Elizabethtown Water Co. v. Hartford Casualty Insurance
1998 U.S. Dist. LEXIS 8376, 998 F. Supp. 447, 1998 WL 141670 (1998)
Premium Feature
Subscribe to Lexplug to listen to the Case Podcast.
Rule of Law:
A clear and unambiguous insurance policy exclusion for damages arising from a failure to perform a contract will be enforced based on the substance of the underlying dispute. An insured cannot circumvent such an exclusion by characterizing its liability and settlement as arising from negligence rather than from a breach of contract.
Facts:
- In 1986, Big Sheepy Partnership and Sheep Hill Associates (collectively 'developers') purchased a large tract of land for development in Somerset County.
- The developers bought the land based on representations from Elizabethtown Water Company that it could and would supply adequate water to the future development.
- In 1988, the developers entered into an agreement with Elizabethtown in which they agreed to pay for an extension of water mains from Elizabethtown’s water supply to the development.
- The water mains were completed in July 1988, but Elizabethtown failed to supply water to all of the houses until October 1990, despite having the ability to do so.
- This delay in water supply caused the developers to lose numerous sales and adversely affected their business reputation, resulting in significant economic losses.
- During the relevant period, Elizabethtown was insured under Comprehensive General Liability (CGL) policies issued by Centennial Insurance Co. and Hartford Casualty Insurance Company.
Procedural Posture:
- Big Sheepy Partnership and Sheep Hill Associates ('developers') filed a complaint against Elizabethtown Water Company in New Jersey Superior Court.
- Nearly two years after the litigation commenced, Elizabethtown notified its insurers, Centennial and Hartford, of the lawsuit.
- Both Centennial and Hartford sent letters to Elizabethtown denying coverage for the claim.
- Elizabethtown settled the underlying lawsuit with the developers for $1.75 million, with the release agreement stating the payment was for potential liability on the negligence count only.
- Elizabethtown then filed a complaint in the U.S. District Court for the District of New Jersey against Centennial and Hartford, seeking indemnification for the settlement amount.
- Centennial and Hartford each moved for summary judgment, arguing their policies did not cover Elizabethtown's loss.
Premium Content
Subscribe to Lexplug to view the complete brief
You're viewing a preview with Rule of Law, Facts, and Procedural Posture
Issue:
Does a general liability policy's exclusion for 'property damage... arising out of a... failure... to perform a contract' bar coverage for an insured's settlement of a claim where the underlying facts show a failure to provide a contractually obligated service, even if the settlement is framed as being for a negligence claim?
Opinions:
Majority - Wolin, District Judge.
Yes, a policy exclusion for damages arising from a failure to perform a contract bars coverage where the underlying facts show a contractual failure, irrespective of the settlement's characterization. While the developers' economic losses could qualify as 'loss of use' property damage and a jury question exists as to whether an 'occurrence' (accident) happened, Hartford's specific exclusion for contractual liability is dispositive. The court will prioritize substance over form, meaning Elizabethtown cannot relabel its breach of contract as negligence to trigger insurance coverage. The court reasoned that the developers' damages directly arose from Elizabethtown's failure to fulfill its agreement to provide water, a risk explicitly excluded by Hartford's policy. However, Centennial's motion for summary judgment was denied because its 'Failure to Supply Water' exclusion was rendered ambiguous by internal company documents suggesting it might not apply, creating a genuine issue of material fact for a jury to decide.
Analysis:
This decision reinforces the principle of 'substance over form' in insurance contract interpretation, preventing insureds from using artful pleading or settlement language to create coverage where none was intended. It clarifies that CGL policies are meant to cover tortious accidents, not foreseeable business risks like the failure to perform a contract. The ruling on Hartford's clear contractual exclusion sets a strong precedent for insurers, while the denial of Centennial's motion serves as a caution that an insurer's internal communications can create ambiguity in otherwise clear policy language, potentially forcing the issue to a jury.
