Eagle Oil & Gas Co. v. Travelers Prop. Cas. Co. of Am.

• Decision Date: 14 July 2014
• Docket Number: Civil Action No. 7:12-cv-00133-O
• Court: U.S. District Court — Northern District of Texas
• Parties: EAGLE OIL & GAS CO. et al., Plaintiffs, v. TRAVELERS PROPERTY CASUALTY COMPANY OF AMERICA et al., Defendants.

EAGLE OIL & GAS CO. et al., Plaintiffs, v. TRAVELERS PROPERTY CASUALTY COMPANY OF AMERICA et al., Defendants.

Civil Action No. 7:12-cv-00133-O

UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF TEXAS WICHITA FALLS DIVISION

SO ORDERED: July 14, 2014

MEMORANDUM OPINION AND ORDER

Before the Court are: Plaintiffs' Motion for Partial Summary Judgment, filed April 14, 2014 (ECF No. 107); Motion for Summary Judgment of Travelers Property Casualty Company of America and St. Paul Surplus Lines Insurance Company, filed April 14, 2014 (ECF No. 113); and Motion for Summary Judgment of York Risk Services Group, Inc., filed April 14, 2014 (ECF No. 115). Having considered the motions, responses, replies, record, and applicable law, and for the reasons that follow, the Court grants in part and denies in part Plaintiffs' Motion for Partial Summary Judgment and Motion for Summary Judgment of Travelers Property Casualty Company of America and St. Paul Surplus Lines Insurance Company, and grants Motion for Summary Judgment of York RiskServices Group, Inc.¹ Also pending is Defendants' Motion to Bifurcate Trial of the Extra-Contractual Claims, filed April 14, 2014 (ECF No. 118), which the Court denies as moot.

I. Factual and Procedural Background²

This is an insurance coverage dispute between policyholder plaintiffs and their insurer under a well-control policy following a September 22, 2011 well blowout in Reeves County, Texas. The lawsuit arises out of a claim under Control of Well Policy Number VI04200283 (the "policy") issued by Defendant Travelers Property Casualty Company of America ("Travelers") to Plaintiff Eagle Oil & Gas Company ("Eagle Oil") with effective dates of June 10, 2011 to June 10, 2012. Among other things, the policy provided protection to the insured against oil well blowouts, and reimbursement for expenses incurred in bringing the well under control.

Pursuant to a Joint Operating Agreement ("JOA"), Eagle Oil was the operator and a working-interest owner in the Monroe 39 #2H Well (the "Well"). Plaintiffs Eagle Wolfbone Energy Partners, LP ("Eagle Wolfbone"), and Eagle Oil & Gas Partners, LLC ("Eagle Partners") were non-operating working-interest owners in the Well and were additional insureds under the Travelers policy. See Appendix for Briefin Support of Pl. Summ. J. Motion ("Pl. SJ App.") at 205-63, ECF Nos. 109-110.

On September 22, 2011, while Eagle Oil was attempting to open a stuck frac port sleeve by applying various levels of pressure, a 7-inch piece of casing ruptured downhole in the Well, causingthe top casing joints and wellhead to be ejected into the air, and allowing a flow of gas and well fluids to the surface that could not be controlled. See Appendix of Exhibits to Briefs in Support of Def. Summ. J. Motions ("Def. SJ App.") at 55-57, 63, 245, 251-52, ECF No. 117. The parties dispute whether the 7-inch casing broke apart because Eagle Oil exceeded the maximum allowable casing pressure for this operation. Id. at 34-35, 55-57; Pl. SJ App. at 580, 885-60. Because of the uncontrolled flow of gas and well fluids to the surface, the Well was "out of control," as that term is defined in the policy, giving rise to Plaintiffs' claims for coverage. Pl. SJ App. at 165, 169. Wild Well Control was dispatched to the location and began removing equipment to gain access to the Well. Def. SJ App. at 11. To contain the flow, Plaintiffs constructed additional pits and the runoff was hauled away by trucks. Cleanup and snubbing operations continued through October 2011. Id. at 13. Plaintiffs later plugged and abandoned the Well, and ultimately redrilled the Monroe 39 #2R replacement well. Plaintiffs incurred costs and expenses: (1) in attempting to regain control of the Well, including plugging and abandonment ("P&A") costs; (2) in redrilling a replacement well; (3) in cleaning up pollution resulting from the blowout; and (4) in regard to oil field equipment owned by others that was damaged. Plaintiffs gave proper notice and submitted their losses to Travelers for reimbursement under the policy. Id. at 164.

