Opinion
Civil Action No. 1:02-CV-122-C
May 8, 2003
ORDER
On this date the Court considered Plaintiff's Motion for Summary Judgment filed by investors Insurance Company of America ("Plaintiff") on March 14, 2003. Breck Operating Corp.'s ("Breck") Response to Plaintiff's Motion for Summary Judgment was filed April 2, 2003. Plaintiff's Reply to Breck's Response to Motion for Summary Judgment was filed April 16, 2003. After considering all the relevant arguments and evidence, this Court DENIES Plaintiff's Motion for Summary Judgment as more fully set forth below.
I. FACTUAL BACKGROUND
Plaintiff insurance company is a New Jersey corporation with its principal place of business in the State of New Jersey. Breck is a Texas corporation with its principal place of business in Breckenridge, Texas. Stephen W. Snelson, individually and d/b/a Quantum Energies Company, Steven A. Becker, Denny Snelson, Mona G. Snelson, Lisa A. Snelson, Rudolph A. Woerndle, and Max E. Wright ("Underlying Plaintiffs") are all citizens of the State of Texas.
On March 28, 2002, the Underlying Plaintiffs sued BRECK and Conoco, Inc. ("Conoco") in the First Judicial District Court in and for Santa Fe County, New Mexico, based on damages allegedly caused by Breck and Conoco in the operation of certain oil and gas leases within the Seven Rivers Queen Formation in and under the South Eunice Unit ("SEU") Waterflood. The Underlying Plaintiffs alleged that Conoco, the former operator of the oil and gas wells, and Breck, the current operator of the oil and gas wells, caused injected salt water to migrate from Conoco's and Breck's wells into producing zones under the Underlying Plaintiffs' oil and gas lease, thereby damaging the formation under the Underlying Plaintiffs' lease and causing excessive volumes of salt water to be produced by the Underlying Plaintiffs' oil and gas wells.
In the March 2002 suit, the Underlying Plaintiffs are seeking $16 million for trespass, nuisance, waste to mineral interests, and intentional tort, plus not less than $300,000 additional damages for sums unnecessarily expended by the Underlying Plaintiffs in extracting and disposing of the excessive salt water injected into the SEU Waterflood, which is contiguous to the down-dip producing zones of the Underlying Plaintiffs' lease. , Relevant to the instant suit, Plaintiff issued two policies of insurance to Breck. The first policy is a commercial general liability insurance policy ("Primary Policy"), with policy limits of $1 million per occurrence and running from December 1, 1999, to December 1, 2000. The second policy is a commercial umbrella liability policy ("Umbrella Policy") with policy limits of $30 million per occurrence and also running from December 1, 1999, to December 1, 2000. Plaintiff brings the instant suit seeking declaratory judgment that Plaintiff has no duty to defend or indemnify Breck in the March 2002 suit filed by the Underlying Plaintiffs.
Plaintiff claims that Breck first notified Plaintiff of the Underlying Plaintiffs' litigation on April 9, 2002. Plaintiff acknowledges that, after Breck put Plaintiff on notice of the March 2002 suit, Plaintiff initially provided a defense to Breck under the Primary Policy, but Plaintiff claims that it expressly reserved the right to deny coverage for costs of defense and indemnity. Plaintiff also claims that it subsequently reserved its rights to deny coverage to Breck under the Umbrella Policy. Plaintiff contends that the March 2002 claims against Breck are not covered by either the Primary Policy or the Umbrella Policy, that Breck's claims are excluded by the specific terms of the policies, and that BRECK failed to timely report the claim within ninety days of the Umbrella Policy's expiration period.
To the contrary, Breck argues that Plaintiff erroneously contends that the policies' exclusions preclude coverage for subsurface saltwater migration. Indeed, Breck insists that the Underground Resources and Equipment Coverage ("UREC") endorsement to the Primary Policy provides coverage for the damages alleged by the Underlying Plaintiffs and is within the occurrence-based policies' effective coverage period.
II. PROCEDURAL BACKGROUND
Plaintiff's Complaint was filed June 11, 2002. The Underlying Plaintiffs filed an Original Answer of Underlying Suit Plaintiffs on July 5, 2002. Breck's Original Answer was filed July 15, 2002.
Plaintiff's Motion for Summary Judgment was filed March 14, 2003. Breck's Response to Plaintiff's Motion for Summary Judgment was filed April 2, 2003, and Plaintiff's Reply to Breck's Response to Plaintiff's Motion for Summary Judgment was filed April 16, 2003.
A jury trial in this matter is set for September 2, 2003.
III. STANDARD
Summary judgment is appropriate only if "the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any," when viewed in the light most favorable to the non-moving party, "show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." Anderson v. Liberty Lobby, Inc., 477 U.S 242, 247 (1986) (internal quotations omitted). A dispute about a material fact is "genuine" if the evidence is such that a reasonable jury could return a verdict for the non-moving party. Id. at 248. In making its determination, the court must draw all justifiable inferences in favor of the non-moving party. Id. at 255.
