Court Opinion

ID: 149312
Source: CourtListenerOpinion
Date Created: 2010-06-24 15:41:57+00
Date Added: 2024-06-11T15:02:14.402003
License: Public Domain

Case: 08-50370     Document: 00511151049          Page: 1    Date Filed: 06/23/2010

            IN THE UNITED STATES COURT OF APPEALS
                     FOR THE FIFTH CIRCUIT  United States Court of Appeals
                                                     Fifth Circuit

                                                  FILED
                                                                            June 23, 2010

                                       No. 08-50370                         Lyle W. Cayce
                                                                                 Clerk

ROBERT NEWHOUSE, Chapter 7 Trustee of the Mainland Drilling LP;
DALLAS DRILLING INC,

                                                   Plaintiffs - Appellants
v.

COLONY INSURANCE COMPANY,

                                                   Defendant - Appellee

                    Appeal from the United States District Court
                         for the Northern District of Texas
                               USDC No. 4:07-CV-16

Before REAVLEY, PRADO, and OWEN, Circuit Judges.
PER CURIAM:*
        This is an appeal from the district court's order holding that
Defendant/Appellee Colony Insurance Co. ("Colony") had no duty to defend
Plaintiffs/Appellants Mainland Drilling LP et al. ("Mainland") under its
insurance policy from claims brought by state-court plaintiff Chaparral Energy
L.L.C. ("Chaparral"). The district court held that Chaparral's claims fell under

        *
         Pursuant to 5TH CIR . R. 47.5, the court has determined that this opinion should not
be published and is not precedent except under the limited circumstances set forth in 5TH CIR .
R. 47.5.4.
     Case: 08-50370   Document: 00511151049       Page: 2   Date Filed: 06/23/2010

                                   No. 08-50370

an exclusion to the insurance policy that barred claims from a "co-owner of the
working interest." Finding no error, we AFFIRM.
1.      Mainland first argues that the district court's reading of the "co-owner of
        the working interest" exclusion would render coverage illusory for five
        hazards outlined in the policy, because such hazards are those typically
        faced by an owner of a mineral lease. However, the district court's reading
        of the exclusion does not bar claims from all owners of a working interest
        in a mineral lease, just one who either (a) "[p]articipates in the operating
        expense of such properties" or (b) "[h]as the right to participate in the
        control development or operations of such properties," as the term "co-
        owner of the working interest" is exclusively defined in the policy.
        Further, even if coverage for some of these hazards might not apply to an
        owner of a working interest in a mineral lease in some contexts, coverage
        for all of these hazards certainly could apply to a third party such as the
        owner of an adjacent property.        Because there remain circumstances
        under which Colony remains obligated to provide coverage for the hazards
        outlined in the policy against other classes of claimants, coverage has not
        been rendered illusory. Accord ATOFINA Petrochems., Inc. v. Cont'l Cas.
        Co., 185 S.W.3d 440, 444 (Tex. 2005) (noting that defendant's
        "interpretation that the exclusion bars all coverage when any negligence
        on the part of the premises owner is pleaded, unless the owner's
        responsibility is based solely on vicarious liability for the acts of the
        contractor, would render coverage under the endorsement largely
        illusory") (emphasis added).
2.      Mainland next argues that the district court erred in finding that
        Chaparral was a "co-owner of the working interest" because Chaparral's
        pleadings demonstrate that Chaparral neither (a) participated in the
        operating expenses of the mineral lease nor (b) retained the right to

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                                      No. 08-50370

