Insurance Coverage Rules for Inverse Condemnation Actions Involving Public Water Systems.

• Author: Fuller, Paul

This article has been substantially updated and expanded from one Mr. Fuller published in the California Public Law Journal, a quarterly publication of the Public Law Section of the California Lawyers Association. "A legal nexus of overlapping damages, liabilities and triggers" INVERSE condemnation is a complex legal theory presenting unique, opaque and expansive liability to public water systems. (1) Its gravity is analogous to the Greek mythological Titan Atlas, who was condemned by Zeus to stand at the western edge of earth and hold up the sky on his shoulders. Public water systems face a similar fate, except their strain arises from the weight of a legal theory that is noble in concept yet predacious in practice. This nobleness reflects a constitutionally protected right against unlawful takings of private property by the government (2) without just compensation. The predation represents acute liability from which its targets have few actionable defenses, no governmental immunities, and immense financial exposure.

Public water systems are vulnerable to inverse condemnation actions because unlawful takings encompass diminution in value to real and personal property proximately caused by physical and nonphysical injury from public improvements. Water delivery systems, which qualify as public improvements, are inherently prone to accidental and temporary takings involving uninvited water arising from breaks, leaks, backups, releases, and overflows. This paper encapsulates the problems owners of public water systems face from inverse condemnation. The first section of this article centers on the legal theory's underlying mechanics, available protections, and emerging areas of liability, and the second section examines insurer defense and indemnity obligations for those insurance policies from which such action cloaks as a potential policyholder right.

I. Inverse Condemnation as Legal Theory

1. Constitutional Derivations

   The principle of due process creates the risk of liability for those public water systems that violate the takings clause of the federal and state constitutions. The Fifth Amendment to the United States Constitution states "...no person shall be... deprived of... property, without due process of law... nor shall private property be taken for public use, without just compensation." Various State constitutions are even broader; Article I, Section 19 of the California Constitution affirms "private property may be taken or damaged for public use only when just compensation...has first been paid...." (3) Due process functions as a constitutional lever for imposing strict liability on inverse condemnation actions for public improvements like water delivery systems that create damage to private property. Courts have frequently found that public water systems "may be liable in an inverse condemnation action for any physical injury to real property proximately caused by a public improvement as deliberately designed and constructed, whether or not that injury was foreseeable, and in the absence of fault by the public entity." (4)

   Water delivery systems are deemed public improvements built for the public benefit. But these water systems are constructed in a way that anticipates tradeoffs. A trespass of uninvited water often occurs as a result of a deliberately designed and constructed water delivery system. In the event of such a trespass, physical injury to real property is a frequent byproduct. The resulting damage is often proximately caused by the trespass, rather than an intervening cause. Should the facts of trespass and damage be established, then inverse condemnation is reasoned to have occurred and strict liability levied. "[D]amage from invasions of water or other liquid effluents often provides the basis for inverse liability." (5) Inverse condemnation and the standard of strict liability extend beyond physical injury from the trespass of uninvited water and similarly comprise nonphysical injury to property, including loss of use, for other intrusive activities linked to water delivery systems. Common examples include nuisance (e.g., odors), existence (e.g., tanks), and land use (e.g., easements). Physical damage to property is not a prerequisite to compensation. (6) The legal theory's low burden of proof, malleable criteria for damages, and other reasons to be examined below have facilitated its widespread and weaponized use against public water systems whenever private property is diminished in value via physical or nonphysical injury from a public improvement. (7)

2. Substantial Cause-and-Effect Rule

   Lack of proximate causation is the only defense for inverse condemnation actions filed against public water systems involving trespass of uninvited water or other intrusive activities linked to their water delivery systems. But in contrast to traditional tort law, the inverse condemnation doctrine requires a plaintiff seeking to prove proximate causation to simply show that the defendant's undertakings set in motion a relatively short chain of events that could reasonably be deduced to lead to the plaintiff's damages. The absence of fault and foreseeability involving water delivery systems has expanded proximate causation to encompass a "substantial cause-and-effect relationship which excludes the probability that other forces alone produced the injury." (8) This wide-ranging definition renders most loss scenarios involving water delivery systems as unlawful takings, since contributing factors are marginalized. "[I]nverse condemn-ation liability may be established where the public improvement constitutes a substantial cause of the damage, albeit only one of several concurrent causes." (9) It is difficult for public water systems to avoid inverse condemnation liability unless there is a clear intervening break in the chain of causation, e.g., a mass inundation of rain preceding a water main break. (10)

3. Eminent Domain and Inverse Condemnation Governing Principles

   The rationale for imposing strict liability against public water systems is based on dispersing the costs of water delivery systems across the entire community, so that no one property owner bears a disproportionate financial burden of the project. "[U]nderlying the concept of inverse condemnation is that the costs of a public improvement benefiting the community should be spread among those benefited rather than allocated to a single member of the community." (11) This principle emanates from eminent domain, (12) which is the contraposition of inverse condemnation. Both theories share the same constitutional safeguards of due process and just compensation arising from the taking or damaging of private property by a public water system. Their singular difference involves a role reversal of plaintiff and defendant.

   Eminent domain (otherwise known as condemnation or direct condemnation) is the more common understanding of the takings clause and involves public water systems initiating takings as plaintiff by: (1) establishing public projects for public benefit requiring the acquisition of private property; (2) notifying potentially affected property owners that their property is needed for this purpose; (3) offering to purchase the private property or requesting it be dedicated; and, if necessary; (4) filing suit to acquire the private property in exchange for just compensation. (13) Inverse condemnation reverses the litigation whereby the property owner is plaintiff and the public water system is defendant. Proof of four rudimentary elements are required to establish inverse condemnation liability: (1) confirmation of interest in real or personal property by plaintiff; (2) the public water system substantially participated in the planning, approval, construction or operation of a public project or public improvement (i.e., its water delivery system); (3) plaintiff's property suffered damage; and (4) the public water system's project, act, or omission was a substantial cause of the damage. (14)

4. Legal Process for Physical Takings

   There are two types of unlawful takings: physical and regulatory. Our focus is the former since public water systems are more susceptible to this type of taking. Physical takings can be temporary or permanent. Public water systems are most vulnerable to claims of temporary takings resulting from trespass of uninvited water from their water delivery systems. Unlawful takings are constitutionally protected, pre-cluding legislative or regulatory remedies. Takings also necessitate two trials. The first is a bench trial to determine if an unlawful taking occurred. Should a judge conclude an unlawful taking, then a second trial by jury establishes just compensation. The California just compensation formula is the same for inverse condemnation and eminent domain. Plaintiffs, however, can recover their attorney fees and expert witness fees, as well as pre-judgment interest and appraisal fees in an inverse condemnation case. The only compensation recoverable under inverse condemnation is for damages to real and personal property. No other recovery, such as personal injury, is allowed. Since inverse condemnation involves strict liability as well as the attachment of fees and interest, litigation requires immediate review of the facts and determination of proximate causation. It is also important to promptly assess the plaintiff's damages, as early settlement may be prudent to mitigate the loss.

5. Invited Water vs. Uninvited Water

   Public water systems are not subject to liability for inverse condemnation actions involving invited water (i.e., voluntary acceptance of water into private piping systems) that complies with statutory and regulatory standards, including regulations and other express government approvals. (15) For example, there would be no liability under this theory for water provided to a property otherwise in conformance with state requirements, including any permits, for specified chemical...