Inverse Condemnation and Public Water Systems: a Legal Nexus of Complexity, Exposure, and Uncertainty

• Publication year: 2018
• Author: by Paul Fuller, CPCU

Inverse Condemnation and Public Water Systems: A Legal Nexus of Complexity, Exposure, and Uncertainty

by Paul Fuller, CPCU

Paul Fuller is an insurance professional specializing in public water systems. He is a director of the American Association of Water Distribution & Management (AAWD&M), CEO of Allied Public Risk, LLC (a national Managing General Underwriter exclusively focused on public entities and public water systems), and the Insurance Administrator for the California Association of Mutual Water Companies Joint Powers Risk & Insurance Management Authority (JPRIMA). Throughout his over 25-year career in the industry, Paul has underwritten thousands of public water systems and adjusted scores of inverse condemnation claims.

Mr. Fuller earned his Bachelor of Business Administration from University of San Diego and Master of Science in Risk Management & Insurance from Georgia State University. He holds the Chartered Property Casualty Underwriter (CPCU) designation, a California Water Operator license (D2/T1), a California qualified Claims Manager license, and is nationally licensed as a Property & Casualty Agent and Surplus Lines Broker.

INTRODUCTION

Inverse condemnation is a complex legal theory that imposes unique, opaque, and expansive liability on public water systems with the power of eminent domain.¹ Like the Greek mythological god 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 are burdened with inverse condemnation liability. However, their strain is not from holding up the sky, but from bearing the weight of a legal theory that is noble in concept yet predacious in practice. The principle underlying this theory is the constitutionally protected right against unlawful takings of private property by the government without just compensation.² Yet predation in the form of liability often results because the public water systems have few defenses, no governmental immunities, and immense financial exposure.

These public entities are vulnerable to inverse condemnation actions primarily because of their water delivery systems, as unlawful takings frequently occur with physical injuries to real property caused by problems with the delivery systems. These systems (i.e., infrastructure and/or public improvements) are inherently prone to accidental and temporary takings involving breaks, leaks, backups, releases, and overflows (i.e., uninvited water).

This article focuses on inverse condemnation with respect to public water systems, and discusses legal mechanics, available protections, and liability.³ It also examines containment strategies like insurance placement and corporate structure as means to effectively manage the risks from inverse condemnation actions.

LEGAL PRINCIPLES UNDERLYING INVERSE CONDEMNATION ACTS

The right to due process of law is the catalyst behind inverse condemnation lawsuits against public water systems that violate the takings clause of the federal and state constitutions. The Fifth Amendment to the United States Constitution states that "no person shall be...deprived of...property, without due process of law; nor shall private property be taken for public use, without just compensation." The California Constitution is slightly broader and affirms "private property may be taken or damaged for public use only when just compensation...has first been paid...."⁴ Due process thus allows strict liability to be imposed in inverse condemnation actions involving water delivery systems. Accordingly, 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."⁵

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Water delivery systems are deemed public improvements built for the public benefit. Any trespass of their uninvited water will thus occur via a deliberately designed and constructed water delivery system, and any physical injury to real property will be a byproduct of such trespass. There is inverse condemnation, and therefore strict liability, whenever the resulting damage is proximately caused by the trespass and not an intervening cause. Such strict liability extends beyond trespass of uninvited water and also includes other intrusive activities linked to water delivery systems, as well as diminution of property value and loss of use. Common examples include nuisance (e.g., odors), existence (e.g., tanks), and policy (e.g., easements). The legal theory's low burden of proof, coupled with other reasons discussed herein, has facilitated its widespread and effective use against public water systems.

Inverse condemnation emanates from eminent domain, which means public water systems are only subject to the former if bestowed power of the latter. Both legal theories are predicated on the takings clause and the principle of due process. These protections "prevent the government from forcing some people alone to bear public burdens which, in all fairness and justice, should be borne by the public as a whole."⁶Eminent domain (otherwise known as condemnation or direct condemnation) is the more commonly understood process involving the takings clause, and is initiated 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.

The above-described roles with eminent domain actions are reversed in inverse condemnation actions. The condemnation occurs when public water systems appropriate private property through trespass of uninvited water or other intrusive activities linked to their water delivery systems. Because the property owner initiates the litigation, he or she must prove ownership of the affected property and demonstrate the public water system acquired the property (temporarily or permanently) without payment of just compensation. Ownership is easy to prove. An unlawful appropriation is also a low bar to clear due to the expansive concept of proximate cause. There is no need to link water delivery systems to public improvements built for public benefit, as case law has already established that connection. Since strict liability applies to inverse condemnation actions, the plaintiff need not prove negligence. Public water systems may prudently choose to assert operational negligence of employees and not policy decisions as a legal tactic to accept liability under a tort, which is less financially onerous than inverse condemnation.⁷"Where damage results from the acts of employees, and not from a policy decision, there is no [inverse condemnation] taking. Recovery, if any, lies in a tort action, such as negligence."⁸

Liability for inverse condemnation could include diminution of property value and loss of use.

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There are two types of unlawful takings: physical and regulatory. Public water systems are predisposed to the former type of taking. Such takings can be temporary or permanent, though public water systems are more frequently sued for temporary takings based on the limited trespass of uninvited water. Moreover, because takings litigation is constitutionally based, legislative and/or regulatory remedies are largely precluded. The litigation is also bifurcated: first is a bench trial to determine if an unlawful taking occurred, and if so, it is followed by a jury trial to determine just compensation. The California just compensation formula is the same for inverse condemnation and eminent domain. Plaintiffs, however, can recover their attorneys' fees, expert witness fees, and 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, as recovery for personal injuries is not allowed.

LITIGATION STRATEGIES FOR INVERSE CONDEMNATION ACTIONS

Since inverse condemnation involves strict liability as well as the attachment...