Once the moving party has initially shown "that there is an absence of evidence to support the nonmoving party's case," Celotex Corp. v. Catrett, 477 U.S. 317, 325 (1986), the non-movant must come forward, after adequate time for discovery, with significant probative evidence showing a triable issue of fact, FED. R. CIV. p. 56(e); State Farm Life Ins. Co. v. Gutterman, 896 F.2d 116, 118 (5th Cir. 1990). Conclusory allegations and denials, speculation, improbable inferences, unsubstantiated assertions, and legalistic argumentation are not adequate substitutes for specific facts showing that there is a genuine issue for trial. Douglass v. United Servs. Auto. Ass'n, 79 F.3d 1415, 1428 (5th Cir. 1996) (en banc); SEC v. Recile, 10 F.3d 1093, 1097 (5th Cir. 1993). To defeat a properly supported motion for summary judgment, the nonmovant must present more than a mere scintilla of evidence. See Anderson, 477 U.S. at 251. Rather, the non-movant must present sufficient evidence upon which a jury could reasonably find in the non-movant's favor. Id.
IV. DISCUSSION
Plaintiff urges this Court to declare that Plaintiff has no duty to defend or indemnify Breck in connection with the lawsuit filed against Breck and Conoco in March 2002 regarding damages caused by the migration of injected salt water into producing zones under the Underlying Plaintiffs' oil and gas lease. Breck insists that Plaintiff has a duty to defend and indemnify BRECK because (1) the Primary Policy and the Umbrella Policy cover the allegations alleged by the Underlying Plaintiffs in the March 2002 suit; (2) there is a specific endorsement that provides coverage for the losses claimed in the underlying suit; and (3) the losses occurred during the policies' coverage periods.Choice of Law
As a threshold matter, the parties do not dispute, and this Court agrees. that Texas law governs the instant diversity action notwithstanding the fact that the Underlying Plaintiffs' litigation was filed in New Mexico. Here, Texas statutory directives provide that
[a]ny contract of insurance payable to any citizen or inhabitant of this State by any insurance company or corporation doing business within this State shall be held to be a contract made and entered into under and by virtue of the laws of this State relating to insurance, and governed thereby, notwithstanding such policy or contract of insurance may provide that the contract was executed and the premiums and policy (in case it becomes a demand) should be payable without this State, or at the home office of the company or corporation issuing the same.
Tex. REV. CIV. STAT. ANN. art 21.42 (Vernon 1981). See also Hefner v. Republic Indem. Co. of Am., 773 F. Supp. 11, 13 (S.D. Tex 1991) (concluding that article 21.42 of the insurance code is dispositive of the choice of law issue and applies if (1) the insurance proceeds are payable to a Texas citizen; (2) the policy is issued by a company doing business in Texas, and (3) the policy arises in the course of the insurance company's business in Texas).
First, this Court finds that, should Plaintiff be required to provide coverage under the policies at issue in the instant diversity action, any proceeds remitted by Plaintiff would be paid to either Breck or the Underlying Plaintiffs, all of whom are Texas residents, Second, this Court finds that Plaintiff is an insurance company doing business in Texas and delivered the policies at issue to Breck in Breckenridge, Texas. Third, this Court finds that the relevant policies were issued by Plaintiff to Breck in the course of Plaintiff's insurance business in Texas. Therefore, because the Texas statutory directives have been satisfied, this Court finds that article 21.42 applies and that Texas law governs the instant action.
Duty to Defend
The Primary Policy provides the following four types of coverage:
1. Coverage A for bodily injury and property damage;
2. Coverage B for personal and advertising injury;
3. Coverage C for no-fault medical expenses; and
4. Coverage D for oil and gas limited pollution events.
Each coverage type contains its own insuring agreement and exclusions. Coverage A and Coverage D are at issue in the instant matter.
Although Plaintiff acknowledges that it "began providing a defense to Breck" under the Primary Policy and that the Primary Policy provides limited oil and gas pollution coverage, Plaintiff argues that Breck's claims fall outside the Primary Policy's and the Umbrella Policy's insuring agreement Plaintiff asserts that the Primary Policy does not cover Breck's loss, because the Primary Policy's general liability coverage is restricted by a pollution exclusion excluding any loss caused by the alleged subsurface migration of injected salt water. Plaintiff also contends that Breck's loss falls without the provisions of the "follows form" Umbrella Policy with respect to pollution coverage and that Plaintiff also expressly reserved its rights to deny coverage for the costs of defense and indemnity and to deny coverage under the Umbrella Policy.
Breck argues that the Primary Policy's UREC endorsement provides coverage for the damages alleged by the Underlying Plaintiffs; and, because the occurrence was "continuous in nature," Breck contends that the loss occurred during the coverage period, notwithstanding the fact that the Underlying Plaintiffs failed to sue on the loss until after the expiration date of the policies.
