Mainland Drilling v. Colony Insurance Co
Opinion of the Court
This is an appeal from the district court’s order holding that Defendant/Appellee Colony Insurance Co. (“Colony”) had no duty to defend Plaintiffs/Appellants Mainland Drilling LP et al. (“Mainland”) under its insurance policy from claims brought by state-court plaintiff Chaparral Energy L.L.C. (“Chaparral”). The district court held that Chaparral’s claims fell under an exclusion to the insurance policy that barred claims from a “co-owner of the working interest.” Finding no error, we AFFIRM.
1. Mainland first argues that the district court’s reading of the “co-owner of the working interest” exclusion would render coverage illusory for five hazards outlined in the policy, because such hazards are those typically faced by an owner of a mineral lease. However, the district court’s reading of the exclusion does not bar claims from all owners of a working interest in a mineral lease, just one who either (a) “ [participates in the operating expense of such properties” or (b) “[h]as the right to participate in the control development or operations of such properties,” as the term “co-owner of the working interest” is exclusively defined in the policy. Further, even if coverage for some of these hazards might not apply to an owner of a working interest in a mineral lease in some contexts, coverage for all of these hazards certainly could apply to a third party such as the owner of an adjacent property. Because there remain circumstances under which Colony remains obligated to provide coverage for the hazards outlined in the policy against other classes of claimants, coverage has not been rendered illusory. Accord ATOFINA Petrochems., Inc. v. Cont’l Cas. Co., 185 S.W.3d 440, 444 (Tex. 2005) (noting that defendant’s “interpretation that the exclusion bars all coverage when any negligence on the part of the premises owner is pleaded, unless the owner’s responsibility is based solely on vicarious liability for the acts of the contractor, would render coverage under the endorsement largely illusory”) (emphasis added).
2. Mainland next argues that the district court erred in finding that Chaparral was a “co-owner of the working interest” because Chaparral’s pleadings demonstrate that Chaparral neither (a) participated in the operating expenses
3. Mainland also argues that Chaparral claimed damages both before and after the Daywork Agreement was in effect, thus taking some matters of coverage outside the policy exclusion. This argument is wholly without merit. Any damages claimed before the Daywork Agreement was in effect were also before the insurance policy was in effect, and were therefore necessarily excluded from coverage. The Chaparral petition also demonstrates that all damages to Chaparral stem directly from Mainland’s alleged failure to perform its duties under the Daywork Agreement, under which Chaparral was a “co-owner of the working interest.”
4. Finally, Mainland argues that even if Chaparral satisfies the definitional prongs of the term “co-owner of the working interest” as it appears in the policy, Chaparral does not satisfy the general meaning of the term. Specifically, Mainland argues that it owns no working interest in the well, and therefore Chaparral does not “co-own” anything with Mainland. The mineral ownership of Mainland is irrelevant to the policy definition of “co-owner.” Moreover, the term “co-owner of the working interest” is specifically defined in the policy, and Chaparral satisfies both prongs of that definition. Inasmuch as there exists a tension between the policy’s definition and any other definition, the definition in the policy controls. See Provident Life & Accident Ins. Co. v. Knott, 128 S.W.3d 211, 219 (Tex. 2003) (“When terms are defined in an insurance policy, those definitions control the interpretation of the policy.”).
AFFIRMED.
Pursuant to 5th Cir R. 47.5, the court has determined that this opinion should not be published and is not precedent except under the limited circumstances set forth in 5th Cir. R. 47.5.4.
Dissenting Opinion
dissenting.
I respectfully dissent. The commercial general liability policy presently before us contains provisions that seem to conflict, and it is ambiguous regarding coverage of the claims made against Mainland Drilling Limited Partnership, the insured, in the underlying litigation. I would therefore reverse and remand. Despite the majority opinion’s protestations, that opinion’s interpretation of the policy does indeed “render coverage under the endorsement largely illusory.”
