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Metropolitan District Commission v. QBE Americas, Inc.

United States District Court, D. Connecticut

September 6, 2019

THE METROPOLITIAN DISTRICT COMMISSION, Plaintiff,
v.
QBE AMERICAS, INC. d/b/a QBE SPECIALTY INSURANCE COMPANY, Defendant.

          RULING ON MOTION TO DISMISS

          STEFAN R. UNDERHILL UNITED STATES DISTRICT JUDGE

         In this action, The Metropolitan District Commission (“MDC”) seeks a declaration that it is entitled to a defense and indemnity coverage under the public officials and employment practices liability policy (“the Policy”) issued by QBE Specialty Insurance Company (“QBE”) in connection with MDC's imposition of surcharges on water customers at issue in Paetzold et al., v. Metro. Dist. Comm'n, HHD-CV18-6090558-S.

         On October 17, 2018, QBE filed a motion to dismiss, alleging that coverage is barred under several policy exclusions. See Mot. to Dismiss (Doc. No. 13). On May 7, 2019, I heard oral argument, after which I took the motion under advisement. See Doc. No. 36. I agree that MDC's claim is barred under the Policy's (1) prior knowledge condition and (2) self-dealing or illegal profit exclusion. Therefore, I grant QBE's motion to dismiss.

         I. Standard of Review

         A motion to dismiss for failure to state a claim pursuant to Rule 12(b)(6) is designed “merely to assess the legal feasibility of a complaint, not to assay the weight of evidence which might be offered in support thereof.” Ryder Energy Distribution Corp. v. Merrill Lynch Commodities, Inc., 748 F.2d 774, 779 (2d Cir. 1984) (quoting Geisler v. Petrocelli, 616 F.2d 636, 639 (2d Cir. 1980)).

         When deciding a motion to dismiss pursuant to Rule 12(b)(6), the court must accept the material facts alleged in the complaint as true, draw all reasonable inferences in favor of the plaintiffs, and decide whether it is plausible that plaintiffs have a valid claim for relief. Ashcroft v. Iqbal, 556 U.S. 662, 678-79 (2009); Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555-56 (2007); Leeds v. Meltz, 85 F.3d 51, 53 (2d Cir. 1996).

         Under Twombly, “[f]actual allegations must be enough to raise a right to relief above the speculative level, ” and assert a cause of action with enough heft to show entitlement to relief and “enough facts to state a claim to relief that is plausible on its face.” 550 U.S. at 555, 570; see also Iqbal, 556 U.S. at 679 (“While legal conclusions can provide the framework of a complaint, they must be supported by factual allegations.”). The plausibility standard set forth in Twombly and Iqbal obligates the plaintiff to “provide the grounds of his entitlement to relief” through more than “labels and conclusions, and a formulaic recitation of the elements of a cause of action.” Twombly, 550 U.S. at 555 (quotation marks omitted). Plausibility at the pleading stage is nonetheless distinct from probability, and “a well-pleaded complaint may proceed even if it strikes a savvy judge that actual proof of [the claims] is improbable, and . . . recovery is very remote and unlikely.” Id. at 556 (quotation marks omitted).

         “Construction of a contract of insurance presents a question of law for the court.” Moore v. Cont'l Cas. Co., 252 Conn. 405, 409 (2000) (quoting Pacific Indemnity Ins. Co. v. Aetna Casualty & Surety Co., 240 Conn. 26, 30 (1997)) (modification omitted). “The obligation of the insurer to defend does not depend on whether the injured party will successfully maintain a cause of action against the insured but on whether he has, in his complaint, stated facts which bring the injury within the coverage. If an allegation of the complaint falls even possibly within the coverage, then the insurance company must defend the insured.” Id. (quoting Flint v. Universal Machine Co., 238 Conn. 637, 646 (1996), and Schwartz v. Stevenson, 37 Conn.App. 581, 585 (1995)) (quotation marks and citations omitted). “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] complaint with the terms of the insurance policy.” Cmty. Action for Greater Middlesex Cty., Inc. v. Am. All. Ins. Co., 254 Conn. 387, 395 (2000). “Because the duty to defend is significantly broader than the duty to indemnify, ‘where there is no duty to defend, there is no duty to indemnify . . . .'” DaCruz v. State Farm Fire & Cas. Co., 268 Conn. 675, 688 (2004) (quoting QSP, Inc. v. Aetna Casualty & Surety Co., 256 Conn. 343, 382 (2001)).

