Opinion ID: 152248
Heading Depth: 2
Heading Rank: 3

Heading: Exclusions and Limitations

Text: Mid-Continent raises a number of limitations and exclusions to coverage and argues that the district court erred in finding that none of them were applicable. We address each of the exclusions and limitations raised by Mid-Continent in turn.
Mid-Continent argues that the CGL Policy's Underground Equipment Limitation removes from coverage the repair costs at issue, which were incurred to remove a stuck drill pipe. Appellees assert that Mid-Continent waived this argument. Mid-Continent rebuts Appellees' assertion by stating that it raised this argument in its complaint and in its summary judgment motions. The fact that Mid-Continent raised this argument in its complaint will not save it from waiver if it failed to present this argument in its summary judgment motions. Grenier v. Cyanamid Plastics, Inc., 70 F.3d 667, 678 (1st Cir.1995) (Even an issue raised in the complaint but ignored at summary judgment may be deemed waived.). In its motions, Mid-Continent did cite the Underground Equipment Limitation, but it only argued that the limitation removed from coverage property damage to `any casing, pipe, bit or tool . . . or other drilling. . . equipment.' Mid-Continent did not argue that the limitation applied to removal of a drill pipe. Because Mid-Continent failed to raise its removal argument in the district court, the argument is waived. See id. ; see also See Martco Ltd. P'ship v. Wellons, Inc., 588 F.3d 864, 877 (5th Cir.2009) ([A]rguments not raised before the district court are waived and cannot be raised for the first time on appeal.).
Mid-Continent argues that the control costs awarded against Bay Rock are removed from coverage by an exclusion in the CGL Policy and a limitation in the Umbrella Policy (collectively, the Well Control Provision). Mid-Continent bears the burden of proving that an exclusion or limitation applies. Underwriters at Lloyd's of London v. Gilbert Tex. Constr., L.P., 245 S.W.3d 29, 33 (Tex.App.-Dallas 2007), aff'd, 2010 WL 2219645 (Tex.2010). The district court found that the Well Control Provision only removed from coverage those control costs incurred at a well in which Bay Rock had a working interest, and, because Bay Rock did not have working interest in Striebeck No. 1, the court found that the costs to control Striebeck No. 1 were covered. We review the district court's policy interpretation de novo. Finger Furniture Co. Inc. v. Commonwealth Ins. Co., 404 F.3d 312, 314 (5th Cir.2005). We hold that the district court did not err in its interpretation of the Well Control Provision. The CGL Policy and the Umbrella Policy both remove from coverage [a]ny cost or expense incurred by [Bay Rock] or at [Bay Rock's] request or by or at the request of any `Co-owner of the Working Interest' in connection with controlling or bringing under control any oil, gas, or water well. The CGL Policy defines Coowner of the Working Interest as any person or organization who is, with [Bay-Rock], a co-owner, joint venturer or mining partner in mineral properties. . . . Mid-Continent argues that the control costs at issue were incurred at Bay Rock's request because it participated in obtaining well control services from Cudd and, therefore, the control costs are removed from coverage by this provision. Under Texas law, we are required to interpret [c]ontract provisions . . . so as to avoid meanings that produce unreasonable, oppressive, or absurd results. . . . Cont'l Sav. Ass'n v. U.S. Fid. & Guar. Co., 762 F.2d 1239, 1245 (5th Cir.1985). Under Mid-Continent's interpretation, the control costs awarded against Bay Rock would have been covered if Bay Rock had refused to participate in obtaining well control services from Cudd. In other words, because Bay Rock made an affirmative attempt to mitigate the damages from the blowout, it lost coverage. Mid-Continent's interpretation creates a perverse incentive on the part of insureds like Bay Rock to do nothing when a well goes out of control in order to preserve their right to coverage. As a result, we cannot accept Mid-Continent's interpretation of the Well Control Provision because it leads to unreasonable and absurd results. Because we cannot accept Mid-Continent's interpretation, we must now determine whether the district court's interpretation of the provision was a reasonable one. The district court found that the Well Control Provision only applied to costs to control a well in which an insured has a working interest (i.e., is a co-owner). The Well Control Provision plainly refers to Bay Rock's co-owners of a working interest, and it is uncertain whether this working interest requirement was meant to apply to control costs incurred by Bay Rock or at Bay Rock's request. Under Texas law, courts must resolve . . . uncertainty [in an insurance policy] by adopting the construction that most favors the insured. See Nat'l Union Fire Ins. Co. of Pittsburgh, Pa. v. Hudson Energy Co., 811 S.W.2d 552, 555 (Tex.1991). Therefore, we must construe the Well Control Provision as the district court did in favor of Bay Rock, and, as a result, we hold that the control costs awarded against Bay Rock are covered by the Policies.