I
The policy at issue, including the endorsement in particular, is not a model of clarity. The endorsement provides that it modifies the insurance provided in preced
A. SECTION I — COVERAGES, COVERAGE A BODILY INJURY AND PROPERTY DAMAGE LIABILITY, 2. Exclusions is amended and the following added:
This insurance does not apply to:
Oil and Gas Working Interests
(1) “Property damage”:
(a) claimed by you or any “co-owner of the working interest”;
(b) incurred by or at the request of you, additional insureds or any “co-owner of the working interest”;
(c) claimed by any co-worker or additional insured of “co-owners of the working interest”; or
(d) from the blowout or cratering of a well resulting from or in connection with operations performed by you or on your behalf unless you at your own cost and expense, promptly and diligently take whatever steps are necessary or legally required of you or necessary for you or any other person to bring such well under control.
The term “co-owner of the working interest” is defined in the endorsement:
“Co-owner of the working interest” means any person or organization who:
a.participates in the operating expense of such properties; or
b.has the right to participate in the control, development or operations of such properties.
Immediately following the section in the endorsement containing the exclusion of property damage claimed by “any ‘eo-owmer of the working interest’ ”, the endorsement amends the policy limits but also appears to identify coverage for five hazards ((a) through (e) below):
B. SECTION III — LIMITS OF INSURANCE is amended and the following added:
Subject to 5. above, the most we will pay under Coverage A for “property damage” resulting from or caused by “your work” or “your product” included within the “products completed operations hazard” as described in the Declarations and included within one or more of the following:
a. “Blowout and cratering hazards”,
b. “Explosion hazard”,
c. “Collapse hazard”,
d. “Saline substance contamination hazard”, or
e. “Underground resources and equipment hazards”
is:
$250,000 Each Occurrence
$250,000 Aggregate
Each of the foregoing hazards is extensively defined in the endorsement.
The majority opinion recognizes that its interpretation of the endorsement results in sparse coverage. The opinion nevertheless concludes that its construction is the only reasonable one, asserting that the endorsement provides coverage in at least two circumstances. One is when a working interest owner “does not participate in the operating expense of such properties” or does not have the right to participate in the control or operations of such properties.
The other circumstance in which the majority opinion asserts that the endorsement at issue could apply is “to a third party such as the owner of an adjacent property.”
For example, if Mainland’s negligence allegedly causes damage to a well and casing on an adjoining property, Mainland
Irespectfully submit that the majority opinion’s interpretation of the endorsement not only provides Mainland with an exceedingly odd extension of insurance coverage, the interpretation is an unreasonable one.
II
Even assuming that the majority’s interpretation were reasonable, another reasonable interpretation of the policy that Colony Insurance Company issued exists. That is that the exclusion in the endorsement regarding co-owners of a working interest applies only when Mainland is performing work on property in which it or an additional insured owns a working interest. The endorsement makes clear that insurance is not extended to property damage “claimed by [Mainland] or any “co-owner of the working interest.” The modifier “co-” is repeated in succeeding subsections of the endorsement’s exclusion and would be superfluous if any and all owners of the working interest, not just those who were co-owners of a working interest along with Mainland or an additional insured, were intended to be included within the exclusion.
This construction of the endorsement’s exclusion is also supported by the use of the term “such properties” in the definition of “co-owner of the working interest.” The reference to such properties relates back to property damage “claimed by [Mainland] or any ‘co-owner of the working interest’” or “incurred by or at the request of [Mainland], additional insureds or any ‘co-owner of the working interest’. ...” “[S]uch property” is not a reference to any and all property on which damage may occur due to Mainland’s operations but rather property damage incurred on property in which Mainland or an additional insured has a working interest.
This is a sensible construction of the policy. It insures that Mainland has coverage when it is pursuing drilling operations as a contractor, which is the business for which the commercial general liability policy was obtained.
Under Texas law, if an insurance contract is susceptible to more than one reasonable interpretation, any ambiguity is resolved in favor of coverage.
Ill
The policy issued to Mainland has other ambiguities. This can be seen when the policy as a whole is examined.
