Mescalero Energy v. Underwriters Indemnity Gen. Agency

• Decision Date: 31 August 2001
• Docket Number: No. 01-96-01590,01-96-01590
• Citation: 56 S.W.3d 313
• Parties: <!--56 S.W.3d 313 (Tex.App.-Houston 2001) MESCALERO ENERGY, INC., Appellant v. UNDERWRITERS INDEMNITY GENERAL AGENCY, INC., PLANET INDEMNITY COMPANY, PHOENIX ASSURANCE PLC, THE OCEAN MARINE INSURANCE COMPANY, LTD., AND COMPAGNIE D'ASSURANCES MARITIME, AERINE ET TERRESTRES, Appellees -CV Court of Appeals of Texas, Houston (1st Dist.)
• Court: Texas Court of Appeals

Page 313

56 S.W.3d 313 (Tex.App.-Houston [1st Dist.] 2001)

MESCALERO ENERGY, INC., Appellant v UNDERWRITERS INDEMNITY GENERAL AGENCY, INC., PLANET INDEMNITY COMPANY, PHOENIX ASSURANCE PLC, THE OCEAN MARINE INSURANCE COMPANY, LTD., AND COMPAGNIE D'ASSURANCES MARITIME, AERINE ET TERRESTRES, Appellees

No. 01-96-01590 -CV

Court of Appeals of Texas, Houston (1st Dist.).

August 31, 2001

On Appeal from the 129th District Court Harris County, Texas Trial Court Cause No. 94-045153B

[Copyrighted Material Omitted] Panel consists of Justices Mirabal, Taft, and Duggan.^*

OPINION ON REHEARING

Lee Duggan, Jr., Justice

We deny the Motion for Rehearing filed by appellees Phoenix Assurance PLC, The Ocean Marine Insurance Company, LTD., and Compagnie D'Assurances Maritime, Aerine Et Terrestres. However, we withdraw our opinion dated May 10, 2001, and we issue this opinion in its stead.

Appellant, Mescalero Energy, Inc. (Mescalero), appeals a summary judgment in favor of appellees, its insurers and underwriters, following an underground oil well blowout during drilling operations. Appellees denied coverage, contending that the explosion occurred within a single "formation," an excludable event under the policy's conditions of coverage. Because of the conflicting evidence presented, we find that the trial court erred in determining that the term "formation" was unambiguous and in granting summary judgment on that basis. We reverse and remand to the trial court.

I. Background

In 1993, Mescalero, an oil and gas drilling contractor, began a program to drill several horizontal wells in Fayette County, Texas. One of the wells, the Stork #1 Well, was to be drilled horizontally through a previously existing vertical well. The location of the drilling is commonly referred to as the Austin Chalk.

Mescalero sought coverage for its program through an insurance agency, Carter & Company, and obtained a Blowout Insurance Policy (the "policy") from the two appellee insurers.¹ The four other appellees underwrote the policy.²

The policy provided coverage for described costs in regaining control of a blowout, redrilling expenses, and third-party equipment damaged by covered casualties in Mescalero's control. A policy endorsement governing underground blowouts states that "[a]n insured well shall also be deemed to be a blowout when there is a sudden, accidental, uncontrollable and continuous flow of oil, gas or water simultaneously between two or more separate formations via by [sic] the well bore under the surface of the earth or water bottom."³ (Emphasis added.)

On March 23, 1994, an uncontrolled flow of oil, gas, or water occurred in the Stork #1 Well. This caused a loss of normal fluid circulation in the well bore and trapped down-hole equipment Mescalero had leased from Horizon Directional Systems, Inc. After several unsuccessful retrieval attempts, Mescalero cut the drill pipe and abandoned the down-hole equipment. When Horizon sued Mescalero for the value of the abandoned equipment, Mescalero forwarded the petition to its insurers for defense under the policy.

The insurers retained Riseden Services, Inc., an oil and gas engineering consulting firm, to analyze the technical aspects of the March 23rd incident. J.E. Riseden, a petroleum engineer and president of Riseden Services, prepared a report concluding that gas and fluid moving through a fractured, unstable portion of the single formation through which Mescalero had drilled, the Austin Chalk, caused the formation to cave in on the drill pipe. Riseden testified in his deposition and his summary judgment affidavit that he found no evidence that oil, gas, or water had flowed from one formation through the well bore to another separate formation, and concluded that there was no evidence of a "blowout" as defined in the policy. The insurers and underwriters denied the occurrence of an underground blowout, denied coverage for the March 23rd incident, and refused to defend Mescalero against Horizon's lawsuit.

