(Article from Insurance Law Alert, June 2023)
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Holding
The Third Circuit ruled that an insurer had no duty to indemnify its insured against property damage claims arising out of the insured’s own faulty workmanship in connection with fracking activities, finding that the claims did not arise out of a covered “occurrence” and that a policy endorsement providing “equipment coverage” did not eliminate the “occurrence” requirement. Am. Home Assurance Co. v. Superior Well Services, Inc., 2023 U.S. App. LEXIS 13355 (3d Cir. May 31, 2023).
Background
U.S. Energy Development Corporation (“U.S. Energy”) contracted with Superior Well Services, Inc. (“Superior”) for hydraulic fracking services to extract natural gas from wells owned by U.S. Energy. When certain wells incurred damage, U.S. Energy filed suit. American Home Assurance Company (“American Home”) defended Superior under a reservation of rights. A jury found in favor of U.S. Energy, returning a special verdict that Superior “fail[ed] to perform its contract . . . in a workman like manner.” Thereafter, American Home sought a declaration that its general liability policy did not cover the underlying claims based on the absence of an “occurrence.” U.S. Energy intervened as a defendant and, in response to American Home’s argument, argued that an “underground resources and equipment coverage” endorsement—which encompassed property damage to “[a]ny well, hole, formation . . . [or] [a]ny casing, pipe, bit, tool, pump or other drilling or well servicing machinery or equipment”—provided coverage. A Pennsylvania district court awarded summary judgment to Superior (and, by extension, U.S. Energy), ruling that the endorsement encompassed the fracking operations and provided coverage regardless of whether Superior’s faulty workmanship constituted a covered “occurrence.” The Third Circuit reversed.
Decision
As a preliminary matter, the Third Circuit ruled that the property damage at issue was not caused by an “occurrence” because, under established Pennsylvania precedent, faulty workmanship is not an accident or an unexpected and unintended event. Turning to the question of whether the endorsement superseded the “occurrence” requirement, the Third Circuit held that it did not. The court explained that an endorsement might supersede a policy provision if the two clauses were in conflict, but that no such conflict existed here. The endorsement defined “underground resources and equipment hazard” to include property damage to oil and gas wells, among other property, and therefore incorporated the “occurrence” requirement via the “property damage” requirement.
Comments
In coverage disputes, policyholders often argue that endorsements displace original policy provisions that operate to limit coverage. The Third Circuit’s opinion clarifies that, unless an endorsement directly conflicts with a coverage provision, the former should not be construed to displace the requirements set forth in the latter. This decision suggests that, in order for an endorsement to trump a core policy requirement, clear language to that effect may be required.