Energy Res. LLC v. Petroleum Solutions Int'l, LLC

• Decision Date: 17 August 2011
• Docket Number: CIVIL ACTION H:08-656
• Parties: ENERGY RESOURCES, LLC, Plaintiff, v. PETROLEUM SOLUTIONS INTERNATIONAL, LLC , Defendant and Third-Party Plaintiff, v. LEXINGTON INSURANCE COMPANY, Third-Party Defendant.
• Court: U.S. District Court — Southern District of Texas

ENERGY RESOURCES, LLC, Plaintiff, v. PETROLEUM SOLUTIONS INTERNATIONAL, LLC , Defendant and Third-Party Plaintiff, v. LEXINGTON INSURANCE COMPANY, Third-Party Defendant.

CIVIL ACTION H:08-656

UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF TEXAS HOUSTON DIVISION

Dated: August 17, 2011

MEMORANDUM AND ORDER

Pending before the court is defendant and third-party plaintiff Petroleum Solutions International's ("PSI") motion for summary judgment (Dkt. 55) and third-party defendant Lexington Insurance Company's ("Lexington") cross-motion for summary judgment (Dkt. 63-2). Having considered the motions, related filings, and applicable law, the court is of the opinion that Lexington's motion should be DENIED, and PSI's motion should be GRANTED IN PART AND DENIED IN PART.

I. BACKGROUND

This is an action in which PSI and Lexington each seek a declaratory judgment relating to a lawsuit filed by Energy Resources, LLC ("ERG") against PSI on February 5, 2008, in the 344th Judicial District Court of Chambers County, Texas, and then removed on the basis of diversity jurisdiction to the U.S. District Court for the Southern District of Texas on February 28, 2008. Dkt. 1. Specifically, Lexington and PSI each seek judgments on a) Lexington's duty,or lack thereof, to defend PSI in the suit by ERG; b) Lexington's duty, or lack thereof, to indemnify PSI for any damages awarded to ERG in that same suit; and c) whether Lexington is liable to PSI for attorneys' fees, costs, and interest accrued in litigating the suit, either for violation of the Texas Prompt Payment of Claims Act or for breach of contract.

In its original petition filed in state court, ERG claimed that PSI is liable for damages resulting from PSI's alleged negligence and negligent misrepresentation while working under an oral contract with ERG to provide well site supervision and consulting services at two of ERG's oil wells: the Kirby B-44 Well ("the Kirby well") located in Chambers County, and the Marrs McLean H-6 Well ("the Marrs well") located in Galveston County. Dkt. 2-1. Specifically, ERG alleged that PSI's consultant, Don Faulkner, negligently failed to provide competent drill site supervision, causing ERG to suffer "excessive cost over-runs in drilling the wells Faulkner supervised." Id.

The services PSI provided to ERG in connection with ERG's wells were insured under a Comprehensive General Liability (CGL) insurance policy (No. 9606692) (the "Policy") issued by Lexington. Dkt. 47. Following the filing of ERG's original petition and removal of the action to this court, PSI sent Lexington a copy of the original petition and made a demand for defense and indemnity in a letter dated March 3, 2008. Dkt. 55. Lexington sent a letter to PSI on July 2, 2008, denying coverage on the basis that the factual allegations in the complaint did not allege an "occurrence" resulting in "property damage" as those terms are defined in the Policy or, alternatively, that the damages alleged by ERG were excluded from coverage by the Policy's Endorsement #11. Dkt. 55, Exh. A. ERG filed its first amended complaint on July 13, 2009, alleging breach of contract and fraud in addition to the causes of action alleged in its original complaint. Dkt. 31. The first amended complaint contains more detailed allegations regarding the damages that allegedly resulted from Faulkner's negligent acts. See id. Those allegations include stuck and/or damaged drill pipe, lost and/or damaged equipment, the Marrs well being drilled in an incorrect direction that required four unnecessary sidetracks, damage to the casing shoe and cement liner of that same well, excessive downtime as a result of an inadequate drilling rig, the Kirby well packing off and becoming stuck as a result of excessive drill speed, and ERG being required to redrill both the Marrs and Kirby wells. Id.

On June 17, 2010, PSI filed a third-party complaint against Lexington seeking a declaratory judgment that Lexington is contractually obligated to defend PSI in the underlying lawsuit based on the language of the Policy, the allegations in ERG's first amended complaint, and discovery in the ERG lawsuit. Dkt. 47. Additionally, PSI seeks recovery of its costs and attorneys' fees incurred in both the ERG lawsuit and in its action against Lexington, as well as 18% interest under the Texas Prompt Payment of Claims Act. Dkt. 47. PSI served Lexington with the third-party complaint on June 17, 2010, but it did not provide Lexington with a copy of ERG's first amended complaint until November 8, 2010. Dkt 63.