It is well settled that "[u]nder Texas law, a court determines an insurer's duty to defend by examining the allegations in the petition filed against the insured and the relevant insurance policy." Gulf States Ins. Co. v. Alamo Carriage Serv., 22 F.3d 88, 90 (5th Cir. 1994). "This is sometimes referred to as the `eight corners' rule." Nat'l Union Fire Ins. Co. of Pittsburgh, Pa. v. Merchs. Fast Motor Lines, Inc., 939 S.W.2d 139, 141 (Tex. 1997). When applying the eight corners rule, the allegations in the underlying complaint should be given a liberal interpretation. Id.
To establish a duty to defend, the underlying pleadings must allege a claim that is potentially covered by the applicable policy. Gulf States Ins Co., 22 F.3d at 90; Nat'l Union Fire Ins. Co., 939 S.W.2d at 141. "But when the plaintiff's petition makes allegations which, if proved, would place the plaintiff's claim within an exclusion from coverage, there is no duty to defend." Gulf States Ins. Co., 22 F.3d at 90. "Stated differently, in case of doubt as to whether or not the [factual] allegations of a complaint against the insured state a cause of action within the coverage of a liability policy sufficient to compel the insurer to defend the action, such doubt will be resolved in insured's favor." Nat'l Union Fire Ins. Co., 939 S.W.2d at 141.
"In reviewing the underlying pleadings, the court must focus on the factual allegations that show the origin of the damages rather than on the legal theories alleged." Id. "It is not the cause of action alleged that determines coverage but the facts giving rise to the alleged actionable conduct." Id. (emphasis in original), The court is not allowed to "look outside the pleadings, or imagine factual scenarios which might trigger coverage." Id. at 142. "In Texas, an insurer's contractual duty to defend must be determined solely from the face of the pleadings, without reference to any facts outside the pleadings." Id.
To assist in determining whether an insurer has a duty to defend, the Fifth Circuit has explained the parties' shifting burdens of proof as follows:
The insured bears the initial burden of showing that the claim . . . is potentially within the insurance policy's scope of coverage. if the insurer relies on the policy's exclusions to deny coverage, the burden shifts to the insurer to prove the exclusion applies. If the insurer is successful, the burden shifts back to the insured to show that an exception to the exclusion brings the claim . . . potentially within the scope of coverage under the insurance policy,Harken Exploration Co. v. Sphere Drake Ins. PLC, 261 F.3d 466, 471 (5th Cir. 2001) (internal citations omitted).
Insured's Initial Burden
Breck bears the initial burden of showing that the Underlying Plaintiffs have alleged a claim which is potentially within the insurance policy's scope of coverage. The Underlying Plaintiffs seek damages for common law trespass; statutory trespass; private nuisance, including negligence, recklessness, res ipso loquitur, and abnormally dangerous activity; unlawful waste; and intentional tort. Specifically, the Underlying Plaintiffs' March 2002 Complaint for Damages for Trespass, Nuisance and Waste ("Underlying Complaint") alleges, in pertinent part, as follows:
1. that Conoco, the previous lease operator, mis-profiled its injector wells and violated certain Enabling Orders of the New Mexico Oil Conservation Commission ("Commission") regarding Conoco's SEU Waterflood strategy to obtain further development and production of its leases, "thereby causing or allowing the water injected . . . to escape away from the approved injection zone into other formations causing the consequent migration of huge quantities of water invading [the Underlying Plaintiffs'] Meyer lease";
2. that the violations of the Enabling Orders continued after Breck, the current lease operator, assumed operations of the SEU Waterflood project;
3. that the Enabling Orders specified that the waterflood would be operated "as to prevent the movement of formation or injected fluid from the injection zone into any other zone" and that injection wells "shall be operated and maintained at all times in such a manner as will confine the injected fluids to the interval or intervals approved and prevent . . . pollution resulting from leaks, breaks or spills";
4. that, from December 1970 through July 2001, Conoco and/or Breck injected in excess of fifty-seven million cumulative barrels of water into the Seven Rivers Queen Formation through twenty-nine injection wells. five of which directly offset the Underlying Plaintiffs' property, viz, the eastern boundary of the Underlying Plaintiffs' lease is the western boundary of Conoco's and Breck's SEU Waterflood;
5. that no natural barriers exist between the producing zones in the Underlying Plaintiffs' lease and the producing zones of Conoco's and/or Breck's waterflood; thus, any injected water escaping from the waterflood zone necessarily migrates to the Underlying Plaintiffs' producing zones;
6. that the Underlying Plaintiffs (a) "re-entered the Meyer No. 9 well in December 2000"; (b) encountered waterflow in excess of 500 barrels/day; and (c) expended, to date, in excess of $300,000 in an effort to obtain a commercially productive well;
7. that Conoco and Breck wrongfully trespassed on the Underlying Plaintiffs' lease subsurface with large quantities of highly pressurized salt-saturated water, thereby depriving the Underlying Plaintiffs of the use, profits and enjoyment of the oil and gas reserves of the underlying lease and damaging and/or destroying the natural features and conditions of the Underlying Plaintiffs' subsurface lease geologic formation;
8. that Breck's continued operation and maintenance of the SEU Waterflood continues to cause injected water to escape from the injection formation and to enter, dissolve, fracture, and migrate down-dip to the Underlying Plaintiff's lease, thus deleteriously affecting the Underlying Plaintiffs' profitable recovery of the oil and gas reserves which exist in the Underlying Plaintiffs' lease;
9. that Conoco and Breck were negligent, grossly negligent, reckless, and wilful and wanton in the operation of the SEU Waterflood, thereby constituting a private nuisance which invaded the Underlying Plaintiffs' interest in the use, profit, and enjoyment of their lease and substantially diminished or destroyed the value of the Underlying Plaintiffs' lease oil and gas reserves;
10. that Conoco's and Breck's acts and omissions constituted "waste," thereby causing the Underlying Plaintiffs to suffer the loss of the oil and gas reserves underlying their lease; and
11. that Conoco and Breck knowingly and intentionally continued to inject water into the Underlying Plaintiffs' producing formations, thus elevating common law trespass and statutory trespass to intentional trespass, for which the Underlying Plaintiffs claim exemplary damages.