        participate in the control and development or operations of the lease.
        Mainland is incorrect on both counts. Looking to the Daywork Agreement
        between      Mainland   and    Chaparral     (which    Chaparral    expressly
        incorporated into its petition), we see that the parties contracted for
        Chaparral to provide dozens of tools and services for the oil-drilling
        operation. Chaparral's petition further alleges that Chaparral furnished
        various materials throughout the operation when Mainland failed to do so.
        In addition, the Daywork Agreement specifically reserved to Chaparral
        the right of direction and control over the entire operation. Whether
        Chaparral ever chose to exercise that right is irrelevant for purposes of the
        insurance policy. Therefore, the district court did not err in holding that
        Chaparral met both disjunctive prongs of the term "co-owner of the
        working interest."
3.      Mainland also argues that Chaparral claimed damages both before and
        after the Daywork Agreement was in effect, thus taking some matters of
        coverage outside the policy exclusion. This argument is wholly without
        merit. Any damages claimed before the Daywork Agreement was in effect
        were also before the insurance policy was in effect, and were therefore
        necessarily excluded from coverage.          The Chaparral petition also
        demonstrates that all damages to Chaparral stem directly from
        Mainland's alleged failure to perform its duties under the Daywork
        Agreement, under which Chaparral was a "co-owner of the working
        interest."
4.      Finally, Mainland argues that even if Chaparral satisfies the definitional
        prongs of the term "co-owner of the working interest" as it appears in the
        policy, Chaparral does not satisfy the general meaning of the term.
        Specifically, Mainland argues that it owns no working interest in the well,
        and therefore Chaparral does not "co-own" anything with Mainland. The

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     mineral ownership of Mainland is irrelevant to the policy definition of "co-
     owner."    Moreover, the term "co-owner of the working interest" is
     specifically defined in the policy, and Chaparral satisfies both prongs of
     that definition. Inasmuch as there exists a tension between the policy's
     definition and any other definition, the definition in the policy controls.
     See Provident Life & Accident Ins. Co. v. Knott, 128 S.W.3d 211, 219 (Tex.
     2003) ("When terms are defined in an insurance policy, those definitions
     control the interpretation of the policy.").
AFFIRMED.

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   Case: 08-50370       Document: 00511151049         Page: 5    Date Filed: 06/23/2010

                                          No. 08-50370

PRISCILLA R. OWEN, Circuit Judge, dissenting.
      I respectfully dissent. The commercial general liability policy presently
before us contains provisions that seem to conflict, and it is ambiguous regarding
coverage of the claims made against Mainland Drilling Limited Partnership, the
insured, in the underlying litigation. I would therefore reverse and remand.
Despite the majority opinion’s protestations, that opinion’s interpretation of the
policy does indeed “render coverage under the endorsement largely illusory.” 1
                                               I
      The policy at issue, including the endorsement in particular, is not a model
of clarity. The endorsement provides that it modifies the insurance provided in
preceding sections of the policy. The endorsement then sets forth an exclusion
and an exception to the exclusion:
      A.       SECTION I – COVERAGES, COVERAGE A BODILY
               INJURY AND PRO PERTY DAM AGE LIABILITY,
               2. Exclusions is amended and the following added:

               This insurance does not apply to:

                      Oil and Gas Working Interests

                             (1)    “Property damage”:

                                    (a)      claimed by you or any “co-owner of
                                             the working interest”;

                                    (b)      incurred by or at the request of you,
                                             additional insureds or any “co-owner
                                             of the working interest”;

                                    (c)      claimed by any co-worker or
                                             additional insured of “co-owners of
                                             the working interest”; or

      1
          ATOFINA Petrochems., Inc. v. Cont’l Cas. Co., 185 S.W.3d 440, 444 (Tex. 2005).

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                                  (d)   from the blowout or cratering of a
                                        well resulting from or in connection
                                        with operations performed by you or
                                        on your behalf unless you at your
                                        own cost and expense, promptly and
                                        diligently take whatever steps are
                                        necessary or legally required of you
                                        or necessary for you or any other
                                        person to bring such well under
                                        control.

The term “co-owner of the working interest” is defined in the endorsement:
      “Co-owner of the working interest” means any person or
      organization who:

            a.      participates in the operating expense of such properties;
                    or

            b.      has the right to participate in the control, development
                    or operations of such properties.