Mid-Continent argues that exclusions 2.j.(5) and 2.j.(6) in the CGL Policy exclude from coverage all the damages at issue. The district court found that these exclusions were inapplicable because they were superseded by the CGL Policy's Oil & Gas Endorsement. We review the district court's interpretation of the policy de novo. Finger Furniture Co. Inc., 404 F.3d at 314. After reviewing the terms of the policy, we conclude that these exclusions do not negate coverage here. [8] Endorsements to a policy generally supersede and control over conflicting printed terms within the main policy; however, the provisions found in the main policy and endorsement should be construed together unless doing so would negate or render superfluous the additional coverage afforded in the endorsement. See Mesa Operating Co. v. Cal. Union Ins. Co., 986 S.W.2d 749, 754-55 (Tex.App.-Dallas 1999, pet. denied). Exclusion 2.j.(5) excludes all property damage to real property that is the subject of Bay Rock's drilling operations. The Oil & Gas Endorsement provided Bay Rock with additional coverage for property damage to [a]ny formation strata or area in or through which exploration for or production of any substance is carried on. The application of exclusion 2.j.(5) would eliminate the additional coverage that Bay Rock purchased with the Oil & Gas Endorsement. Accordingly, we conclude that the district court did not err in finding that exclusion 2.j.(5) was superseded. Exclusion 2.j.(6) removes from coverage property damage to that particular part of any property that must be restored, repaired or replaced because [Bay Rock's] work was incorrectly performed on it. Exclusion 2.j.(6) has been interpreted to apply only to property damage to parts of a property that were themselves the subject of defective work by [an] insured. Mid-Continent Cas. Co. v. JHP Dev., Inc., 557 F.3d 207, 215 (5th Cir.2009). As a result, the exclusion does not bar coverage for damage to parts of a property that were the subject of only nondefective work by the insured and were damaged as a result of the defective work by the insured on other parts of the property. Id. Given this interpretation of the exclusion, we will first address whether exclusion 2.j.(6) even applies to the damages at issue. Mid-Continent argues that Bay Rock was contracted to supervise the drilling of Striebeck No. 1 as a whole, and, because the damages at issue resulted from Bay Rock's defective supervision, all property damage related to the well is excluded by 2.j.(6). Mid-Continent's argument is inconsistent with the case law and the terms of the exclusion, which restricts the exclusion to property damage to that particular part of Striebeck No. 1 that was the subject of Bay Rock's defective work. The state liability suit established that the damages at issue were incurred as a result of Bay Rock's negligent decision to drill ahead without running a true formation integrity test (`FIT'), also known as a `shoe test' or `casing seat test,' to ensure that the intermediate casing seat and surrounding formation could withstand the anticipated higher pressures as they drilled further down-hole. Bay Rock Operating Co., 298 S.W.3d at 227, 230. The state court suit shows that the intermediate casing seat and the surrounding formation were the property that was the subject of Bay Rock's defective work, and, as a result, exclusion 2.j.(6) only applies to property damage to that property; the exclusion does not apply to any resulting damage to other property. Mid-Continent does not point to any evidence that any of the costs awarded were specifically for property damage to the intermediate casing seat or the surrounding formation. [9] Consequently, we hold that exclusion 2.j.(6) does not apply to any of the damages at issue. If we accepted Mid-Continent's interpretation of 2.j.(6), as applying to any and all property damage to Striebeck No. 1, we would still find 2.j.(6) inapplicable because Mid-Continent's interpretation would cause an irreconcilable conflict between the exclusion and the additional coverage purchased by Bay Rock in the Oil & Gas Endorsement. In the Oil & Gas Endorsement, Bay Rock purchased coverage for any damage to the formation, strata, or area in which it worked, as well as coverage for all surface and subsurface property damage from a blowout. [10] The application of exclusion 2.j.(6), as interpreted by Mid-Continent, would exclude from coverage all the additional property damage coverage described within the Oil & Gas Endorsement. Accordingly, even if we accepted Mid-Continent's interpretation, we would still find exclusion 2.j.(6) inapplicable because Mid-Continent's interpretation would lead us to conclude that the exclusion was superseded. In summary, we find that the district court did not err in finding that exclusions 2.j.(5) and 2.j.(6) did not remove from coverage the damages awarded against Bay Rock.