Mid-Continent Cas. Co. v. Circle S Feed Store, LLC

Decision Date17 June 2014
Docket NumberNo. 13–2006.,13–2006.
Citation754 F.3d 1175
CourtU.S. Court of Appeals — Tenth Circuit
PartiesMID–CONTINENT CASUALTY CO., Plaintiff–Appellee, v. CIRCLE S FEED STORE, LLC, Richard L. Menuey and Mary L. Menuey, Defendants–Appellants. and I & W, Inc., Defendant.


Jennifer L. Collins (Robert J. Mroz with her on the briefs), Madison & Mroz, P.A., Albuquerque, NM, for Appellants.

Ken Slavin (Shelly W. Rivas, with him on the brief), Kemp Smith LLP, El Paso, TX, for Appellee.

Before TYMKOVICH, SEYMOUR, and GORSUCH, Circuit Judges.

TYMKOVICH, Circuit Judge.

I & W, Inc. owned a solution mining operation in Carlsbad, New Mexico. Its operations formed a cavern under its own property, which grew so large it infringed upon the subsurface property of the nearby Circle S Feed Store, LLC. This cavern, in turn, caused subsidence and damages to Circle S's surface property. A New Mexico state court found I & W negligent and liable for damages its solution mining operations caused to Circle S's property.

I & W sought indemnification for the damages under its commercial general liability (CGL) insurance policies, which had been issued by Mid–Continent Casualty Company. Mid–Continent, in turn, sought a declaratory judgment in federal court that it was not required to indemnify I & W for damages awarded in the state court action. The district court granted summary judgment for Mid–Continent, holding that a provision of the policies' Oil Industries Limitation Endorsement (Oil Endorsement) excluded coverage of the damages awarded in state court.

Exercising jurisdiction under 28 U.S.C. § 1291, we AFFIRM IN PART and REVERSE IN PART. We agree that the Oil Endorsement excludes coverage under the excess/umbrella policies issued to I & W, but we hold the Endorsement does not affect coverage under the primary policies.

I. Background

Starting in 1995, I & W engaged in solution mining on its property in Carlsbad, New Mexico. Solution mining involves injecting fresh water into an underground salt formation to dissolve the salt for the creation of brine water. Brine water is then pumped from the formation and sold for use in the oil and gas industries. This process inevitably creates an underground cavern. As a regulated entity of the New Mexico Oil Conservation Division (NMOCD), I & W was required to monitor subsidence and ensure that its brine removal was not washing out salt from deep within the salt bed.

In 2008, the NMOCD required I & W to plug its last open well because the well posed a threat to “life and property.” App. 58. I & W's operations caused an underground cavern to form under its own property and the adjacent property owned by Circle S, where Circle S operated its feed store, and caused subsidence and movement of Circle S's land. Circle S filed suit against I & W in state court, alleging negligence, negligent trespass, nuisance, withdrawal of lateral and subjacent support, interference with and interruption of enjoyment of property and operation of business, and unjust enrichment. Circle S alleged that I & W's actions caused damages to real property and structures and reduced the value of its property and business operations. At trial, experts testified that the cavern had increased in size over the years and the risk of the cavern collapsing was significant. Circle S also introduced evidence of the physical damages already caused to the structures located on its property. One expert opined that, as a result of I & W's actions, the value of Circle S's property declined from $703,000 to zero. The jury ultimately found I & W 100% negligent and awarded Circle S compensatory damages of $703,000 and punitive damages of $300,000.1

From 2000 to 2009, Mid–Continent issued to I & W separate CGL primary insurance policies for successive twelve-month periods. Mid–Continent also issued five separate excess/umbrella policies to I & W for successive twelve-month periods from June 1, 2000 to June 1, 2005 that were distinct from the primary policies. The excess/umbrella policies provided coverage beyond what was covered in the primary policies and required I & W to maintain underlying primary insurance. The excess/umbrella policies also expressly incorporated the terms of a standard-form “Oil Industries Limitation Endorsement,” which excluded coverage for damages caused by I & W's subsurface operations.

During the pendency of the state court litigation, Mid–Continent sought a declaratory judgment in federal court that it owed no duty to indemnify I & W under the insurance policies it issued to I & W between 2000 and 2009. Mid–Continent and Circle S both filed motions for summary judgment. The court rejected Mid–Continent's assertion that the damages to the Circle S property were not caused by an “occurrence” within the meaning of the policy. The district court also held that the policy's “intentional injury” exclusion did not apply. Finally, the court concluded that the state court did not award damages for the property's diminution in value, a type of damages not covered by the policy. Nevertheless, the district court granted summary judgment for Mid–Continent because it concluded that the Oil Endorsement excluded damages caused by I & W's subsurface mining operations.

