Breach of Contract is not an Occurrence
In American Home Assurance Company v. Superior Well Services, Inc., No.
22-1498, United States Court of Appeals, Third Circuit (May 31, 2023)
American Home Assurance Co. ("American Home") appealed the District
Court's order grant of summary judgment for policy holder Superior Well
Services, Inc. ("Superior").
BACKGROUND
The Underlying State Law Claim
U.S. Energy contracted with Superior for hydraulic fracking services to
extract natural gas from wells owned by U.S. Energy. In November 2007,
Superior notified its insurance provider, American Home, about the
potential claim for damage to wells. In February 2008, American Home
agreed to provide Superior with defense counsel, but it also sent
Superior a letter reserving its right to contest insurance coverage.
U.S. Energy sued Superior in New York state court, alleging that
Superior had damaged 97 of its wells. After trial the jury found that
Superior breached the contract by failing to perform services with
reasonable care, skill and diligence. The jury found Superior had
damaged 53 of the 97 wells and specified that Superior "fail[ed] to
perform its contract with U.S. Energy in a workman like manner" and that
this "failure" was "a substantial factor in causing damage to the U.S.
Energy wells[.]" Accordingly, it awarded U.S. Energy $6.16 million, a
figure that was increased to approximately $13.18 million after the
state court tabulated interest.
THE DISPUTE BETWEEN SUPERIOR AND AMERICAN HOME
Superior's policy provided coverage for "property damage" arising out of
an "occurrence." The policy defined "property damage" as both
"[p]hysical injury to tangible property, including all resulting loss of
use of that property."
Superior also purchased an "underground resources and equipment
coverage" ("UREC") endorsement that amended the CGL policy to provide
additional coverage "against risks associated with well-servicing
operations[.]" Specifically, the endorsement "added" coverage "with
respect to 'property damage' included within the 'underground resources
and equipment hazard' arising out of the operations performed by
[Superior] or on [Superior's] behalf[.]"
American Home sued seeking a declaratory judgment that Superior's policy
does not indemnify Superior for any damages that might be awarded to
U.S. Energy and which were caused by Superior's breach of contract.
THE DISTRICT COURT'S OPINION
The District Court granted summary judgment for Superior and, by
extension, for U.S. Energy, and it ordered American Home to indemnify
Superior for the state court judgment. The Court concluded that each of
the 53 damaged wells gave rise to a separate occurrence, triggering an
independent coverage limit for each respective well.
DISCUSSION
The definition of "accident" required to establish an "occurrence" under
the policies cannot be satisfied by claims based upon faulty
workmanship. Such claims simply do not present the degree of fortuity
contemplated by the ordinary definition of "accident" or its common
judicial construction in this context.
The Third Circuit Court of Appeal concluded that the endorsement does
not displace the underlying policy's occurrence requirement and reversed
the District Court's summary judgment order and remanded the case to
the District Court with instructions to enter judgment for American
Home.
ZALMA OPINION
The key to every liability insurance policy is that for coverage to
apply the loss must be fortuitous, that is neither expected nor intended
by the insured, and must fit within the generally understood meaning of
the term "accident." Under no definition of fortuity is faulty
workmanship by the insured. Since the jury found the insured responsible
for its breach of contract by means of faulty workmanship there was no
occurrence and no coverage
(c) 2023 Barry Zalma & ClaimSchool, Inc.