Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-arwd-1_03-cv-01166/USCOURTS-arwd-1_03-cv-01166-1/pdf.json

Nature of Suit Code: 110
Nature of Suit: Insurance
Cause of Action: 28:2201 Declaratory Judgment

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Separate Defendant Zadeck also filed a response to Bituminous’ amended motion for 1

summary judgment. (Doc. No. 46). However, Zadeck has been dismissed from the 

lawsuit (Doc. No. 58), therefore, Zadeck’s response will not be considered by the Court in

deciding Bituminous’ amended motion. 

IN THE UNITED STATES DISTRICT COURT

WESTERN DISTRICT OF ARKANSAS

EL DORADO DIVISION

BITUMINOUS CASUALTY CORPORATION PLAINTIFF

VS. CASE NO. 03-CV-1166

ZADECK ENERGY GROUP, INC. and

TRI-STATE OIL TOOL COMPANY, INC. DEFENDANTS

MEMORANDUM OPINION

Before the Court are two pending motions for summary judgment. The first motion was

filed on behalf of Plaintiff Bituminous Casualty Corporation (“Bituminous”) and is styled as

Plaintiff’s Amended and Substituted Motion for Summary Judgment. (Doc. No. 36). Separate

Defendant Tri-State Oil Tool Company, Inc. (“Tri-State”) has filed a response to the motion. 

(Doc. No. 42). Bituminous filed a reply to Tri-State’s response. (Doc. No. 49). The second 1

motion before the Court is a Motion for Summary Judgment filed on behalf of Separate

Defendant Tri-State. (Doc. No. 57). Bituminous has filed a response to that motion. (Doc. No.

60). Both motions are ripe for consideration. 

BACKGROUND

Zadeck Energy Group, Inc. (“Zadeck”) is in the business of owning and operating oil and

gas wells, including a gas well know as the “Partnership Properties No. 1 Well” located in

Columbia County, Arkansas. Zadeck acquired this particular well with the intention of 

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reworking and recompleting the well to include a second production zone at a depth in excess of

10,000 feet. 

In order to bring the well into production, Zadeck hired Tri-State to preform the final

step of “swabbing” the well. On March 29, 2003, Tri-State commenced the swabbing 

procedure on Zadeck’s Partnership Properties No. 1 Well. During the lowering of the swab into

the well, the swab and the swab line were lost down the tubing because the line was not attached

to the rig’s spool. The swab and swab line were retrieved from the well, but not without the well

suffering damage which rendered it incapable of gas production. Prior to the incident,

Bituminous had issued a policy of insurance to Tri-State, on which Tri-State made a claim. On

June 6, 2003, Bituminous sent a written disclaimer of coverage to Tri-State. 

On August 1, 2003, Zadeck brought suit in this Court against Tri-State (Zadeck Energy

Group v. Tri-State Oil Tool Company, Inc., Case No. 03-CV-1126) alleging that the damage to

its Partnership Properties No. 1 Well was the result of the negligence and breach of contract by

Tri-State. Tri-State filed its Answer on August 14, 2003. On August 21, 2003, Tri-State’s

attorney, Mike Kinard, wrote Bituminous tendering the defense of the Zadeck v. Tri-State

lawsuit to it. On September 29, 2003, Mr. Kinard received a letter from Bituminous’ counsel

stating that Bituminous was declining tender of the defense based on its determination that there

was no coverage or possibility of coverage for the claims against Tri-State. Thereafter, the

defense of the Zadeck v. Tri-State lawsuit was handled by Mr. Kinard. 

On October 23, 2003, Bituminous filed this declaratory judgment action against Tri-State

and Zadeck pursuant to 28 U.S.C. § 2201. In this action, Bituminous is seeking a determination

of the rights of the parties pursuant to the policy of insurance issued by it to Tri-State. 

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Bituminous stated in its Complaint that a real and justiciable controversy existed between the

parties because Bituminous’ position was that the insurance policy in question did not cover

Zadeck’s claims against Tri-State and it owed no duty to defend Tri-State in that suit. Mr.