Circle S filed a motion to alter or amend the final judgment, asserting that the district court erred in holding that the Oil Endorsement applied to the primary policies issued to I & W and requesting the court to clarify its holding. The district court declined to reconsider its holding, but declared that it would have found coverage but for the language in the Oil Endorsement. This appeal followed.

II. Analysis

Circle S argues for reversal on the grounds that the Oil Endorsement does not apply to the primary policies. Mid–Continent asks us to affirm the grant of its motion for summary judgment, noting that we may adopt alternate grounds for excluding coverage that the district court rejected. We agree with Circle S that the primary policies cover its damages, as we explain further below.

We review a grant of summary judgment de novo. See Timmons v. White, 314 F.3d 1229, 1232 (10th Cir.2003). Because this is a diversity case, we ascertain and apply state law—in this case, New Mexico law. See McIntosh v. Scottsdale Ins. Co., 992 F.2d 251, 253 (10th Cir.1993). Under New Mexico law, the construction of an insurance policy is a legal question that is reviewed de novo. See United Nuclear Corp. v. Allstate Ins. Co., 285 P.3d 644, 647 (N.M.2012).

We first explain why the Oil Endorsement exclusion does not apply to the primary policies. We then explain why the subsidence was a covered “occurrence” under the primary policies and that the state court's damages calculation reasonably covers the physical damage to Circle S's property. We conclude the district court erred in granting summary judgment for Mid–Continent.

A. Application of Oil Endorsement Exclusion

I & W purchased CGL policies from Mid–Continent to cover its general business operations. In addition to the primary policies, I & W purchased additional coverage in the form of excess/umbrella policies. As a part of this additional coverage, I & W and Mid–Continent agreed to an exclusion for damages arising from I & W's subsurface operations, the so-called “Oil Industries Limitation Endorsement.” The Oil Endorsement, labeled Endorsement MU6057, operates to exclude coverage for damages caused by subsurface mining. Specifically, the Oil Endorsement states,

It is agreed that this insurance does not apply to:


2. Loss of, damage to, or loss of use of property directly or indirectly resulting from subsidence caused by subsurface operations of the Insured.

3. Removal of, loss of, or damage to subsurface oil, gas or any other substance, the property of others.

App. 574 (emphasis added). The district court reasoned that subsection A.2 clearly applied to exclude the damages to Circle S's property caused by I & W's solution mining operations. The court applied the Oil Endorsement to exclude all coverage under the primary and excess/umbrella policies, even though Mid–Continent did not argue for such a broad exclusion before the district court.

Circle S argues that the Oil Endorsement does not exclude coverage under the primary policies because the primary policies do not incorporate the Oil Endorsement. We agree.

The primary policies and excess/umbrella policies issued to I & W are distinct sets of policies, serve different purposes, and incorporate different forms and endorsements. An excess policy provides secondary coverage only after the primary coverage limits have been exhausted. An umbrella policy, meanwhile, “provide[s] primary coverage for risks that the underlying policy does not cover.” 15 Steven Plitt et al., Couch on Insurance § 220:32 (3d ed.2013). The term “umbrella” does not mean that every one of the umbrella policy's terms is applicable to an underlying primary policy—the umbrella policy is a separate and distinct policy. See Commercial Union Ins. Co. v. Walbrook Ins. Co., 7 F.3d 1047, 1053 (1st Cir.1993) (“Umbrella policies differ from standard excess insurance policies in that they are designed to fill gaps in coverage both vertically (by providing excess coverage) and horizontally (by providing primary coverage).”). Because excess and umbrella policies are distinct from underlying primary policies, their endorsements are not automatically incorporated into and do not affect the terms of the primary policies. Cf. Empire Fire & Marine Ins. Co. v. Guaranty Nat'l Ins. Co., 868 F.2d 357, 363 (10th Cir.1989) (declining to apply one policy's endorsement to other policies because the endorsement does not “purport to limit or delete clauses in other policies”), overruled on other grounds by Carolina Cas. Ins. Co. v. Yeates, 584 F.3d 868 (10th Cir.2009).

Mid–Continent issued excess/umbrella policies to I & W that contain policy numbersdistinct from the primary policies and for which Mid–Continent collected separate...

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