The insurers and one of the underwriters, Planet Indemnity Company, then filed a declaratory judgment action seeking a determination that Mescalero's damages were not covered under the terms of the policy because, inter alia, the damages resulted from a "kick,"⁴ and not from a "blowout" as defined in the policy. They asserted that the accident occurred within a single formation, the Austin Chalk, and not between separate formations, as required to constitute an underground blowout. Mescalero answered and brought counterclaims against the insurers and underwriter Planet Indemnity Company, asserting that the Austin Chalk was a series of formations, and that the explosion and damage occurred between two or more of them. In an amended counterclaim, Mescalero joined the remaining underwriters and the insurance agency, Carter & Company, as defendants.⁵

The insurers and underwriters moved for summary judgment on the ground that, because the Austin Chalk is a single formation, the uncontrollable loss of fluids did not occur "between two or more separate formations" (as required by the policy) and the underground blowout endorsement did not provide coverage for the March 23rd accident.⁶ The trial court granted the insurers' and underwriters' motions for summary judgment, severed Mescalero's remaining claim against Carter & Company, the insurance agency, and made the summary judgment final and appealable.⁷

II. Standard of Review

The party moving for Rule 166a(c) summary judgment has the burden of showing that no genuine issue of material fact exists and that it is entitled to judgment as a matter of law. Nixon v. Mr. Property Mgmt. Co., 690 S.W.2d 546, 548 (Tex. 1985). In deciding whether a disputed material fact issue exists, the reviewing court will take as true all evidence favoring the nonmovant. Id. at 548-49. Every reasonable inference must be indulged in favor of the nonmovant and any doubts resolved in the nonmovant's favor. Id.

III. Discussion

In a single point of error, Mescalero asserts the trial court erred in granting summary judgment in favor of the insurers and underwriters (collectively, "appellees"). Under Mescalero's definition, the Austin Chalk constitutes a series of formations.

Mescalero argues that the term "formation" is ambiguous because it is subject to two reasonable definitions, that any ambiguity should be resolved in favor of the insured, and that because of this ambiguity, the trial court erred in granting summary judgment for appellees on the issue of coverage.

Our analysis turns on the meaning of the term "formation" and the evidence to which we may resort to make this determination.

A. Appellees' Summary Judgment Motions

In their motions for summary judgment and on appeal, appellees cite HOWARDR. WILLIAMS & CHARLES J. MEYERS, MANUAL OF OIL AND GAS TERMS (9th ed. 1994), a commonly cited oil and gas dictionary, which defines a "formation" as

A succession of sedimentary beds that were deposited continuously and under the same general conditions. It may consist of one type of rock or of alterations of types. An individual bed or group of beds distinct in character from the rest of the formation and persisting over a large area is called a "member" of the formation. Formations are usually named for the town or area in which they were first recognized and described, often at a place where the formation outcrops. For example, the Austin chalk formation outcrops at Austin, Texas.

Id. at 559 (emphasis added). Appellees note this definition of "formation" was quoted in its entirety (including the reference to the Austin Chalk) by the Texas Supreme Court in Amarillo Oil Co. v. Energy-Agri Products, Inc., 794 S.W.2d 20, 23 n.3 (Tex. 1990). They argue that the Court expressly adopted this definition, under which the Austin Chalk constitutes a single formation, as the sole and unambiguous meaning of the term within the oil and gas industry.

Appellees also cite the affidavit of J.E. Riseden (included with their motions for summary judgment). Riseden concluded that, based on his investigation, there had not been an underground blowout within the definition of the policy. In his affidavit, he also stated that the definition of "formation" in the Williams & Meyers dictionary is the one most generally accepted in the industry.

B. Mescalero's Response

In its response, Mescalero argued that summary judgment was not proper because the term "formation" is subject to more than one reasonable interpretation. Mescalero attached the affidavit of Byron Davenport, a petroleum engineer whose resume and testimony show extensive experience with horizontal drilling techniques. Davenport concluded that the March 23rd accident was a blowout as defined in the policy and stated that, in his opinion, there are numerous formations within the Austin Chalk. According to Davenport, the ordinary, generally accepted meaning of the term "formation" for horizontal wells would be defined as "[a]ny mappable, separate, self contained pressure unit within a geologic interval." However, Davenport did not cite any authority upon which he bases his definition.

Mescalero also contended that the deposition testimony of Riseden and of Jack E. Carter, a partner of the insurance agency that obtained the policy for Mescalero, establishes that the term "formation" is subject to more than one reasonable interpretation.

Based on Davenport's affidavit, and the deposition testimony of Riseden and Carter, Mescalero argued that the trial court was presented with two reasonable interpretations of the term "formation," and was, thus, required to adopt the interpretation most favorable to the rights of the insured. At a minimum, Mescalero argued, its alternative interpretation of the term "formation" gave rise to a fact issue concerning whether an underground blowout had occurred under the policy.

C. Rules of Construction

Insurance policies are controlled by rules of interpretation and...