Town Denied Insurance for $11M Judgment Over the Political Closing of Quarry

A federal judge has ruled that the Connecticut town of East Haven is not entitled to insurance coverage for a civil lawsuit and $11 million judgment against it regarding the closure of a local quarry in 2017 for political reasons.

The town sued to force two insurers to provide coverage. Last Friday, the town lost its case when the insurers were granted summary judgment in the federal district court for Connecticut.

During the time period relevant to its underlying dispute with the quarry owners, the town had two different liability insurers. Between July 1, 2015, and July 1, 2016, the town was insured by Starr Indemnity and Liability and between July 1, 2016, and July 1, 2021, the town was insured by Allied World Insurance. Both insurers disclaimed duties to defend and indemnify the town for the civil case under the terms of their policies.

The federal district court found that neither insurer breached a duty to indemnify or defend the town in relation to the lawsuit by the quarry owners. In the case of Starr, the actions taken by the officials that closed the quarry were taken outside of the policy period. In Allied World’s case, an exclusion for claims related to the “lack of due process” barred coverage.

The underlying action against the town and a former mayor, zoning official and tax assessor by the quarry was filed on June 15, 2017. The plaintiffs were John Patton, One Barberry Real Estate Holding, LLC and Farm River Rock LLC, who owned and operated a quarry in East Haven. They alleged that the town interfered with their quarry’s operations through various regulatory measures before eventually shutting it down through a series of cease-and-desist orders in 2017. The town’s actions included reclassifying portions of the quarry as industrial land and taxing it at a higher rate than previously beginning in October 2015; informing Patton that blasting permits would not be granted in the months preceding the 2015 municipal election; and issuing three cease-and-desist orders between February and May 2017, the last of which instructed the owners to completely shut down their quarry operations.

The plaintiffs claimed that the town and its officials violated their federal and state constitutional rights. They sought damages in excess of $25 million.

Since both Starr and Allied World denied they had a duty to defend, the lawsuit was defended through trial by the town through its retained counsel without the assistance of either insurer.

A federal judge in a bench trial concluded that the town and officials infringed on the quarry owners’ constitutionally protected property right in an arbitrary and irrational manner, in violation of the Fourteenth Amendment’s substantive due process protections. The judge awarded damages of $9,465,832.

The day after judgment was entered, on October 5, 2023, the town sent a demand to both Allied World and Starr for each company to accept its duty to indemnify the town. Both insurers disclaimed a duty to indemnify.

The underlying litigation continued after entry of judgment. The quarry owners moved to alter the judgment and were granted prejudgment interest and attorneys’ fees and costs. The action was settled for $11,000,000.

Both Allied World and Starr referenced two primary bases for their disclaimers: that the self-insured retention had not been satisfied, relieving the carriers of defense obligations, and that the timing of the “occurrence” fell outside of its coverage, and into the other carrier’s coverage.

The town took the position that—depending on the court’s finding as to when the relevant events occurred—either Starr or Allied World breached its duty to indemnify and to defend the town in the underlying lawsuit.

The court relied upon the timeline of events presented in the civil trial. The court concluded that Starr had no duty to indemnify the town because the vast majority of relevant wrongful acts occurred after the end of its policy period and the chief wrongful act was determined to be the third cease-and-desist order on May 2017.

The court noted that the trial judge treated the shutdown of the quarry as the relevant constitutional deprivation, and the decision to issue a third cease-and-desist order as the wrongful act that caused such shutdown. These events supported the trial court’s conclusion that the town committed a substantive due process violation in May of 2017, based on the mayor’s long-held resistance to continued operation of the quarry for political reasons.

Based on the trial court’s timelines, the wrongful acts occurred during the Allied World policy period. But the court found that Allied World had no duty to indemnify the town because a plain reading of an exclusion in its policy squarely barred coverage for the type of liability at issue. The trial court had determined that the quarry owners suffered losses resulting from the “deprivation” or “controlling” of their property by means involving “lack of due process” and the “resulting diminution of property value.” Allied World’s “due process” policy exclusion foreclosed coverage for suits “arising out of or resulting from deprivation, destruction or controlling of property by any means, method or proceeding that involves or is any way related to the principles of eminent domain, inverse condemnation, adverse possession, right of prescription, dedication by adverse use, lack of due process, or by whatever name used or however characterized; or the resulting diminution of property value.”

Both insurers also successfully argued that, since the town did not expend the $1 million retained limit until it paid the settlement in 2023—at which time the duty to defend was no longer at issue—they had no duty to defend against the underlying lawsuit.