The term “Produets-completed operations hazard” is defined in the main body of the policy, and that definition would appear to exclude the claims made against Mainland in the underlying suit because Mainland had allegedly abandoned the work it was performing. The definition in the policy states in pertinent part:
16. “Produets-completed operations hazard”:
a. Includes all “bodily injury” and “property damage” occurring away from premises you own or rent and arising out of “your product” or “your work”11 except:
(2) Work that has not yet been completed or abandoned....12
b. Does not include “bodily injury” or “property damage” arising out of:
(2) The existence of tools, uninstalled equipment or abandoned or unused materials;....
The endorsement at issue, entitled “OIL AND GAS COVERAGE LIMITATION”, states that it modifies the insurance that is otherwise being provided. This endorsement then sets forth the exclusion quoted above regarding “Oil and Gas Working Interests” and “Property damage” claimed by Mainland and “any ‘co-owner of the working interest.’ ” That exclusion appears to except from the exclusion property damage “from the blowout or cratering of a well resulting from or in connection with operations performed by [Mainland] or on [Mainland’s] behalf unless [Mainland] at [its] own cost and expense, promptly and diligently take[s] whatever steps are necessary or legally required of [Mainland] ... to bring such well under control.” From this section of the policy, it is fair to conclude that Mainland has coverage from claims for property damage resulting from blowouts or cratering, provided Mainland responds appropriately to the occurrence.
Why would the endorsement take such great pains to define various potential hazards to an oil and gas working interest and place separate dollar limits of liability on these hazards if all but two of them were expressly excluded by the first section of the endorsement? To the extent that the section in the endorsement limits hazards and the succeeding sections expand them, the policy is ambiguous.
The apparent conflict between the exception of only property damage from a blowout or cratering from the exclusions set forth in the first section of the endorsement and the identification of other hazards in the immediately succeeding sections of the endorsement does not appear to be the only conflict. As discussed earlier, the definition of “Products-completed operations hazard”, contained in the main body of the policy, includes only damage to property arising out of Mainland’s completed work. It specifically excludes “[wjork that has not yet been completed.” Yet, both the definition of “[pjroperty damage” in the exclusion section of the endorsement and the hazards identified in the section regarding “LIMITS OF INSURANCE” in the endorsement, indicate that there is coverage for certain property damage that results from the blowout or cratering of a well. A blowout or cratering of a well would seem to arise in many instances before Mainland completed its work. More pertinent to the present dispute is the question of whether “[ujnder-ground resources and equipment hazards” are only covered if the property damage occurs after Mainland’s work is completed, but are not covered if the property damage occurs before Mainland’s work is completed or after Mainland abandoned its work under a contract.
It is far from clear precisely what coverage was extended to Mainland for property damage arising out of its work as a driller of oil and gas wells. I must conclude that the policy is ambiguous in this regard. I would therefore remand this case to the district court for further proceedings consistent with Texas law.
. ATOFINA Petrochems., Inc. v. Cont'l Cas. Co., 185 S.W.3d 440, 444 (Tex. 2005).
. The endorsement provides:
C. SECTION V — DEFINITIONS is amended and the following added:
1. "Blowout and cratering hazards" means "property damage” above the surface of the earth caused by or resulting from:
a. an uncontrolled eruption of gas and/or oil from a well; and
b. the resulting collapse or caving in of the surrounding earth or structure around a well.
2. "Collapse hazard” includes "structural property damage” and any resulting "property damage" to any other property at any time.
4. "Explosion hazard” includes "property damage” arising out of blasting or explosion. The "explosion hazard” does*465 not include "property damage” arising out of the explosion of air or steam vessels, piping under pressure, prime movers, machinery or power transmitting equipment.
5. "Saline substance contamination hazard” includes "property damage" resulting from or caused by the contamination of oil, gas, water, mineral substances or other property by a saline substance.
6. "Structural property damage” means the collapse of or structural injury to any building or structure due to:
a. grading of land, excavating, borrowing, filling, back-filling, tunneling, pile driving, cofferdam work or caisson work; or
b. moving, shoring, underpinning, raising or demolition of any building or structure or removal or rebuilding of any structural support of that building or structure.