Breck argues that Coverage A of the Primary Policy provides that Plaintiff has the duty to defend any suit seeking property damage "to which this insurance applies. . . .This insurance applies to . . . `property damage' only if: (1) [t]he . . . `property damage' is caused by an occurrence . . . and (2) [t]he . . . `property damage' occurs during the policy period."
Breck maintains that the migration of the salt-saturated water into the Underlying Plaintiffs' down-dip producing zones constitutes the occurrence during the policy period which triggered the applicability of Coverage A and Plaintiff's duty to defend. Thus, in order to determine whether Plaintiff has a duty to defend Breck against the Underlying Plaintiffs' claims under Coverage A, this Court must first determine whether the Underlying Plaintiffs have alleged an occurrence which is potentially embraced by the scope of coverage provided by Coverage A. See id. at 472.
The Primary Policy defines "occurrence" to mean "an accident, including continuous repeated exposure to substantially the same general harm conditions." However, the Primary Policy does not define "accident," and "[t]he Texas Supreme Court has not articulated a hard and fast rule for when an accident occurs." Id.
Nevertheless, the Fifth Circuit provides the following guidance:
The Texas Supreme Court has told us that there is not an accident when the action is intentionally taken and performed in such a manner that it is an intentional tort, regardless of whether the effect was unintended or unexpected. We also know, however, that there is an accident when the action is intentionally taken, but is performed negligently, and the effect is not what would have been intended or expected had the action been performed non-negligently. In other words, if the act is deliberately taken, performed negligently, and the effect is not the intended or expected result had the deliberate act been formed non-negligently, there is an accident.Id. at 472-73 (internal citations omitted).
Here, the Underlying Complaint alleges, inter alia, that Conoco and/or Breck neglected to follow reasonable industry safeguards and practices and failed to use ordinary and reasonable care to prevent the intentionally and continuously injected floodwater into the SEU Waterflood from invading the Underlying Plaintiffs' down-dip formation. The Underlying Plaintiffs contend that Conoco and/or Breck have injected the floodwater into the Seven Rivers Queen Formation from December 1970 until July 2001 in violation of the Commission's Enabling Orders and that said floodwater escaped from the injection wells and migrated into the Underlying Plaintiffs' down-dip producing zones, thus diminishing or destroying the value of the Underlying Plaintiffs' oil and gas lease.
Consistent with the Fifth Circuit's criteria discussed supra and the facts alleged in the Underlying Complaint, this Court is convinced that the Underlying Plaintiffs have alleged "an accident, including continuous repeated exposure to substantially the same general harm conditions." Accordingly, this Court finds that the Underlying Plaintiffs have alleged property damage caused by an "occurrence" which potentially invokes coverage under the terms of the Primary Policy's Coverage A.
The second prong affecting applicability under Coverage A is whether the property damage occurred "during the policy period". Breck argues that, because the Primary Policy is an occurrence-based policy, coverage attaches from the date of the loss, not the time the claim is actually made. Plaintiff fails to address this issue.
The relevant reference in the Underlying Complaint alleges that "[f]rom its inception in December 1970 until July 2001, in excess of 57,000,000 cumulative barrels of water have been injected by Conoco and/or Breck into the Seven Rivers Queen [F]ormation." Because the Primary Policy and the Umbrella Policy were in effect from December 1, 1999, to December 1, 2000, this Court finds that the Underlying Complaint clearly alleges that at least some of the property damage occurred "during the policy period." Therefore, this Court finds that Breck has satisfied its burden to show that the Underlying Plaintiffs have alleged a claim, i.e., property damage caused by an occurrence during the policy period, which is potentially within Coverage A's scope of coverage.