      Immediately following the section in the endorsement containing the
exclusion of property damage claimed by “any ‘co-owner of the working interest’”,
the endorsement amends the policy limits but also appears to identify coverage
for five hazards ((a) through (e) below):
      B.    SECTION III – LIMITS OF INSURANCE is amended and the
            following added:

            Subject to 5. above, the most we will pay under Coverage A for
            “property damage” resulting from or caused by “your work” or
            “your product” included within the “products completed
            operations hazard” as described in the Declarations and
            included within one or more of the following:

                    a.      “Blowout and cratering hazards”,
                    b.      “Explosion hazard”,
                    c.      “Collapse hazard”,
                    d.      “Saline substance contamination hazard”, or

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                                     No. 08-50370

                    e.      “Underground resources and equipment hazards”

              is:

                    $250,000 Each Occurrence
                    $250,000 Aggregate

Each of the foregoing hazards is extensively defined in the endorsement.2

     2
         The endorsement provides:

      C.      SECTION V - DEFINITIONS is amended and the following added:

              1.    “Blowout and cratering hazards” means “property damage” above
                    the surface of the earth caused by or resulting from:
                    a.     an uncontrolled eruption of gas and/or oil from a well; and
                    b.     the resulting collapse or caving in of the surrounding
                           earth or structure around a well.
              2.    “Collapse hazard” includes “structural property damage” and any
                    resulting “property damage” to any other property at any time.
                                             ...
              4.    “Explosion hazard” includes “property damage” arising out of
                    blasting or explosion. The “explosion hazard” does not include
                    “property damage” arising out of the explosion of air or steam
                    vessels, piping under pressure, prime movers, machinery or
                    power transmitting equipment.
              5.    “Saline substance contamination hazard” includes “property
                    damage” resulting from or caused by the contamination of oil,
                    gas, water, mineral substances or other property by a saline
                    substance.
              6.    “Structural property damage” means the collapse of or structural
                    injury to any building or structure due to:
                    a.     grading of land, excavating, borrowing, filling, back-
                           filling, tunneling, pile driving, cofferdam work or caisson
                           work; or
                    b.     moving, shoring, underpinning, raising or demolition of
                           any building or structure or removal or rebuilding of any
                           structural support of that building or structure.
              7.    “Underground resources and equipment hazards” includes
                    “property damage” to any of the following:
                    a.     oil, gas, water or other mineral 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;

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       The majority opinion concludes that Mainland has coverage for claims
made against it by a working interest owner for property damage resulting from
all of the hazards identified in the definitions above. However, this coverage is
extremely limited in the view of the majority opinion. Coverage is available only
when the working interest owner whose property is damaged does not
participate in the expenses of operating its working interest and has no right to
participate in operations.3
       The majority opinion recognizes that its interpretation of the endorsement
results in sparse coverage.                The opinion nevertheless concludes that its
construction is the only reasonable one, asserting that the endorsement provides
coverage in at least two circumstances. One is when a working interest owner
“does not participate in the operating expense of such properties” or does not
have the right to participate in the control or operations of such properties.4
With great respect, it would be highly unusual for a working interest owner to
not participate, at all, in the operating expenses of an oil and gas working
interest that is being drilled or developed or to not have the right to participate.5

                           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 or beneath
                                   the surface of any body of water.
       3
           Ante, at ¶ 1.
       4
           Id.
       5
         A working interest is “[t]he operating interest under an oil and gas lease. The owner
of the working interest has the exclusive right to exploit the minerals on the land.” 8 HOW ARD
R. WILLIAM S & CHARLES J. MEYERS , OIL AND GAS LAW , MANUAL OF TERM S 1191 (2000); see also
Broesche v. Jacobson, 218 S.W.3d 267, 272 n.3 (Tex. App.–Houston [14th Dist.] 2007, pet.
denied) (citing Williams & Meyers’s treatise for its definition of working interest and noting
that “[c]ourts in Texas and around the country have relied on this treatise when analyzing the
meaning of a working interest in particular cases”). “Under an oil and gas lease, operating
expenses are the burden of the working interest in the property and a royalty interest is free
of the burden of such expenses.” 8 WILLIAM S & MEYERS , supra, at 730; see also Johnston v.
Am. Cometra, Inc., 837 S.W.2d 711, 717 (Tex. App.–Austin 1992, writ denied) (holding that the