Acting through internal adjuster, Paul Zatopek (and later Dale Reed), Travelers assigned BC Johnson Associates ("BC Johnson") as independent energy loss adjusters to investigate the claims. BC Johnson is a trade name of Defendant York Risk Services Group ("York"). See Def. Answer & Affirmative Defenses ¶ 14, ECF No. 71. On October 11, 2011, BC Johnson issued its preliminary report to Travelers, finding Eagle Oil may have violated the policy's "due care and diligence" clause during the fracturing job, either by using too much pressure causing the 7-inch casing to separate,or by failing to attach the wellhead to the Well's 13-3/8 inch casing rather than the 9-5/8 inch casing. Def. SJ App. at 1-39. Travelers then hired Greg Sones ("Sones'), a petroleum engineer, to further review information regarding the cause and/or nature of the well control incident. Id. at 308-10. Sones ultimately concluded that the cause of the blowout was Eagle Oil's use of excessive pressure on the 7-inch casing which caused the casing to fail, and the blowout to occur Id. at 318-24, 327, 343-44.

On July 5, 2012, relying on Sones's report,Travelers denied coverage to Eagle Oil and Eagle Wolfbone on their control of well (including P&A), redrill, pollution cleanup, and care, custody and control claims on the grounds that Eagle Oil's engineering decision to exceed maximum safe fracturing pressure violated the "due care and diligence" clause in the policy. Id. at 228-30; Pl. SJ App. at 707, 713, 714. The July 5, 2012 denial of coverage letter stated in relevant part:

Despite the planned limitation of the wellbore pressure, Eagle elected to exert higher pressure on the 7-inch casing and it appears that this higher pressure caused the failure of the casing and the blowout ensued . . . Travelers views the repeated pressure excursions far in excess of the designed pressure tolerances . . . as a failure to exercise due care and diligence in the conduct of the frac job. For that reason, Travelers is denying Eagle's claim.

Def. SJ App. at 229.

Travelers denied coverage for P&A and redrill costs on the additional basis that the policy did not cover these claims because the Well was lost due to the pressure operation and not from any unintended and uncontrolled flow that followed the breaking of the casing. See id. at 228-30. As stated in the July 5, 2012 denial of coverage letter:

There is an additional coverage issue with respect to the P&A and redrill portions of Eagle's claim. Well control coverage under Section 1A of the Policy is for expenses "as a direct result of" the well getting out of control. Similarly, redrill coverage is afforded under Section 1B of the Policy where redrill expense was incurred "as aresult of" a well control incident. In this instance, it appears that the necessity of P&A and redrill was due to the parting of the casing, and not due to the well control event. Significantly, the casing parted before — not as a result of — the blowout. Therefore, even without the due diligence issue referenced herein, there would be no coverage for P&A or redrill expenses that resulted from the parted casing.

Id.

On July 9, 2012, Eagle Oil and Eagle Wolfbone filed this case in the 30th Judicial District Court of Wichita County, Texas against Travelers alleging, among other things, that Travelers breached the policy by denying coverage. Travelers removed the action to this Court. Eagle Oil and Eagle Wolfbone subsequently amended their pleadings to add as additional Plaintiffs non-operating working-interest owners Eagle Partners, Riverford Exploration, LLC ("Riverford"), and Wolverine Oil and Gas Corp. ("Wolverine"), and to add as additional Defendants both St. Paul Surplus Lines Insurance Company ("St. Paul"), which issued a similar control of well policy to Wolverine, and independent energy loss adjuster York (in place of improperly designated Defendant OCB Interests, LLC d/b/a BC Johnson Associates).

The live pleading is Plaintiffs' Third Amended Complaint where Plaintiffs sue Defendants Travelers and St. Paul for: (1) breach of contract for denial of claim coverage under the policy, (2) breach of the common law duty of good faith and fair dealing, (3) violations of sections 541 and 542 of the Texas Insurance Code, and (4) violations of section 17.46(b) of the Texas Deceptive Trade Practices Act ("DTPA") and resultant penalties. See Pl. Third Am. Compl. ¶¶ 29(a) - 31(b), ECF No. 68.³ Plaintiffs also sue York for common law and statutory bad faith under Texas InsuranceCode sections 541 and 542, and related DTPA provisions, in connection with its loss adjusting services. See id. ¶¶ 32(a) - 32(b). Plaintiffs seek actual damages, exemplary damages, treble damages under the Texas Insurance Code, as well as interest, costs, and attorney's fees. See id. ¶ 34. Defendants live pleading is Defendants' Answer and Affirmative Defenses to Plaintiffs' Third Amended Complaint, in which Defendants assert forty-two affirmative defenses, including that "[t]here is no coverage under the policies because the claimed expenses arise from a blowout caused, in whole or in part, by Plaintiffs' breach of the policy's Due Diligence and Warranties condition[]"; "[t]here is no Section IA Control of Well Insurance coverage for plugging and abandonment expenses because they are not a direct result of the well getting out of control[]"; and "[t]here is no Section IB Redrill/Extra Expense coverage for redrill expense because the well was lost or damaged as a result of a casing failure and not as a result of a Section IA well control incident." See Def. Aff. Defenses Nos. 7-9, ECF No. 71.

On June 30, 2014, pursuant to a joint stipulation of dismissal, the Court dismissed Plaintiffs Wolverine and Riverford's claims against Defendants with prejudice, and dismissed Wolverine, Riverford and Defendant St. Paul as parties from this lawsuit. See Rule 54(b) Partial Final Judg....