That the Underlying Complaint also alleges reckless, wilful, wanton, or knowing actions does not preclude the policy's potential coverage of the claimed property damage. "If an insurer has a duty to defend any portion of a suit, the insurer must defend the entire suit." Id. at 474 (internal citation omitted). "Thus, (the insurer) must defend [the insured] against the entire suit including causes of action that would not alone trigger the duty to defend, regardless whether the complaint is pled in the alternative or not because the [underlying plaintiffs'] factual allegations of negligence are sufficient to trigger the duty to defend." Id.
Consequently, because this Court must focus on the facts alleged and not the legal theories pleaded, this Court is persuaded that Breck has satisfied its initial burden of showing that the Underlying Plaintiffs have alleged a claim which is potentially within the Primary Policy's scope of coverage.
Insurer's Burden to Prove Exclusion
Because Breck has shown that the Underlying Plaintiffs have alleged a claim which is potentially within Coverage A's scope, the burden shifts to Plaintiff to prove that an exclusion applies to limit the potential coverage provided by Coverage A. "Courts should construe exclusions `more stringent[ly]' than the other parts of an insurance policy or the factual allegations in the complaint." Id. at 475. "Additionally, Courts must adopt the construction of an exclusionary clause urged by the insured as long as that construction is not itself unreasonable, even if the construction urged by the insurer appears to be more reasonable or a more accurate reflection of the parties['] intent." Id. (internal quotations omitted).
Here, Plaintiff asserts that any property damage claims which are potentially within the scope of the Primary Policy are specifically precluded by Coverage A's pollution exclusion and by Coverage D's temporal limitations. In relevant part, the Primary Policy provides that Coverage A does not apply to:
(1) "Bodily injury" or "property damage" arising out of the actual, alleged or threatened discharge, dispersal, seepage, migration, release or escape of "pollutants
(2) Any loss, cost or expense arising out of any:
(a) request, demand or order that any insured or others test for, monitor, clean up! remove, contain, treat, detoxify or neutralize, or in any way respond to, or assess the effects of "pollutants."
"Pollutants" is defined to mean "any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste. Waste includes materials to be recycled, reconditioned or reclaimed."
The Underlying Complaint alleges that (1) Conoco and/or Breck injected over 57 million barrels of water into the SEU Waterflood; (2) the water escaped from the approved injection zone, which caused huge quantities of salt-saturated water to migrate down-dip into the Underlying Plaintiffs' producing formations; (3) water flow in excess of 500 barrels/day has been encountered in the Underlying Plaintiffs' producing zones; (4) disposal of the injected water costs the Underlying Plaintiffs twenty-five cents/barrel; (5) the water is not naturally occurring groundwater due to the impenetrable barrier created by the naturally impermeable bedded salts of the Salado Formation overlying the Underlying Plaintiffs' lease; (6) Conoco and/or Breck caused the " water injected into the [waterflood] to escape from the approved injection formation and to enter, dissolve, fracture, and migrate down-dip" to the Underlying Plaintiffs' lease; (7) Conoco and/or Breck ignored out-of-formation loss of water indicated by their own data (8) Conoco's and/or Breck's injection of water has caused highly pressurized salt-saturated water to wrongfully enter and invade the Underlying Plaintiff's lease; and (9) the large volume of salt water is present solely because Conoco and/or Breck have continued to inject salt water into their injector wells, all in violation of the Commission's Enabling Orders.
Plaintiff contends that the Underlying Plaintiffs' interchangeable use of water and saltwater in the Underlying Complaint indicates that the Underlying Plaintiffs' claims for damages caused by any subsurface saltwater migration clearly fall within the literal scope of the pollution exclusion of Coverage A. This Court agrees. Breck makes no argument against the applicability of the pollution exclusion provisions of Coverage A.
The pollution exclusion denies coverage for property damage arising out of the "actual, alleged or threatened discharge, dispersal, seepage, migration, release or escape" of any "solid, liquid, gaseous or thermal irritant or contaminant."
Here, the Primary Policy clearly defined pollutants to include "any . . . liquid . . . contaminant, including . . . waste." "Waste" is defined non-exclusively to include "materials to be recycled, reconditioned or reclaimed." Because these definitions were included in the Primary Policy itself; "it must be considered the written expression of the parties' intent." Am. Equity Ins. Co. v. Castlemane Farms, Inc., 220 F. Supp.2d 809, 814 (S.D. Tex. 2002).
