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IN American Home Assurance Company v. Superior Well Services, Inc.No. 22-1498, United States Court of Appeals, Third Circuit (May 31, 2023) American Home Assurance Co. (“American Home”) appealed the district court’s order granting summary judgment to the policyholder Superior Well Services, Inc. (“Superior”).
The underlying state law requirement
US Energy contracted with Superior for hydraulic fracking services to extract natural gas from wells owned by US Energy. In November 2007, Superior notified its insurance provider, American Home, of the potential well damage claim. In February 2008, American Home agreed to provide Superior with defense counsel, but it also sent Superior a letter reserving its right to contest insurance coverage.
US Energy sued Superior in New York state court, alleging that Superior had damaged 97 of its wells. After trial, the jury found that Superior breached the contract by failing to perform services with reasonable care, skill and diligence. The jury found that Superior had damaged 53 of the 97 wells and stated that Superior “failed[ed] to perform its contract with US Energy in a workmanlike manner” and that this “failure” was “a substantial factor in causing damage to the US Energy wells[.]” Accordingly, it awarded US Energy $6.16 million, a figure that increased to approximately $13.18 million after the state court awarded interest.
THE DISPUTE BETWEEN SUPERIOR AND AMERICAN HOME
Superior’s policy provided coverage for “property damage” arising from an “occurrence.” The policy defined “property damage” as both “[p]physical damage to tangible property, including any resulting loss of use of that property.”
Superior also purchased an endorsement for “underground resources and equipment coverage” (“UREC”) that amended the CGL policy to provide additional coverage “against risks associated with well-being operations[.]” Specifically, the recommendation “adds” coverage” with respect to “property damage” included in the “hazard to underground resources and equipment” arising from the operations conducted by [Superior] or on [Superior’s] on behalf[.]”
American Home sued seeking a declaratory judgment that Superior’s policy does not indemnify Superior for any damages attributable to US Energy caused by Superior’s breach of contract.
OPINION OF THE DISTRICT COURT
The district court granted summary judgment for Superior and, by extension, for US Energy, and it ordered American Home to indemnify Superior for the state court judgment. The court concluded that each of the 53 damaged wells gave rise to a separate event, triggering an independent coverage limit for each respective well.
The definition of “accident” required to establish an “occurrence” under the policies cannot be met by claims based on faulty workmanship. Such claims simply do not present the degree of chance contemplated by the ordinary definition of “accident” or its ordinary legal construction in this context.
To hold otherwise would be to convert an insurance policy into a performance guarantee. The court was unwilling to do so, especially since such protections are already available to protect contractors.
The UREC endorsement restores coverage by providing that the exclusion “does not apply to any ‘property damage’ included in ‘underground resource and equipment risks[.]'” To trigger coverage, the recommendation specifically requires “property damage,” which, according to the underlying policy, is only covered if it is “caused by an ‘occurrence.'” The recommendation includes the “occurrence” requirement in the form of the “property damage” requirement.
No provision in the approval implicitly, let alone expressly, waives the “occurrence” requirement.
The Third Circuit Court of Appeal concluded that the endorsement does not preempt the existence of the underlying policy and reversed the district court’s grant of summary judgment and remanded the case to the district court with instructions to rule for American Home.
The key to any liability insurance policy is that for coverage to apply, the loss must be fortuitous, that is, neither expected nor intended by the insured, and must fit within the commonly understood meaning of the term “accident.” Under no definition of accident is wrongful conduct by the insured. Because the jury found the insured liable for its breach of contract by means of defective performance, there is no event and no coverage
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