MDC cannot use insurance policy to offset costs it faces in case of imposing illegal charges on homeowners

Sep. 26--A federal court has told the Metropolitan District, Greater Hartford's regional water and sewer authority, that it cannot use a multimillion dollar-insurance policy to offset $10 million or more in costs and potential damages it faces for imposing illegal charges on homeowners in suburban towns.

The decision, a win for QBE Specialty Insurance, makes it increasingly likely -- as the MDC has warned -- that ratepayers will get stuck with the costs of a class action suit by 9,000 homeowners who claim that, for years, their towns have been singled out for special water surcharges that the state Supreme Court has called illegal.

The MDC's lawyers and other officials did not respond to questions about the ruling and about what other coverage, if any, the district has.

The MDC filed a claim with QBE on a $5 million Public Officials and Employment Practices liability policy last year when when the disgruntled ratepayers in East Granby, Farmington, Glastonbury and South Windsor moved successfully in court to be allowed to sue as a class. The policy indemnifies the MDC for damages due to a wrongful or negligent act that arises from the MDC's performance of its duties.

The insurer responded that it is not obligated to pay the claim because the district violated three policy exclusions -- the surcharges were intentional, not negligent; the MDC knew from an earlier court ruling in a related suit by the town of Glastonbury that the surcharges were illegal and would probably lead to damages; and that the surcharges amounted to self-dealing or illegal profiteering.

The MDC sued, unsuccessfully, to force payment on the policy. U.S. District Judge Stefan R. Underhill ruled for the MDC on one exclusion, finding that the district may not have acted intentionally because it may have thought the billing was legal. But he concluded the MDC should have known long before buying the policy that it faced damages and that the surcharges amounted to self-dealing.

The 9,000 customers in the class action buy MDC water, but live in towns that are not member towns of the district. The MDC has said in the past it is entitled to impose surcharges in nonmember towns because, unlike member towns, they do not contribute to the upkeep of the regional water and sewer infrastructure.

Ratepayers in the four towns complain that they have been made to pay surcharges not imposed on the member towns and that the money has been spent on capital improvements that benefit customers elsewhere in the MDC network.

Surcharges on nonmember towns have been imposed for decades. But nonmember ratepayers complained loudly in 2012 and 2013 when the surcharges soared. The lawsuit cites successive annual surcharges, ranging from $41.40 to as much as $423, between 2006 and 2014.

After the complaints, the MDC reduced the surcharge and the state legislature, which created the regional water and sewer authority and controls its operations by statute, enacted a law to limit surcharges on nonmembers. The legislature also gave the nonmember towns seats on the MDC board.

The 9,000 water customers paid more than $7 million in what the state Supreme Court in 2018 called illegal surcharges. But interest on the $7 million has been growing since 2012, when Glastonbury filed the first suit in the case.

Any financial judgment against the MDC will depend on factors such as how interest is calculated, how many years of surcharges are considered and whether the MDC is found to have unjustly enriched itself at the expense of customers in towns with no representation on the commission board.

Edmund H. Mahony can be reached at emahony@courant.com.

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