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I submit that such a circumstance would be extremely rare, if not non-existent.
Of course, there may be instances in which a working interest owner opts out of
participation in the drilling or re-working of a particular well under a joint
operating agreement that permits that option.                   But even under those

“appellants [were] the parties whom the take-or-pay obligation [was] intended to compensate”
because the “appellants [were] working-interest owners who, unlike lessors, share the risk and
expense of exploration, production and development”).
        “When a leasehold is concurrently owned, normally the concurrent owners, before
beginning exploration and development of the premises, enter into an operating agreement
specifying the rights and liabilities of the parties and designating an operator. Such
agreements typically provide for contribution by nonoperators to expenses incurred and that
the operator will, from time to time, bill the nonoperating concurrent owners for their share
of the costs.” 2 HO W ARD R. WILLIAM S & CHARLES J. MEYERS , OIL AND GAS LAW § 503.2.
Typical provisions of a joint operating agreement include “requiring the operator to discharge
all costs and expenses incurred and the nonoperators to contribute proportionately to such
costs and expenses as billed to them by the operator.” Id. “If the operating agreement does
not include an express promise by the nonoperators to contribute to the expenses of
acquisition, exploration, development and operation of the premises, the operator usually is
not entitled to reimbursement from the nonoperating concurrent owner except out of the
proceeds of exploration, development and operation.” Id.
        The term “joint exploration activities” is
               used to describe the situation of a jointly owned lease or block of
               acreage which contemplates the exploration and drilling of
               multiple wells, each party paying for its own costs and being
               entitled to its pro rata share of income and operating expenses.
               This joint form of oil and gas activity is primarily conducted via
               the form of a “joint operating agreement” in which the various
               participants appoint an operator who controls the day-to-day
               operations and has authority to make decisions affecting the
               other interest owners in nonmajor areas of operations.
8 WILLIAM S & MEYERS , supra, at 540 (internal quotation marks omitted). A “joint operating
agreement” is
               [a]n agreement between or among interested parties for the
               operation of a tract or leasehold for oil, gas and other minerals.
               This type of agreement is frequently entered into before there has
               been any development. Typically the agreement provides for the
               development of the premises by one of the parties for the joint
               account. The parties to the agreement share in the expenses of
               the operations and in the proceeds of development, but the
               agreement normally is not intended to affect the ownership of the
               minerals or the rights to produce, in which respects, among
               others, the joint operating agreement is to be distinguished from
               a unitization agreement and from a mining partnership.
Id. at 541.

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                                      No. 08-50370

circumstances, the working interest owner who is given the right to opt out has
the right to participate.
      The other circumstance in which the majority opinion asserts that the
endorsement at issue could apply is “to a third party such as the owner of an
adjacent property.”6         In such a situation, the majority opinion concludes,
“coverage for all of these hazards [the five listed in the endorsement] certainly
could apply.”7 The opinion does not explain whether damage sustained by the
third-party working interest owner of the adjacent property would be covered if
that owner participated in the expense of operating its working interest or had
the right to participate in those operations. But it seems inescapable that the
majority opinion’s definition of “co-owner of the working interest” must be the
same under this endorsement, regardless of whether the working interest that
is damaged is one that is the subject of a drilling contract with Mainland or
instead is a working interest in an adjoining property damaged by Mainland’s
operations. The fact remains that the coverage that Colony Insurance Company
now asserts that it provided, and extensively defined, is virtually meaningless,
if the majority opinion’s construction of the endorsement were correct.
      For example, if Mainland’s negligence allegedly causes damage to a well
and casing on an adjoining property,            Mainland has no coverage for, and
therefore no right to a defense against, claims made by a working interest owner
in that adjoining property who bears some or all of the cost of exploring and
developing the working interest. But Mainland would have coverage and a right
to a defense, the majority opinion opines, if, in the unlikely event, Mainland is
sued by a working interest owner in the adjoining property who has no right to
participate in operations and in fact did not participate.