There can be little dispute that the Underlying Plaintiffs allege a migration of huge volumes of liquid pollutant, i.e., injected water and/or salt water, which contaminated their producing zones. See WEBSTER'S THIRD NEW INT'L DICTIONARY 491 (1986) (defining contaminate to include "make inferior or impure by mixture: pollute"); Am. Equity Ins. Co., 220 F. Supp.2d at 814 (determining that saltwater is within the category of liquid waste and that it is reasonable to conclude that salt water is a contaminant); Harken Exploration Co., 261 F.3d at 475 (characterizing saline substances as pollutants); Mid-Continent Cas. Co. v. Safe Tire Disposal Corp., 16 S.W.3d 418, 423 (Tex.App.-Waco 2000, pet. denied) (defining waste, in part, as an unwanted byproduct); and Mesa Operating Co. v. Cal. Union Ins. Co., 986 S.W.2d 749, 752 (Tex.App.-Dallas 1999, pet. denied) (concluding that escaped salt water contaminated fresh water aquifer, thereby invoking saline substances contamination endorsement). Accordingly, even construing the terms of the pollution exclusion in the manner most favorable to Breck and against Plaintiff, this Court finds that Coverage A's pollution exclusion precludes coverage for any contamination allegedly caused by the migration of the water/salt water as complained of by the Underlying Plaintiffs. Therefore, this Court finds that Plaintiff has satisfied its burden to show that Coverage A's pollution exclusion applies.
Insured's Burden to Prove Exception to Exclusion
Because Plaintiff has satisfied its burden to show that an exclusion precludes coverage under the Primary Policy, Breck must now show that an exception to the exclusion brings the claim potentially within the scope of coverage under the insurance policy. To that end, Breck asserts that (1) the oil and gas limited pollution coverage provided by Coverage D covers the losses alleged by the Underlying Plaintiffs and (2) the UREC endorsement irreconcilably conflicts with the pollution exclusion and, therefore, supercedes the exclusionary clause,
Relevant to Coverage D, Plaintiff contends that any oil and gas limited pollution coverage which might have been afforded to Breck under Coverage D of the Primary Policy was lost when Breck failed to satisfy the notice requirements of Coverage D's insuring agreement Plaintiff argues that the unambiguous language of Coverage D's insuring agreement clearly indicates that coverage for "Bodily Injury and Property Damage — Oil and Gas Limited Pollution" under Coverage D applies only if:
(1) The "bodily injury" or "property damage" is caused by an "occurrence" that takes place in the "coverage territory";
(2) The "bodily injury" or"Property damage" occurs during the policy period;
(3) The "occurrence" became first known to you during the policy period and you report it to us within the policy period or 90 days after the end of the policy period.
Plaintiff asserts that the occurrence "became first known" to Breck when Breck was served with the Underlying Plaintiffs' suit on March 28, 2002. Plaintiff also asserts that, because Breck did not first learn of the occurrence until after December 1, 2000, the expiration of the policies at issue, Breck did not first learn of the occurrence "during the policy period." Finally, Plaintiff asserts that, because Breck did not report the occurrence to Plaintiff until April 9, 2002, Breck failed to report the occurrence "within the policy period or 90 days after the end of the policy period." Thus, Plaintiff argues that coverage under Coverage D is not available to Breck with regard to the Underlying Plaintiffs' claimed losses.
Although Breck acknowledges that it did not report the Underlying Plaintiffs' claims to Plaintiff until April 9, 2002, Breck insists that the losses alleged by the Underlying Plaintiffs "were continuous in nature" and that, because the Primary Policy is an occurrence-based policy, "[o]nce the occurrence takes place, coverage attaches even though the claim may not be made for some time thereafter."
This Court finds that the temporal limitations of Coverage D's insuring agreement are clearly stated and unambiguous, See Glover v. Nat'l Ins. Underwriters, 545 S.W.2d 755, 761 (Tex. 1977) (concluding that "[c]ourts should not strain to find an ambiguity, if; in doing so, they defeat the probable intentions of the parties) even though the insured may suffer an apparent harsh result as a consequence"). If the "contract provision is not ambiguous, interpretation of the unambiguous language is also a question of law." Myers v. Gulf Coast Minerals Mgmt. Corp., 361 S.W.2d 193, 196 (Tex. 1962).
First, the Court notes that the Underlying Plaintiffs alleged that they "re-entered the . . . well in December, 2000," without specifically identifying which day in December 2000 the reentry took place. The Court also notes that the exact term of the Primary Policy ran from December 1, 1999, to December 1, 2000, at 12:01 a.m. This Court finds wholly improbable that the Underlying Plaintiffs "re-entered the well" during the sixty seconds on December 1, 2000, that the Primary Policy remained in effect and that Breck became aware of the reentry in December 2000 "during the policy period."
Second, the Court notes that Breck, without further explanation, asserts that "the date of loss was recorded as February 1, 2000)" and, thus, the claims fall within the policy period. Assuming arguendo that February 1, 2000, is the recorded date of loss — albeit ten months before the Underlying Plaintiffs reentered the well and presumably discovered the alleged property damage, as well as being a finite loss date notwithstanding Breck's alleged 1970-2001 continuous loss-then Breck's deadline to report the loss to Plaintiff within the parameters of Coverage D would clearly have been no later than ninety days after December 1, 2000. There can be no doubt that notice given in April 2002 is unquestionably not "within the policy period or 90 days after the end of the policy period."