Kinard, on behalf of Tri-State, answered Bituminous’ Complaint and filed a counterclaim asking

for, inter alia, an award of $250,000 in consequential damages and its attorney fees in defending

Bituminous’ declaratory judgment action and the Zadeck v. Tri-State lawsuit. Thereafter, on

July 30, 2004, Bituminous filed a Motion for Summary Judgment in this action. 

On July 27, 2004, Zadeck filed a motion to amend its Complaint in the Zadeck v. TriState lawsuit. On August 13, 2004, the Court granted Zadeck’s motion, and, on August 17,

2004, Zadeck amended its Complaint. In its Amended Complaint, Zadeck alleged that although

some portion of the injury suffered by it occurred deep in the well bore, substantial injuries and

damages took place elsewhere and on the surface. On August 18, 2004, the day after Zadeck

amended its Complaint, Bituminous assumed the defense of the Zadeck v. Tri-State lawsuit

subject to a reservation of rights. At this point, the defense of Tri-State in that lawsuit was

assumed by Anderson, Murphy & Hopkins, and, on August 27, 2004, Randy Murphy of that

firm was substituted for Mike Kinard as counsel for Tri-State. 

On November 2, 2004, Tri-State filed a motion for leave to file a third-party complaint

against Indiana Petroleum Contractors, Inc., the company from which Tri-State acquired the rig

used in the swabbing of Zadeck’s Partnership Properties No. 1 Well. On January 6, 2005, TriState filed third-party complaint against Indiana Petroleum, bringing it into the Zadeck v. TriState lawsuit.

On March 21, 2005, the Court ruled that Bituminous’ Motion for Summary Judgment

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was moot in that it was based upon Zadeck’s original Complaint and ordered Bituminous to

resubmit its summary judgment motion in light of Amended Complaint in Zadeck v. Tri-State.

On May 2, 2005, Bituminous filed the Amended and Substituted Motion for Summary Judgment

now pending before the Court. In its amended motion, Bituminous contends that the insurance

policy in question does not cover the claims stated in Zadeck’s Amended Complaint. It also

contends that it owes no duty to defend Tri-State in that lawsuit even though it had assumed TriState’s defense on August 18, 2004. 

In September 2005, Zadeck’s claims against Tri-State and Indiana Petroleum were

settled. In settlement of those claims, Bituminous paid $85,000 to Zadeck on behalf of TriState. The claims made by Zadeck against Tri-State have been dismissed with prejudice. 

On October 26, 2005, Tri-State filed a Motion for Summary Judgment in this case asking

the Court to order Bituminous to pay Tri-State’s attorney fees in both the declaratory judgment

action and the Zadeck v. Tri-State lawsuit. Bituminous admits that the sole issue pending before

the Court is whether Tri-State can recover its attorney fees in defending the instant case for

declaratory judgment and the legal fees it incurred in defending the underlying Zadeck v. TriState lawsuit. However, before the Court can address the issue of attorney fees, the question of

coverage and the duty to defend in Bituminous’ amended motion for summary judgment must

first be answered.

STANDARD OF REVIEW

The standard of review for summary judgment is well established. Rule 56(c) of the

Federal Rules of Civil Procedure provides that summary judgment “shall be rendered forthwith

if the pleadings, depositions, answers to interrogatories, and admissions on file, together with

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affidavits, if any, show that there is no genuine issue as to any material fact and that the moving

party is entitled to a judgment as a matter of law.” The Court must view the evidence and the

inferences that may be reasonably drawn from the evidence in the light most favorable to the

nonmoving party. Enterprise Bank v. Magna Bank, 92 F.3d 743, 747 (8 Cir. 1996). The th

moving party bears the burden of showing that there is no genuine issue of material fact and that

it is entitled to judgment as a matter of law. Id. The nonmoving party must demonstrate the

existence of specific facts in the record that create a genuine issue for trial. Krenik v. County of

LeSueur, 47 F.3d 953, 957 (8 Cir. 1995). A party opposing a properly supported motion for th

summary judgment may not rest upon mere allegations or denials, but must set forth specific

facts showing that there is a genuine issue for trial. Anderson v. Liberty Lobby, Inc., 477 U.S.

242, 256, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986); Krenik v. County of LeSueur, 47 F.3d at 957. 