The policy language at issue in this case is contained in Section I (Coverages), Section IV (Definitions), Endorsement # 11 (Limited Professional Liability), Endorsement #7 (Oil Industry Endorsement), and Endorsement #1 (Self-Insured Retention) of the Policy. The dispute centers around whether the factual claims in ERG's complaint allege a covered "occurrence" resulting in "property damage," as those terms are defined in the Policy, whether the limitations inEndorsements #7 and #11 apply to exclude the allegations from coverage, and whether PSI has exhausted its self-insured retention as required by Endorsement #1. Section I of the Policy provides, in pertinent part:

1. Insuring Agreement

a. We will pay those sums that the insured becomes legally obligated to pay as damages because of "bodily Injury" or "property damage" to which this insurance applies. We will have the right and duty to defend the insured against any "suit" seeking those damages. However, we will have no duty to defend the insured against any "suit" seeking damages because of "bodily injury" or "property damage" to which this insurance does not apply.

b. This insurance applies to "bodily injury" or "property damage" only if: (1) The "bodily injury" or "property damage" is caused by an "occurrence" that takes place in the "coverage territory"; . . . .

Dkt. 55, Exh. B. Section IV of the Policy contains the definitions of specific terms used in the Policy, including the disputed terms at issue here. It provides, in pertinent part:

13. "occurrence" means an accident, including continuous or repeated exposure to substantially the same general conditions.

. . .

17. "Property damage" means:

a. Physical injury to tangible property, including all resulting loss of use of that property.

b. Loss of use of tangible property that is not physically injured.

Id. Endorsement # 11, the "Limited Professional Liability Endorsement," provides a limited exclusion of coverage for damages related to "professional services." It provides, in pertinent part:

It is agreed that coverage under this policy shall not apply to damages arising out of the rendering of, or failure to render, professional services or any error or omission or mistake of a professional nature performed for others in the Insured's capacity as an architect, engineer, or consultant . . . .

However, this exclusion shall not apply to "bodily injury" or "property damage" resulting from the aforementioned professional services or error, omission, or mistake. The term "property damage" as used in the endorsement means only physical injury to tangible property.

Id. Endorsement #7, the "Oil Industry Endorsement," contains limited exclusions of coverage for certain specific damages related to oil industry operations. The Endorsement provides, in pertinent part:

It is agreed that this policy shall not cover any liability imposed upon the insured by law or assumed by the insured under contract for or arising out of:

. . .

2. loss of, damage to, or loss of use of drilling tools, pipes, collars, machinery, and equipment leased or rented to, or in the care, custody, or control of any Insured.

Id. Finally, Endorsement #1, the "Self-Insured Retention Endorsement," applies a self-insured retention of $100,000 per claim that PSI agrees to assume. The endorsement provides, in pertinent part:

I. LIMITS OF INSURANCE

The LIMITS OF INSURANCE . . . shall apply excess of a Self-Insured Retention (hereinafter referred to as the "Retained Limit") in the amount of:

$100,000 each "occurrence"

. . .

and you agree to assume the retained limit. The Retained Limit, or any part of it, shall not be insured without our prior written approval.

II. DEFENSE AND SETTLEMENT- COVERAGES A AND B

A. WITHIN THE RETAINED LIMIT

We do not have the duty to investigate or defend any "occurrence", claim or "suit" unless and until the Retained Limit is exhausted with respect to that "occurrence", claim or "suit."

Id.

PSI moved for summary judgment on December 27, 2010, seeking declaratory relief in its favor on Lexington's duty to defend PSI in the underlying suit and reimbursement plus 18% interest for the defense costs it has incurred so far. PSI argues that the factual allegations in both ERG's original petition and its first amended complaint describe "occurrences" resulting in "property damage," as those terms are defined in the Policy, thus triggering Lexington's duty to defend PSI in the underlying suit as a matter of law. Dkt. 55. PSI also argues that Lexington's refusal to defend PSI in the underlying suit is a violation of the Prompt Payment of Claims Act, thereby entitling PSI as a matter of law to an award of reasonable attorneys' fees and costs incurred in defending the underlying suit, prejudgment interest and penalty interest of 18% for the fees and costs incurred defending the underlying suit, and fees and costs incurred while pursuing its third-party action against Lexington. Id. In the alternative, PSI argues that Lexington is liable to PSI for breach of contract under Texas law, thereby entitling PSI as a matter of law to an award of reasonable attorneys' fees, costs, and prejudgment interest under section 38.001 of the Texas Civil Practice and Remedies Code. Id.

Lexington filed a response in opposition to PSI's summary judgement motion and a cross motion for summary judgment on February 2, 2011. Dkt. 63. Lexington seeks denial of PSI's request for declaratory relief on the duty to...