7. "Underground resources and equipment hazards” includes "property damage” to any of the following:
a. oil, gas, water or other mineral substances which have not been reduced to physical possession above the surface of the earth or above the surface of any body of water;
b. any well, hole, formation, strata, or area in or through which exploration for or production of any substance is carried on;
c. any casing, pipe, bit, tool, pump, or other drilling or well servicing machinery or equipment located beneath the surface of the earth in any such well or hole or beneath the surface of any body of water.
. Ante, at ¶ 1.
. Id.
. A working interest is "[t]he operating interest under an oil and gas lease. The owner of the working interest has the exclusive right to exploit the minerals on the land.” 8 Howard R. Williams & Charles J. Meyers, Oil and Gas Law, Manual of Terms 1191 (2000); see also Broesche v. Jacobson, 218 S.W.3d 267, 272 n. 3 (Tex.App.-Houston [14th Dist.] 2007, pet. denied) (citing Williams & Meyers's treatise for its definition of working interest and noting that "[cjourls in Texas and around the country have relied on this treatise when analyzing the meaning of a working interest in particular cases”). "Under an oil and gas lease, operating expenses are the burden of the working interest in the property and a royalty interest is free of the burden of such expenses.” 8 Williams & Meyers, supra, at 730; see also Johnston v. Am. Cometra, Inc., 837 S.W.2d 711, 717 (Tex.App.-Austin 1992, writ denied) (holding that the "appellants [were] the parties whom the take-or-pay obligation [was] intended to compensate” because the "appellants [were] working-interest owners who, unlike lessors, share the risk and expense of exploration, production and development”).
"When a leasehold is concurrently owned, normally the concurrent owners, before beginning exploration and development of the premises, enter into an operating agreement specifying the rights and liabilities of the parties and designating an operator. Such agreements typically provide for contribution
The term "joint exploration activities” is used to describe the situation of a jointly owned lease or block of acreage which contemplates the exploration and drilling of multiple wells, each party paying for its own costs and being entitled to its pro rata share of income and operating expenses. This joint form of oil and gas activity is primarily conducted via the form of a "joint operating agreement” in which the various participants appoint an operator who controls the day-to-day operations and has authority to make decisions affecting the other interest owners in nonmajor areas of operations.
8 Williams & Meyers, supra, at 540 (internal quotation marks omitted). A "joint operating agreement” is
[a]n agreement between or among interested parties for the operation of a tract or leasehold for oil, gas and other minerals. This type of agreement is frequently entered into before there has been any development. Typically the agreement provides for the development of the premises by one of the parties for the joint account. The parties to the agreement share in the expenses of the operations and in the proceeds of development, but the agreement normally is not intended to affect the ownership of the minerals or the rights to produce, in which respects, among others, the joint operating agreement is to be distinguished from a unitization agreement and from a mining partnership.
Id. at 541.
. Ante, at ¶ 1.
. Id.
. The "Common Policy Declarations” page of the policy issued to Mainland reflects that Mainland's "Business Description” is "oil/gas well driller”.
. Don's Bldg. Supply, Inc. v. OneBeacon Ins. Co., 267 S.W.3d 20, 23 (Tex. 2008) (“If an insurance contract uses unambiguous language, we must enforce it as written. If, however, a contract is susceptible to more than one reasonable interpretation, we will resolve any ambiguity in favor of coverage.").
. There is also a $ 100,000 limit for "Damage To Premises Rented To You.”
. The policy defines "Your work” to include "Work or operations performed by you or on your behalf...."
.Even this exclusion is arguably ambiguous due to the placement of the word "yet”. Grammatically, the policy does not apply to property damage arising out of “[w]ork that has not yet been completed” or "[wjork that has not yet been ... abandoned."
Reference
- Full Case Name
- Robert NEWHOUSE, Chapter 7 Trustee of the Mainland Drilling LP; Dallas Drilling Inc., Plaintiffs-Appellants v. COLONY INSURANCE COMPANY, Defendant-Appellee
- Cited By
- 1 case
- Status
- Unpublished