Mid–continent Cas. Co. v. Eland Energy Inc.

• Decision Date: 14 June 2011
• Docket Number: 3:06–CV–1578–D.,Civil Action Nos. 3:06–CV–1576–D
• Citation: 795 F.Supp.2d 493
• Parties: MID–CONTINENT CASUALTY COMPANY, Plaintiff-counterdefendant,v.ELAND ENERGY, INC., et al., Defendants-counterplaintiffs.
• Court: U.S. District Court — Northern District of Texas

795 F.Supp.2d 493

MID–CONTINENT CASUALTY COMPANY, Plaintiff-counterdefendant,

v.ELAND ENERGY, INC., et al., Defendants-counterplaintiffs.

Civil Action Nos. 3:06–CV–1576–D

3:06–CV–1578–D.

United States District Court,N.D. Texas,Dallas Division.

June 14, 2011.

Christopher W. Martin, Mark J. Dyer, Martin Disiere Jefferson & Wisdom, Gregory L. Griffith, The Griffith Law Firm, Dallas, TX, Adel Meyerov Sander, Cozen O'Connor, Scott C. Kirklin, Ethan D. Carlyle, Kennetha W. Lucas, Robert G. Dees, Martin Disiere Jefferson & Wisdom, Houston, TX, for Plaintiff–counterdefendant.Carl D. Rosenblum, Eric Michael Liddick, Madeleine Fischer, Tara G. Richard, Jones Walker Waechter Poitevent Carrère & Denegre, New Orleans, LA, C. B. Harrison, Jr., Law Office of C. B. Harrison Jr., Dallas, TX, for Defendants–counterplaintiffs.

MEMORANDUM OPINION AND ORDER

SIDNEY A. FITZWATER, Chief Judge.

This insurance litigation involves coverage and extra-contractual causes of action arising from the handling of claims made under commercial general liability and umbrella policies following Hurricanes Katrina and Rita. After the court narrowed the case through rulings on pretrial motions, the parties tried the balance of the lawsuit to a jury, which ruled partially in favor of the insurer and partially in favor of the insureds, and the court entered a judgment in accordance with the verdict. Both sides challenge the verdict and judgment by post-judgment motions that present these principal questions: whether Texas recognizes a claim for breach of duty of good faith and fair dealing in the third-party claims handling context presented here; whether the jury could reasonably have found in favor of the insureds on the grounds of their unfair settlement practices counterclaim that the jury decided in their favor; and whether the jury could reasonably have found against the insureds on their Hurricane Rita breach of contract counterclaim. For the reasons that follow, the court holds that the insureds are not entitled to relief on any counterclaim, and it enters an amended judgment in favor of the insurer.

I

A

To place this litigation and today's decision in context, the court begins by recounting some of the pertinent background facts and procedural history, some of which it draws from its pretrial memorandum opinions and orders.

These consolidated cases concern insurance coverage and extra-contractual claims involving commercial general liability and umbrella policies that covered pollution incidents under an Oil & Gas Endorsement. See Mid–Continent Cas. Co. v. Eland Energy, Inc., 2009 WL 3074618, at *1 (N.D.Tex. Mar. 30, 2009) (Fitzwater, C.J.) (“ Mid–Continent I ”). Plaintiff-counterdefendant Mid–Continent Casualty Co. (“Mid–Continent”) initiated this litigation by filing a declaratory judgment action against defendants-counterplaintiffs Eland Energy, Inc. and Sundown Energy LP (collectively, “Sundown,” unless the context otherwise requires). Shortly thereafter, Eland and Sundown filed suit asserting contractual and extra-contractual claims against Mid–Continent. After the two cases were consolidated, Mid–Continent was aligned as plaintiff-counterdefendant and Eland and Sundown as defendants-counterplaintiffs. The parties litigated the case at trial, however, as if Eland and Sundown were the plaintiffs and Mid–Continent the defendant.

The dispute between Sundown and Mid–Continent arose in connection with the escape of crude oil from storage tanks at Sundown's oil and gas facility near Port Sulphur, Louisiana, following Hurricane Katrina, and from the escape of that oil from a containment boom constructed during the Hurricane Katrina cleanup operations, following Hurricane Rita. Id. Hurricane Katrina struck the Louisiana coast on August 29, 2005, and Hurricane Rita made landfall on September 24, 2005. Id.

At all times pertinent to this litigation, Mid–Continent insured Sundown under a commercial general liability policy (“Primary Policy”) and an umbrella policy (“Umbrella Policy”). Id. at *2. The Primary Policy had limits of $1 million per occurrence and $2 million in the aggregate, and included a duty to defend. Id. An Oil & Gas Endorsement provided coverage for a “Pollution Incident.” Id. The Umbrella Policy had an aggregate limit of $5 million and included a right, but not a duty, to associate with an underlying insurer and the insured to defend. Id.