DISCUSSION

Bituminous has filed this declaratory judgment action pursuant to 28 U.S.C. § 2201. 

Section 2201 states that “[i]n a case of actual controversy within its jurisdiction . . . , any court

of the United States, upon filing of an appropriate pleading, may declare the rights and other

legal relations of any interested party seeking such declaration, whether or not further relief is or

could be sought.” Bituminous asks the Court to determine the rights of the parties pursuant to

the policy of insurance issued by it to Tri-State. If the Court determines that coverage exists

under the policy in question, Tri-State is entitled to the attorney fees it has incurred in defending

the declaratory judgment action now pending before the Court. See Ark. Code Ann. § 23-79-

209. Therefore, in order to determine if Tri-State is entitled to recover these attorney fees the

Court must first determine if coverage exists under the policy. 

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In determining coverage under an insurance policy, the Court first turns to the policy

itself. If the terms of the policy are clear and unambiguous, the policy language controls; and

absent statutory strictures to the contrary, exclusionary clauses are generally enforced according

to their terms. State Automobile Ins. Co. v. Lawrence, 358 F.3d 982 (8 Cir. 2004)(quoting th

Noland v. Farmers Insurance Co., 892 Ark. 449, 452, 892 S.W.2d 271 (1995)). Whether the

language of a policy is ambiguous is a question of law to be resolved by the Court. Norris v.

State Farm Fire & Cas. Co., 341 Ark. 360, 16 S.W.3d 242 (2000). The policy language is

considered ambiguous if there is doubt or uncertainty as to its meaning and it is susceptible to

more than one reasonable interpretation. Nicholas v. Farmers Ins. Co., 83 Ark.App. 324, 329

128 S.W.3d 1 (Ark.App. 2003). In reviewing the policy in this case, the Court finds that its

language is unambiguous; therefore, it is the duty of the Court to give effect to the plain

language of the policy without resorting to rules of construction. Castaneda v. Progressive

Classic Ins. Co., 83 Ark.App. 267, 273, 125 S.W.3d 835 (Ark.App. 2003). 

The insurance policy in question contains an endorsement titled “Exclusion S

Underground Resources and Equipment.” This endorsement provides that this “insurance does

not apply to ‘Property Damage’ included within the ‘underground resources and equipment

hazard’.” The “underground resources and equipment hazard” is defined to include “property

damage” to any of the following:

A. Oil, gas, water, or other minerals substances which have not been reduced

 to physical possession above the surface of the earth or above the surface 

 of any body of water;

B. Any well, hole, formation, strata or area in or through which exploration

 for or production of any substance is carried on: or 

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C. Any casing, pipe, bit, tool, pump, or other drilling or well servicing machinery

 or equipment located beneath the surface of the earth in any such well or hole 

 beneath the surface of any body of water. 

The allegations in Zadeck’s original Complaint sought damages resulting from TriState’s swabbing equipment coming loose underground in Zadeck’s Partnership Properties No. 1

Well and falling down the well, thus, damaging the well. These alleged damages clearly fall

within the policy’s “underground resources and equipment hazard” exclusion. 

In its Amended Complaint, Zadeck also alleges that “although some portion of the injury

to the Plaintiff occurred deep in the well bore of the ‘Partnership Properties #1 Well’, 

substantial injuries and damages suffered by Plaintiff took place elsewhere and on the surface.” 

Even though Zadeck does not specify what these alleged surface damages are, Tri-State argues

that these additional allegations create a question of fact for the jury as to whether the damages

in question are outside the policy’s exclusions. However, Tri-State has not produced any

evidence showing that anything on the surface was damaged by its swabbing equipment being

lost down Zadeck’s Partnership Properties No. 1 Well. In order for Tri-State to avoid summary

judgment, it must set forth specific facts showing that there is a genuine issue of fact for trial. 

Tri-State has not done this. There is no evidence before the Court that indicates that any of the

damage claimed by Zadeck was above ground and outside the “underground resources and

equipment hazard” exclusion. The mere allegation of surface damage is not enough to defeat

summary judgment on the question of coverage. Bituminous is entitled to judgment as a matter

of law on this issue. Because the Court finds that Bituminous is entitled to summary judgment

on the issue of coverage, Tri-State is not entitled to its attorney fees for defending the action

under Ark. Code Ann. § 23-79-209. 