         II. Background

         A. The Glastonbury Action

         On February 12, 2014, the Town of Glastonbury (“Glastonbury”) filed a civil action against MDC in the Judicial District of Hartford, captioned Town of Glastonbury v. Metropolitan District Commission, No. HHD-CV14-6049007-S (“Glastonbury Action”). See Ex. A to Mot. to Dismiss (Doc. No. 13-1). Glastonbury sought a declaratory judgment that the surcharge MDC levied on water recipients in non-member towns was unlawful.[1] Id. On August 13, 2015, Glastonbury moved for summary judgment. On May 12, 2016, the court entered an order granting Glastonbury's motion for summary judgment and denying MDC's cross-motion. See Town of Glastonbury v. Metro. Dist. Comm'n, 2016 WL 3179757 (Conn. Super. Ct. May 12, 2016). The court held that the non-member surcharge was illegal as a matter of law. Id. at *6. “Because the General Assembly did not authorize [MDC] to recover its water utility infrastructure or capital improvement costs, the surcharge included costs that [MDC] was not authorized to impose upon [Glastonbury] and therefore, it was illegal as a matter of law.” Id.

         On March 6, 2018, the Connecticut Supreme Court affirmed the trial court's judgment. See Town of Glastonbury v. Metro. Dist. Comm'n, 328 Conn. 326 (2018). “Upon review of the grants of authority made to [MDC], the court is compelled to conclude that the surcharge, which encompassed general costs that [MDC] was not expressly empowered to impose upon [Glastonbury], was unlawful.” Id. at 344. The Connecticut Supreme Court further stated that:

[Glastonbury] is seeking a declaration by the court that certain surcharges imposed by [MDC] were unlawful. [Glastonbury] is not presently seeking damages and is not obligated to do so. There is no question that if the surcharges are unlawful, then [Glastonbury] can demonstrate damages for those years the surcharges were imposed. It may be that [Glastonbury] has not articulated the specific legal theory under which it would recover those damages, and it is uncertain whether [Glastonbury] will seek to recover those damages at all.

Id. at 336 (internal citations omitted).

         B. The Underlying Action

         On March 6, 2018, a lawsuit was filed on behalf of a proposed class of MDC's water customers in the non-member towns of Glastonbury, East Granby, Farmington and South Windsor who paid the surcharge between January 1, 2006 and October 1, 2014. See Paetzold et al., v. Metro. Dist. Comm'n, HHD-CV18-6090558-S (“Underlying Action”). Count 1 of the Underlying Action asserts a breach of contract claim, alleging that MDC breached its contracts with customers in non-member towns by imposing the unlawful surcharge on the Plaintiffs. See Underlying Compl. ¶¶ 24-29. Count 2 alleges that MDC breached the duty of good faith and fair dealing by imposing the unlawful surcharge. Id. ¶¶ 30-35. Count 3 alleges an unjust enrichment claim, charging that MDC benefited from the “payment of the unlawful Surcharges” and that “[e]quity and the interests of justice mandate . . . reimbursement of the unlawful Surcharges imposed from January 1, 2006 to October 1, 2014, plus interest.” Id. ¶ 42. The Plaintiffs seek “[c]ompensatory damages exceeding $15, 000, 000” and “[i]nterest for monies wrongfully withheld.” Id. at Prayer for Relief.

         MDC filed this lawsuit against QBE on August 10, 2018, seeking a declaration that it is owed a duty of indemnification and a duty of defense under the Policy. See Doc. No. 1-1. On September 10, 2018, QBE removed the case to this court. See Doc. No. 1. QBE subsequently moved to dismiss on October 17, 2018. See Doc. No. 13.

         III. Discussion

         A. The Underlying Action Alleges a “Wrongful Act” Under the Policy

         Under the Policy, QBE agrees to cover damages that MDC becomes legally obligated to pay due to a wrongful act arising out of a discharge of duties by MDC.

         SECTION I - COVERAGE

A. Insuring Agreement
1. We will pay those sums that the Insured becomes legally obligated to pay as damages because of a wrongful act (regardless of whether or not such allegations prove to be groundless, false or fraudulent) arising out of the discharge of duties by or on behalf of the Named Insured as shown in the Declarations provided always that:
a. the claim, on account of such wrongful act, is first made against the Insured and reported to us ...

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