Because Coverage D's applicability requirements are written in the conjunctive, the failure by Breck to satisfy any portion thereof inures to Plaintiff's benefit. This Court agrees that Breck failed to notify Plaintiff of the claimed losses "during the policy period or within 90 days after the end of the policy period" as required by the terms of the oil and gas limited pollution insuring agreement. Consequently, this Court finds that Breck is not entitled to coverage under Coverage D and that Coverage D does not constitute an exception to the Primary Policy's pollution exclusion.
Relevant to the UREC endorsement, Breck argues that the UREC endorsement irreconcilably conflicts with the pollution exclusion and, therefore. supercedes the exclusionary clause. Plaintiff argues, however, that the UREC endorsement (1) merely supplements the Primary Policy with additional coverage; (2) is wholly consistent with the terms of the pollution exclusion; and (3) does not supercede the pollution exclusion.
It is well settled that "[e]ndorsements to a policy generally supersede and control over conflicting printed terms within the main policy." Mesa Operating Co., 986 S.W.2d at 754. "Often, endorsements are issued to add coverages that would otherwise be excluded." Id. "Yet, an endorsement cannot be read apart from the main policy, and the added provisions will only supersede the previous policy terms to the extent they are truly in conflict." Id. "The policy and endorsement should be construed together unless they are so much in conflict that they cannot be reconciled." Id.
First, this Court notes that the Primary Policy's UREC endorsement is headed by the caveat "THIS ENDORSEMENT CHANGES THE POLICY. PLEASE READ IT CAREFULLY." Second, the endorsement includes the notice that "[t]his endorsement modifies coverage under this insurance." Third, the UREC endorsement states that "[t]he following provisions are added with respect to `property damage' . . . arising out of the operations performed" by Breck. Fourth, the endorsement provides that "[t]he following additional definitions apply." Fifth, the footer of the UREC endorsement does not contain the notification that "ALL OTHER TERMS AND CONDITIONS OF THIS POLICY REMAIN UNCHANGED," a notice which is found at the bottom of the Primary Policy's failure to supply exclusion, lead contamination exclusion, subsidence of land exclusion, asbestos liability absolute exclusion, known injury or damage exclusion, abuse or molestation exclusion, employment related practices exclusion, and minimum premium endorsement
Breck urges that the endorsement's warnings, which alert insureds that the UREC changes or modifies coverage under the Primary Policy by adding further provisions and definitions, be construed to mean that the UREC endorsement supersedes the written terms of the Primary Policy's pollution exclusion. To the contrary, Plaintiff contends that the UREC endorsement does not conflict with the Primary Policy's pollution exclusion and that the added provisions and additional definitions were clearly intended to augment, rather than supersede, the Primary Policy's terms.
On the one hand, and consistent with this Court's reasoning set forth supra, the Primary Policy excludes coverage for property damage caused by pollutants, viz., the migration of huge volumes of water/salt water into the Underlying Plaintiffs' producing zones. On the other hand, however, the UREC endorsement clearly provides that
`[UREC]' includes `property damage' to any of the following:
1. 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;
2. Any well, hole, formation, strata or area in or through which exploration for or production of any substance is carried on;
3. 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.
"A basic rule of contract construction is that the preferred interpretation is one that provides meaning to every provision and does not read any term out of the contract." Eagle Life Ins. Co. v. G.I.C. Ins. Co., 697 S.W.2d 648, 651 (Tex App.-San Antonio 1985, writ ref'd n.r.e.). "The contract must be considered as a whole, and each part of the contract should be given effect." Ohio Cas. Group of Ins. Cos. v. Chavez, 942 S.W.2d 654, 658 (Tex.App.-Houston [14th Dist.] 1997, writ denied).
"The determination of whether an insurance provision is ambiguous is a question of law for the court." Coker v. Coker, 650 S.W.2d 391, 393-94 (Tex. 1983). "An insurance provision is ambiguous when it is susceptible to more than one interpretation. each of which is fair and reasonable." Barnett v. Aetna Life Ins. Co., 723 S.W.2d 663, 666 (Tex. 1987).
Courts must "construe insurance policies strictly against the insurer and liberally in favor of the insured, particularly when dealing with exceptions and words of limitation" and when "an ambiguity exists in the policy." Id. at 658-59. The court "must afford the words of an insurance contract their plain, ordinary, and generally accepted meaning unless the instrument shows that the parties used them in a technical or different sense." Am. Equity Ins. Co., 220 F. Supp.2d at 814 (internal quotations omitted).
With the above criteria in mind, this Court agrees with the initial conclusions reached by the court in Mesa, which analyzed a similarly worded UREC endorsement, that the plain language of the endorsement "appears to cover the salt water [sic] contamination at issue" and that "the language of the [UREC] endorsement is broad enough to cover salt water [sic] contamination." Mesa Operating Co., 986 S.W.2d at 754-55. This Court also agrees with the Mesa court that a plain reading of the UREC endorsement unambiguously indicates that the endorsement is broad enough to cover a wide range of other types of property damage. Id. at 755.
