from the provision in the American Alternative policy.   See Northeast Utilities Service Co. v. St. Paul Fire & Marine Ins., 2012 U.S. Dist. LEXIS 96641 (D.Conn July 12, 2012) (distinguishing Fortin and interpreting policy language substantially similar to the language in the American Alternative policy)..  FN5. The Town relies on Judge Quinn's decision in Fortin v. Harford Underwriters Ins., Superior Court, Judicial District of Middlesex, Complex Litigation Docket at Middletown, Docket No. No. X04–CV–03–0103483 S (April 6, 2005, Quinn, J.).   Although that decision is well reasoned, it interprets policy language that is significantly and substantively different from the provision in the American Alternative policy.   See Northeast Utilities Service Co. v. St. Paul Fire & Marine Ins., 2012 U.S. Dist. LEXIS 96641 (D.Conn July 12, 2012) (distinguishing Fortin and interpreting policy language substantially similar to the language in the American Alternative policy).

Sheridan, David M., J.