United States: "Right To Occupy" Surface Estate Bars Coverage For Property Damage

In its September 22, 2014 opinion in Pioneer Exploration, L.L.C. v. Steadfast Insurance Co. 767 F.3d 503 (5th Cir. 2014), the Fifth Circuit denied coverage for damages resulting from a well blowout, concluding that the insured's legal right to occupy property was sufficient to exclude coverage under the property damage and blended pollution exclusions relating to property owned, rented or occupied by the insured. Justice Higginbotham's opinion suggests that an insured's legal right to occupy the property, as opposed to its physical occupancy of the property, may be sufficient to preclude coverage under an owned-property-type exclusion.

The suit arose from a blowout at a gas well operated by insured, Pioneer Exploration, L.L.C. in Cameron Parish, Louisiana. Pioneer was operating the well pursuant to a 1958 mineral lease. The well was located on a half-acre of the property covered by the mineral lease. In 2008, the well suffered a blowout causing property damage to approximately 12 acres of the property, including damage to neighboring property. At the time of the blowout, Pioneer was insured under three separate policies including an umbrella policy at issue in the lawsuit. The insurer, Steadfast, denied coverage under the policy arguing that coverage was expressly excluded.

Finding that Texas law, which would otherwise apply to this matter, did not conflict with Louisiana law, the Fifth Circuit applied Louisiana law to affirm the lower court's grant of summary judgment that coverage was precluded under the unambiguous terms of the umbrella policy.

In reaching its holding, the Fifth Circuit agreed with Steadfast that the policy's property damage exclusion for property owned, rented or occupied by the insured as well as a similar blended pollution endorsement excluding damages related to pollution cleanup from premises owned, rented or occupied by the insured unambiguously precluded coverage for the insured's costs to contain and remediate the property damage resulting from the blowout. The court rejected Pioneer's argument that the owned, rented or occupied exclusion did not apply to its drilling operations because its only interest in the land was its mineral lease. The court likewise rejected Pioneer's argument that if it did occupy the property, its occupancy was limited to only the half-acre drill pad site, not the entire parcel subject to its lease.

The court concluded that the "owned, rented or occupied" language in both the property damage exclusion and the blended pollution endorsement precluded coverage because of the "dispositive fact" that the mineral lease and Louisiana law granted Pioneer "the right to occupy all the land for its exploration and production purposes." Id. at 515. Specifically, the court acknowledged that (1) the mineral lease gave Pioneer the right to occupy the land for the purpose of exploring for and producing minerals; (2) Louisiana law provides mineral lessees broad rights to occupy the surface of the property for the same purpose; and (3) the pollution affected the land that Pioneer had the right to occupy under the terms of its lease and Louisiana law. The court also noted that the insured undisputedly occupied some part of the land. These facts brought the insured within the unambiguous term "occupy" within the applicable exclusions thereby precluding coverage of containment and remediation costs. 

Significantly, the Fifth Circuit's focus on the mineral leaseholder's right to occupy the property as the "dispositive fact" in determining whether the insured occupied the property suggests that an insured's legal right to occupy the property may be as important as its physical occupancy of the property in determining the applicability of the exclusion. While the court did not expound upon the reach of its holding outside of the mineral lease context, the opinion opens the door to excluding coverage for damages to property occupied by the insured if the insured has a legal right to occupy the property.

The Fifth Circuit also affirmed the district court's determination that coverage for remediation and contamination costs incurred to prevent third-party property damage was likewise excluded. In reaching its conclusion, the court relied on the language in the blended property endorsement excluding coverage for "containment" of pollutants and the language in the property damage exclusion precluding coverage for the "prevention of ... damage to another's property." 

The Fifth Circuit further affirmed the district court's grant of summary judgment on the basis that the oil industry limitation endorsement's exclusion for costs relating to "controlling or bringing under control any oil, gas or water well which becomes out of control" precluded coverage for costs incurred in plugging the well. The court rejected Pioneer's distinction between costs relating to controlling a well and plugging a well, concluding that the cost of plugging the well was the final step in controlling the blowout and thus precluded from coverage.

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