United States: Texas Court Rejects Policy Interpretation Extending Coverage To Well Blowout Expenses

Case:    Gemini Insurance Company, et al. v. Drilling Risk Management Inc., et al.
             Court of Appeals of Texas, Fourth District, San Antonio
             No. 04–15–00318–CV, 2016 Tex. App. LEXIS 7048 (Tex. App. San Antonio July 6, 2016)

In Gemini Insurance Company v. Drilling Risk Management, Inc., a Texas appellate court reversed a $9.63 million judgment against insurers holding the Insured was not entitled to additional coverage and penalties in a lawsuit seeking coverage stemming from well blowouts off the Louisiana coast. The Insured, Drilling Risk Management Inc. (DRMI), filed suit following a partial denial of coverage by Gemini Insurance Company ("Gemini") and Berkley Oil & Gas Specialty Services LLC ("Berkley") claiming the insurers should have paid for casing and lining equipment it used to shore-up a well after encountering pressure zones which led to two previous blowouts.

DRMI was hired to drill a well off the Louisiana coast under a turnkey fixed price drilling contract. DRMI first encountered unexpected weak and high pressure zones that caused a blowout. DRMI drilled a "sidetrack" well, but encountered another weak pressure zone and high pressure kick, resulting in a second blowout. DRMI was finally able to successfully drill a sidetrack well after installing a liner to protect against the high and low pressure zones.

DRMI was an additional insured on a policy that covered "well out-of-control" events like blowouts and resulting re-drilling costs and made claims for each blowout. DRMI was reimbursed approximately $4.5 million in covered expenses incurred in bringing the two blowouts under control and another $3 million for the expense of drilling the sidetrack wells; however, the insurers denied coverage for $1.7 million of other redrilling expenses, including the casing and liner used in the sidetrack wells, concluding those costs were not caused by the blowouts. The insurers maintained the casing and liner costs were costs DRMI knew it would have prior to drilling the well, not covered costs caused by the blowouts.

DRMI sued Gemini and Berkley for improperly denying covered claims and committing unfair claim settlement practices. The trial court granted a summary judgment for DRMI on coverage and the claims for unfair settlement practices were tried to the jury. After trial, the jury ruled in favor of DRMI and the court entered judgment for roughly $3.5 million in actual damages and another $4 million for unfair settlement practices under the Texas Insurance Code. DRMI was also awarded $1.1 million in interest penalties and about $1 million in attorneys' fees.

On appeal, Gemini argued the casing and liner were not incurred "as a result of" the blowouts and thus were not covered redrill expenses. DRMI argued the policy language should mean once a well had been lost or damaged as a result of a blowout, all costs and expenses reasonably incurred to redrill the well are covered. The Fourth Court of Appeals in San Antonio reversed and rendered a take-nothing judgment against DRMI.

The court agreed with Gemini that the driller would have incurred the disputed redrilling costs anyway because of pre-existing geologic conditions. In particular, the evidence showed that regardless of whether or not a blowout occurred, DRMI would have had to incur casing and liner expenses in order to complete the well. As such, the court found that under the policy, those costs were not incurred as a result of an occurrence and did not fall within the scope of the policy. The court also found DRMI's interpretation of the scope of the policy's redrill coverage to be unreasonable because it attempted to transform coverage for losses caused by a blowout into coverage for expenses incurred after a blowout, and ignored restrictions in the policy wording. Finally, the court held the insurer's obligation was limited to restoring the well to a condition comparable to that existing before the blowout.

Finding that, as a matter of law, the only reasonable interpretation of the policy wording was that its scope was limited to redrill expenses incurred because of an occurrence, i.e., a well out of control event, as asserted by Gemini, the summary judgment in favor of DRMI on the coverage issues were reversed and the court rendered judgment in favor of Gemini and Berkley as a matter of law, declaring the disputed expenses not covered under the insurance policy. The court also concluded the blowouts constituted two separate occurrences requiring two separate deductibles under the policy, and reversed a separate summary judgment in DRMI's favor on this issue.

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