The U.S. Coast Guard (“Coast Guard”) mandated that Sundown clean up the areas surrounding Sundown's facility that were affected by the escape of crude oil. Id. at *1–2. Five lawsuits (the “Underlying Litigation”)—including Blanchard, a class action lawsuit—were filed against Sundown by neighboring property owners and commercial fishermen affected by the spillage of oil due to Hurricane Katrina. Id. at *2. Sundown tendered the Underlying Litigation to Mid–Continent for defense and indemnification, and Mid–Continent informed Sundown that it would provide a defense to the class action lawsuits subject to a reservation of rights. Id. Because of Mid–Continent's reservation of rights, Sundown asserted that there was a conflict and that it was entitled to independent counsel. Id. Mid–Continent eventually agreed that Sundown could be represented by Jones, Walker, Waechter, Poitevent, Carrère & Denegre, L.L.P. (“Jones Walker”) and that Mid–Continent would reimburse Sundown for its attorney's fees at Mid–Continent's typical rates for appointed counsel. Id.

Mid–Continent tendered the Primary Policy and Umbrella Policy limits to Sundown on March 22, 2006 and August 18, 2006, respectively. Id. Sundown informed Mid–Continent that it was placing its Hurricane Katrina cleanup claim “in abeyance” in order to use the insurance proceeds to pay for the class action lawsuits, and it declined to negotiate the checks. Id. Sundown sought to place its claim “in abeyance” so that it could pursue reimbursement for government-mandated cleanup costs from a fund established under the Oil Pollution Act of 1990 (“OPA Fund”). Id. at *3, *10. Sundown was concerned that, if Mid–Continent paid for Sundown's cleanup costs, Mid–Continent would have no further duty to defend Sundown in the Underlying Litigation and, through its subrogation rights, would be entitled to any available reimbursement from the OPA Fund. Id. at *10. The court in Mid–Continent I held that Sundown did not have the right to place its cleanup claim “in abeyance,” and that Mid–Continent exhausted the limits of the Primary Policy when it tendered the $1 million check to Sundown. Id. at *11–12.

In Mid–Continent Casualty Co. v. Eland Energy, Inc., No. 3:06–CV–1576–D (N.D.Tex. Oct. 22, 2009) (Fitzwater, C.J.) (“ Mid–Continent II ”), and Mid–Continent Casualty Co. v. Eland Energy, Inc., 2010 WL 610713 (N.D.Tex. Feb. 22, 2010) (Fitzwater, C.J.) (“ Mid–Continent III ”), the court held that Sundown had incurred $5,469,650.65 in covered cleanup costs by the time Mid–Continent tendered the Umbrella Policy limits, and that Mid–Continent's $5 million tender fulfilled its obligations under the Umbrella Policy. Mid–Continent II, slip op. at 25; Mid–Continent III, 2010 WL 610713, at *1.

Sundown submitted a Hurricane Rita cleanup claim on July 12, 2006. Mid–Continent I, 2009 WL 3074618, at *30. Mid–Continent acknowledged receipt of the claim and stated that it was starting an investigation. Id. Mid–Continent denied the claim by letter dated July 19, 2007. Pretrial Order (“PTO”) ¶ 52. Mid–Continent stated that the Hurricane Rita claim was not covered because Sundown did not provide notice of the claim as soon as practicable, Hurricane Rita did not cause a second “Pollution Incident,” and Sundown did not provide notice of a government mandate for cleanup due to Hurricane Rita. See P. JMOL Resp. App. 10–11.

B

In Mid–Continent I, II, and III, the court granted in part and denied in part the summary judgment motions of both parties. Sundown's remaining counterclaims were tried to a jury, which returned a verdict partially in favor of Sundown and partially in favor of Mid–Continent.

The court submitted the case to the jury on 13 questions. The first five pertained to Sundown's Hurricane Rita contractual or extra-contractual counterclaims, the next five related to Sundown's Hurricane Katrina contractual or extra-contractual counterclaims, and the final three concerned damages. The jury found the following:

• Sundown did not prove its Hurricane Rita duty to indemnify breach of contract counterclaim (Question No. 1);

• Sundown did not prove its bad faith investigation counterclaim—that Mid–Continent failed to affirm or deny coverage of Sundown's Hurricane Rita claim within a reasonable period of time, or that Mid–Continent refused to pay Sundown's Hurricane Rita claim without conducting a reasonable investigation of the claim (Question No. 2); ¹

• Sundown did not prove that Mid–Continent's misrepresentation of the Primary Policy was a producing cause of damages to Sundown (Question No. 4); ² • Sundown proved its unfair settlement practices counterclaim as to Hurricane Katrina on five grounds: (1) Mid–Continent misrepresented to Sundown a material fact or policy provision relating to coverage at issue; (2) Mid–Continent failed to attempt in good faith to effectuate a prompt, fair, and equitable settlement of a claim when Mid–Continent's liability had become reasonably clear; (3) Mid–Continent failed to provide promptly to Sundown a reasonable explanation of the factual and legal basis in the policy for Mid–Continent's offer of a compromise settlement of a third-party claim; (4) Mid–Continent failed to affirm or deny coverage of Sundown's claim within a reasonable time; and (5) Mid–Continent refused to pay Sundown's claim without conducting a reasonable investigation of the claim (Question No. 6);

• with respect to the foregoing five grounds, Mid–Continent acted knowingly only as to ground (3)—when it failed to provide promptly to Sundown a reasonable explanation of the...