Insurance company liable to City for failure to defend attack on ordinances.

The City of College Station, Texas v. Star Insurance Company No. 12-20746 (5th Cir. November 13, 2013).

The underlying case is a zoning matter; however the issues on appeal is whether the City’s insurance should have covered the defense. This case should be read by any governmental attorneys who deal with coverage claim issues. It should be noted, however, that while not in this opinion, not all insurance case holdings apply the same way if your entity is a member of a risk pool as opposed to a commercial insurer.

Weingarten Realty Investors (“WRI”) sued the City of College Station, Texas, in a dispute over re-zoning. WRI purchased the tract in reliance on the City’s 1990 Comprehensive Plan, which designated the tract for “regional retail use,” as well as the City’s 2001 land use study, which designated the tract for a “power” retail center. However, when WRI requested C-1 zoning in 2006, the City denied it.  WRI sued asserting the decision lacked a rational basis, was discriminatory, violated substantive due process and was arbitrary and capricious.

The City requested that its insurer, Star Insurance Company (“SIC”), fund its defense of WRI’s lawsuit. However, SIC refused, claiming that the general commercial liability policy it had issued to the City did not provide coverage. The policy excluded liability associated with eminent domain.  After settling with WRI, the City sued SIC for wrongful denial of coverage. The trial court ruled SIC had no duty to defend and the City appealed.

The United States Court of Appeals for the Fifth Circuit reversed and remanded. The court held If the underlying complaint pleads facts sufficient to create the potential of covered liability, the insurer has a duty to defend the entire case, even if the allegations are demonstrably false, fraudulent, or groundless, and even if some of the injuries alleged are not covered or fall within the scope of an exclusion.  The 5th Circuit agreed with the City that its potential liability under WRI’s equal protection, substantive due process, and tortious interference claims is independent of any just-compensation liability “arising out of” the inverse condemnation.  The court went through a detailed analysis why certain listed claims can give rise to such independent liability.  Holding that SIC had a duty to defend, the court remanded for the parties to submit evidence on the duty to indemnify for the settlement with WRI and whether the failure to defend is worthy of statutory penalty provisions.

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