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Tri-State argues that Bituminous has waived the issue of coverage pending in the

declaratory judgment action because it settled Zadeck’s claim against Tri-State. However,

Bituminous settled that claim under a reservation of rights. Bituminous has never abandoned its

claims that no coverage existed under the policy issued by it to Tri-State or that it has no duty to

defend Tri-State in the Zadeck v. Tri-State lawsuit. Therefore, since Bituminous has not

voluntary surrendered these rights, there is no waiver of them on its part. 

Tri-State also argues that this case is analogous to the case of Hicks v. Allstate Ins. Co.

and it is entitled to attorney fees based upon the reasoning in that case. See Hicks v. Allstate Ins.

Co., 304 Ark. 101, 799 S.W.2d 809 (1990). However, in the Hicks case, Allstate settled the

underlying lawsuit and its declaratory judgment, dismissing the declaratory judgment with

prejudice. The Arkansas Supreme Court determined that such a dismissal with prejudice was a

final adjudication of the declaratory judgment action, therefore, attorney fees were appropriate

under Ark. Code Ann. § 23-70-209. That is not the case here. Bituminous settled the

underlying lawsuit between Zadeck and Tri-State but the settlement of that case was not a final

adjudication here and it is not conclusive of the rights of the parties now before the Court. The

declaratory judgment action on the issue of coverage is not settled until now with the Court’s

granting of Bituminous’ summary judgment on that issue, and, because the declaratory judgment

is in favor of Bituminous, Tri-State is not entitled to its attorney fees in defending this action. 

Therefore, Tri-State’s Motion for Summary Judgment on the issue of attorney fees in connection

with the declaratory judgment action should be denied. 

The second issue pending in this declaratory judgment action is the question of

Bituminous’ duty to defend Tri-State in the underlying suit of Zadeck v. Tri-State, and, whether

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Bituminous should now be required to pay the attorney fees of Tri-State’s independent counsel

in that suit. The Court will first address Bituminous’ duty to defend. 

The general rule in Arkansas is that an insurer’s duty to defend is determined from the

pleadings. Mattson v. St. Paul Title Company of the South, 227 Ark. 290, 292, 641 S.W.2d 16

(1982)(citing Commercial Union Insurance Co. of America v. Henshall, 262 Ark. 117, 553

S.W.2d 274 (1977)). This duty to defend is broader that the duty to pay damages. Henshall, 262

Ark. at 121 (1977). If there is a possibility that the injury or damages may fall within the policy

coverage, the duty to defend arises. See Home Indemnity Co. v. City of Marianna, 291 Ark. 610,

727 S.W.2d 375 (1987). Conversely, where there is no possibility that the damage alleged in the

complaint may fall within the policy coverage, there would be no duty to defend. See Murphy

Oil USA, Inc. v. Unigard Security Insurance Company, 347 Ark. 167, 61 S.W.3d 807 (2001). 

Here, the original Complaint in Zadeck v. Tri-State alleged damages resulting from TriState’s swabbing equipment coming loose underground in Zadeck’s Partnership Properties No. 1

Well and falling down the well, thus, damaging the well and rendering it incapable of

production. Looking at this Complaint, it is apparent that the damage that Zadeck alleges to its

well is underground. There is no possibility that these damages fall within the policy’s coverage

because they are clearly within the policy’s “underground resources and equipment hazard”

exclusion. Under the original Complaint, Bituminous did not have a duty to defend Tri-State

against Zadeck’s claims. Therefore, it is not responsible for any attorney fees incurred by TriState under the original Complaint. 

