City taxpayers could face $30M hit as insurer sues Spokane to deny coverage

(The Center Square) – Spokane could be on the hook for paying more than $30 million in claims after its insurer recently asked a federal court to declare that it has no duty to defend or indemnify the city.

The Insurance Company of the State of Pennsylvania filed a lawsuit in the U.S. District Court for the Eastern District of Washington on Aug. 28. ICSOP issued Spokane special excess liability policies in the early 2000s, but now claims that several underlying provisions exclude the city from that coverage.

The dispute arises from lawsuits that Spokane faces regarding its water surcharges outside city limits.

In one case, a golf course had made investments in response to a city ordinance but was still allegedly overcharged. The other involves a class-action lawsuit that alleges county taxpayers were charged up to 100% more for water than city residents. Those plaintiffs and the city will go to trial this December.

The other lawsuit involving West Terrace Golf is scheduled to go to trial against Spokane by April 2026.

“The City’s rates are reasonable and appropriate,” Spokane Communications Director Erin Hut wrote in a statement to The Center Square. “Most municipal utilities in Washington state, including Spokane, charge more for services provided outside the City’s boundaries — which is supported by state law.”

Hut says ICSOP likely refiled the insurance coverage lawsuit in anticipation of the trial this winter. The insurer originally filed suit in 2022 but held off as an appeals court reviewed the two underlying cases.

The Spokane County Superior Court initially agreed with the city, citing the same law as Hut, but the appeals court reversed that decision in February 2024. Two judges declared that the city’s surcharges must be “just, fair, reasonable and sufficient,” remanding both lawsuits to the superior court for trial.

Spokane asked the Washington Supreme Court for another opinion after the appellate ruling last year, but it declined. Now, the class action lawsuit, worth over $30 million, is proceeding, along with the golf course case. If ICSOP is successful, Spokane would be responsible for that restitution, not the insurer.

Spokane will have to prove its surcharges are reasonable; otherwise, local taxpayers may foot the bill through the general fund, which is already facing a deficit, or reserves within that account and others.

“The state allows utility providers to make decisions about costs for services that account for differences in maintenance, operation, repair, historic investment, and the value of other payments made to the municipality by customers,” Hut wrote in the statement to The Center Square.

According to the Aug. 28 filing, ICSOP policies exclude coverage for refunding assessments, taxes and fees; claims for failing to provide water service; wrongful acts for profit; the known loss doctrine, which refers to disputes the city knew about before obtaining coverage; and for equitable relief.

ICSOP policies only cover damages, not court-ordered restitutions, like the plaintiffs are seeking here.

The Center Square contacted ICSOP’s lawyer for comment, but didn’t receive an immediate response.

The court overseeing ICSOP’s coverage lawsuit issued a summons to the city on Aug. 29, giving Spokane three weeks to respond to the complaint, which it should receive by the end of the month.

“If you fail to respond, judgment by default will be entered against you for the relief demanded in the complaint,” according to the summons.