However, unlike the final conclusion reached in Mesa, this Court is persuaded by the eight corners relevant to this matter that the UREC endorsement's language embracing coverage for damages caused by saltwater contamination is not mutually exclusive of the endorsement's language extending broad coverage for property damages caused by other occurrences. Cf. id. at 755 (concluding ultimately, inter alia, that the UREC endorsement did not conflict with, and could be construed together with, a pollution exclusion which differentiated between "sudden" and "accidental" occurrences of pollution and "non-sudden" and "non-accidental" occurrences of pollution).
Here, because a plain reading of the UREC endorsement appears to cover the saltwater contamination at issue, this Court finds that the UREC endorsement directly and irreconcilably conflicts with Coverage A's pollution exclusion which excludes such saltwater contamination coverage. That the UREC endorsement would also cover, for example, depletion of another person's reservoir, loss of drilling equipment in a well hole, well blow-out, and cratering, it does not necessarily follow that the endorsement consequently excludes coverage for any one or all of the other instances of coverage clearly included by the plain language of the endorsement, viz., saltwater contamination. In addition, when the UREC endorsement is construed with the rest of the insurance contract as a whole, including the conspicuous absence of the above-referenced footer alert, this Court concludes that the UREC endorsement does, indeed, change, modify, and add coverage that would otherwise be excluded by the main policy.
Consequently, because the UREC endorsement embracing saltwater contamination cannot be construed together with the Primary Policy's pollution exclusion without being rendered, in all or in part, meaningless, this Court finds that the UREC endorsement was intended to supersede, rather than augment, the Primary Policy's terms. Therefore, the Court finds that Breck has satisfied its burden to show that an exception to the Primary Policy's pollution exclusion brings the Underlying Plaintiffs' claims potentially within the policy's scope of coverage.
Accordingly, under Coverage A of the Primary Policy, Plaintiff has a duty to defend Breck "against the entire suit . . . because the [Underlying Plaintiffs'] factual allegations . . . are sufficient to trigger the duty to defend." Harken Exploration Co., 261 F.3d at 474.
Umbrella Policy
The parties agree that the Umbrella Policy "follows form" and provides coverage for property damage "if such liability is covered by [the] underlying insurance." Indeed, Plaintiff specifically acknowledges that "[i]f the primary policy covered a pollution loss, the umbrella policy would follow form in that respect." So be it.
Duty to Indemnify
Texas law is well settled that the duty to defend is a broader duty than the duty to indemnify. St. Paul Fire Marine Ins. Co. v. Green Tree Financial Corp.-Tex., 249 F.3d 389, 391 (5th Cir. 2001). "An insurer's duty to defend and its duty to indemnify are distinct and separate." Quorum Health Res. v. Maverick County Hosp., 308 F.3d 451, 468 (5th Cir. 2002). "However, the scope of the insurance coverage determines the outcome of both inquiries. If the claims alleged against the insured are outside the scope of the coverage, there obviously is no duty to indemnify." Jim Johnson Homes, Inc. v. Mid-Continent Cas. Co., 244 F. Supp.2d 706, 714 (N.D. Tex. 2003) (internal quotations and citations omitted).
"The duty to indemnify arises from the actual facts that are developed to establish liability in the underlying suit." Quorum Health Res., 308 F.3d at 468. "An insurer may have a duty to defend but, eventually, not to indemnify." Id. "Further, the duty to indemnify only arises after an insured has been adjudicated, whether by judgment or settlement, to be legally responsible for damages in a lawsuit." Home Depot. U.S.A., Inc. v. Fed. Ins. Co., No. 4:02-CV-95, 2003 U.S. Dist. LEXIS 5504, *16 (E.D. Tex. Jan 27, 2003). "Logic and common sense dictate that if there is no duty to defend, then there must be no duty to indemnify" Am. States Ins. Co. v. Bailey, 133 F.3d 363, 368 (5th Cir. 1998).
Consistent with this Court's determination that Plaintiff has a duty to defend Breck under the policies at issue, this Court also finds that, should Breck, whether by judgment or settlement, be adjudicated as legally responsible for any damages claimed by the Underlying Plaintiffs in the Underlying Complaint, Plaintiff shall indemnify Breck as required by the applicable terms of the Primary Policy and the Umbrella Policy. See id. at 368-69 (affirming that "[g]iven that the district court was going to decide the issue of the duty to defend, . . . it was not an abuse of discretion for the district court also to decide the issue of the duty to indemnify").
CONCLUSION
After considering all the relevant arguments and evidence, this Court DENIES Plaintiff's Motion for Summary Judgment and DECLARES that Plaintiff has a duty to defend Breck in the underlying lawsuit and that, should Breck be adjudicated legally responsible, whether by judgment or settlement, for any damages claimed by the Underlying Plaintiffs, then Plaintiff shall indemnify Breck according to the applicable terms of the binary Policy and the Umbrella Policy.
SO ORDERED