On August 17, 2004, Zadeck filed an Amended Complaint in its suit against Tri-State. In

its Amended Complaint, Zadeck also alleged that “although some portion of the injury to the

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Plaintiff occurred deep in the well bore of the ‘Partnership Properties #1 Well,’ substantial

injuries and damages suffered by Plaintiff took place elsewhere and on the surface.” Looking at

this Complaint, Zadeck alleges surface damage which could be outside the policy’s exclusion. If

Zadeck proves such damage, Bituminous would be liable under the policy for this surface

damage. There is a possibility that some of the allegations contained in the Amended Complaint

could fall within the policy’s coverage. Once Zadeck’s Amended Complaint was filed on

August 17, 2004, Bituminous had a duty to defend Tri-State. Therefore, Bituminous’ Motion for

Summary Judgment on the question of its duty to defend under the insurance policy in question

should be denied. 

Bituminous fulfilled its duty to defend by assuming the defense of Tri-State subject to a

reservation of rights. Once this happened, Randy Murphy, who was substituted for Tri-State’s

independent counsel, defended Tri-State in the lawsuit. Tri-States alleges that even though

Bituminous provided independent counsel to defend it in the Zadeck v. Tri-State lawsuit, it was

entitled to retain counsel of its own choice and Bituminous should be required to reimburse TriState for that counsel. Tri-State contends that its own counsel was necessary because a conflict

of interest was created by the defense being provided by Bituminous under a reservation of

rights. It is true that when there is a duty to defend under an insurance policy and there is a

conflict of interest between the insurer’s interest and that of the insured, the insurer must either

provide an independent attorney to represent the insured or pay the costs incurred by the insured

in hiring counsel of its own choice. U.S. Fidelity and Guaranty Co. v. Louis A. Roser Co., Inc.,

585 F.2d 932, 939 (8 Cir. 1978)(citing All-Star Ins. Corp. V. Steel Bar, Inc., 324 F.Supp 160, th

165 (N.D. Ind. 1971); Executive Aviation, Inc. v. National Ins. Underwriters, 16 Cal.App.3d

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799, 94 Cal.Rptr. 347, 354 (1971); Employers’ Fire Ins. Co. v. Beals, 103 R.I. 623, 240 A.2d

397, 404 (1968); Prashker v. United States Guarantee Co., 1 N.Y.2d 584, 593, 154 N.Y.S.2d

910, 917, 136 N.E.2d 871, 876 (1956)). But an insurance company is not required to do both. 

In this case, once the Amended Complaint was filed and Bituminous had a duty to

defend Tri-State, it hired Randy Murphy to represent Tri-State in the litigation with Zadeck. 

Upon entering the lawsuit, Mr. Murphy brought Indiana Petroleum into the litigation by filing a

third-party complaint against it. He entered into settlement negotiations with Zadeck on behalf

of Tri-State and eventually settled Zadeck’s claim against Tri-State for $85,000, which

Bituminous paid. There is no indication that the counsel provided by Bituminous did not

vigorously defend Tri-State in its lawsuit with Zadeck or act contrary to Tri-State’s best

interests. Under its duty to defend, Bituminous was required to provide independent counsel to

Tri-State or pay the costs incurred by it in hiring its own counsel. Bituminous fulfilled this duty

by hiring independent counsel in the form of Randy Murphy. It is not required to provide such

independent counsel and pay for Tri-State’s own attorney. Therefore, Tri-State’s Motion for

Summary Judgment on the issue of reimbursement of the fees of its own attorney should be

denied. 

The only remaining matter before the Court is Tri-State’s request for consequential

damages. Tri-State requests damages in the amount of $250,000 based upon Bituminous’

refusal to pay the claims under the policy in good faith and in a timely manner. In light of the

fact that the Court has found that there is no coverage under the insurance policy in question,

Tri-State is not entitled to such consequential damages. Therefore, Tri-State’s Counterclaim

should be dismissed as a matter of law. 

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CONCLUSION

For the reasons discussed herein above, the Court finds that Bituminous Casualty

Corporation’s Amended and Substituted Motion for Summary Judgment should be and hereby is

granted in part and denied in part. The Motion for Summary Judgment filed by Tri-State Oil

Tool Company should be and hereby is denied. The Counterclaim filed by Tri-State should be

and hereby is dismissed. An order of even date shall be issued.

IT IS SO ORDERED, this 14 day of December, 2005. th

 /s/Harry F. Barnes 

Hon. Harry F. Barnes

United States District Judge

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