City faces lawsuit over condos' defective pipes

The City of San Diego is being sued for millions over corroded sewage pipes that have allegedly leaked hydrogen sulfide gas into expensive condominiums downtown.

Last month, a New York state judge ruled that the city failed to submit three claims in a reasonable time frame to their insurer, Indian Harbor Insurance. The delay violated a clause in the policy, leaving the city to face a $29 million lawsuit filed by Grande North's HOA.

The first claim, according to a September 25 judgment in New York Superior Court, occurred at the Grande North condominium building located on Pacific Highway. The smell and potential hazard was covered by online news organization Voice of San Diego in September 2009.

Residents at the Grande North had complained about the foul odor coming from the pipes for years. In August 2009, they filed a claim with the city's Risk Management Department, alleging that "sewer gases containing hydrogen sulfide were migrating on an ongoing basis from the City’s sewer main along the Pacific Coast Highway into the Grande North HOA building systems, causing corrosion and other damage."

It took less than two weeks for the city to deny the claim on the grounds that residents waited more than six months from when the odor was first detected. The building's homeowners association fired back, alleging the city was allowing a "potentially deadly condition" to persist. They asked the city to repair the aging pipes immediately. Again the city said the claims were not submitted in time. The homeowners association then filed suit against the city for $29 million in damages.

The case worked its way through the court and, while it did, city staff never informed Indian Harbor Insurance of the claims or the litigation, despite clauses in the policy requiring city staff to do so in a "practicable" time frame.

In fact, it took 31 months for word to finally reach Indian Harbor Insurance. That was too late. In July, the insurance company denied coverage.

Grande North isn't the only downtown building with pipe problems to blame on the city.

In May 2011, residents at 235 Market Street filed a similar claim over a "corrosion problem" that was “directly attributed to sewer gasses containing hydrogen sulfide (among other things) which originate in the City sewer main.”

In July, the city's Risk Management Office denied the claim, again on the grounds that the residents sat on the issue for too long before reporting the problem.

Two months later, the homeowners association at 235 Market filed suit for a "breach of implied warranty; negligence; inverse condemnation; dangerous conditions; breach of fiduciary duty; breach of covenants, conditions and restrictions; and negligent misrepresentation."

Yet, despite having just discovered that Indian Harbor needed immediate notice, the city again waited to notify them of the complaint or the lawsuit. Notice wasn't given until the next year, in May 2012. And again, the insurance company denied the claim.

But, wait, there's another case: In March 2012, as the City Attorney's Office was defending the two other lawsuits and negotiating with the insurance company, another claim for corrosive pipes and seeping hydrogen sulfide gas was made to the Risk Management Department, this one at a building on 15th Street in East Village.

In an all-too-familiar summary: City denies claim. Residents file lawsuit. City waits two months to notify their insurance provider.

The city subsequently filed a lawsuit in New York Superior Court against Indian Harbor Insurance. That didn't work so well. This from the the summary judgement:

The City has offered two justifications for its delays; neither presents a triable issue of fact. First, the City argues that language in the policy requiring that claims be “made against the Insured during the policy period and reported to the Company during the policy period” renders all notice of claims given within the policy period timely, regardless of whether such notice was given as soon as practicable after the claim was reported. This argument ignores the fact that these two provisions create separate requirements with separate purposes. The purpose of requiring reporting within the policy period is to afford the insurance carrier “greater certainty in computing premiums, since it does not need to be concerned with the risk of claims filed long after the policy period has ended, and as a result the insured may benefit from lower premiums.”

There is no reason to excuse the City’s failure to comply with the timely notice requirement in this case. It is not reasonable for an insured to rely on an insurance carrier’s performance after sitting on a claim for weeks or months without reporting it, in the face of a clause calling for notice of claims as soon as practicable and decades of precedent interpreting such clauses strictly. Further, New York courts have repeatedly emphasized the importance of timely notice to an insurer to protect against fraud; allow the insurer an opportunity to investigate, control, and settle claims; and to estimate potential exposure and establish adequate reserves.

That leaves the city on the hook not only for the millions of dollars in claims stemming from corroding sewage pipes, but also for legal fees to go after their insurance company. It's not over yet — on October 28, the city council voted to appeal the judge's decision.

(corrected 11/12, 4:10 p.m.)