      6
          Ante, at ¶ 1.
      7
          Id.

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                                  No. 08-50370

      I respectfully submit that the majority opinion’s interpretation of the
endorsement not only provides Mainland with an exceedingly odd extension of
insurance coverage, the interpretation is an unreasonable one.
                                       II
      Even assuming that the majority’s interpretation were reasonable, another
reasonable interpretation of the policy that Colony Insurance Company issued
exists. That is that the exclusion in the endorsement regarding co-owners of a
working interest applies only when Mainland is performing work on property in
which it or an additional insured owns a working interest. The endorsement
makes clear that insurance is not extended to property damage “claimed by
[Mainland] or any “co-owner of the working interest.” The modifier “co-” is
repeated in succeeding subsections of the endorsement’s exclusion and would be
superfluous if any and all owners of the working interest, not just those who
were co-owners of a working interest along with Mainland or an additional
insured, were intended to be included within the exclusion.
      This construction of the endorsement’s exclusion is also supported by the
use of the term “such properties” in the definition of “co-owner of the working
interest.” The reference to such properties relates back to property damage
“claimed by [Mainland] or any ‘co-owner of the working interest’” or “incurred by
or at the request of [Mainland], additional insureds or any ‘co-owner of the
working interest’. . . .” “[S]uch property” is not a reference to any and all
property on which damage may occur due to Mainland’s operations but rather
property damage incurred on property in which Mainland or an additional
insured has a working interest.
      This is a sensible construction of the policy. It insures that Mainland has
coverage when it is pursuing drilling operations as a contractor, which is the

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                                      No. 08-50370

business for which the commercial general liability policy was obtained.8 The
policy does not insure Mainland or its co-interest owners when Mainland is
drilling or developing an oil and gas property for itself.
       Under Texas law, if an insurance contract is susceptible to more than one
reasonable interpretation, any ambiguity is resolved in favor of coverage. 9 I
would therefore remand this case to the district court.
                                            III
       The policy issued to Mainland has other ambiguities. This can be seen
when the policy as a whole is examined.
       To determine what Mainland’s policy provides regarding coverage of the
claims against it in the underlying suit, the logical starting point is the
Declarations pages. As already noted, the “Common Policy Declarations” page
reflects that Mainland’s “Business Description” is “oil/gas well driller”, and the
“program code” of the policy is “98C–oil & gas”. The “Commercial General
Liability Coverage Part Declarations” page reflects that Mainland was charged
two premiums for two “classification[s].” The first classification is “Oil or gas
wells–drilling or redrilling–,” for which Mainland was charged an annual
premium of $16,800, and the second classification is “installation or recovery of
casing,” for which Mainland was charged an annual premium of $4,200, for a
total premium of $21,000. The “Limits of Insurance” section of this Declarations
page lists dollar limits of insurance in six categories, including “General
Aggregate Limit (Other Than Products–Completed Operations)”, with a

       8
       The “Common Policy Declarations” page of the policy issued to Mainland reflects that
Mainland’s “Business Description” is “oil/gas well driller”.
       9
        Don’s Bldg. Supply, Inc. v. OneBeacon Ins. Co., 267 S.W.3d 20, 23 (Tex. 2008) (“If an
insurance contract uses unambiguous language, we must enforce it as written. If, however,
a contract is susceptible to more than one reasonable interpretation, we will resolve any
ambiguity in favor of coverage.”).

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$2,000,000 limit, and “Products Completed Operations Aggregate Limits”, with
a limit of $2,000,000. The limit for “Each Occurrence” is $1,000,000.10
       The term “Products-completed operations hazard” is defined in the main
body of the policy, and that definition would appear to exclude the claims made
against Mainland in the underlying suit because Mainland had allegedly
abandoned the work it was performing. The definition in the policy states in
pertinent part:
       16.     “Products-completed operations hazard”:

               a.     Includes all “bodily injury” and “property damage”
                      occurring away from premises you own or rent and
                      arising out of “your product” or “your work” 11 except:
                                           ...

                      (2)    Work that has not yet been completed or
                             abandoned. . . .12

               b.     Does not include “bodily injury” or “property damage”
                      arising out of:
                                         ...

                      (2)    The existence of tools, uninstalled equipment or
                             abandoned or unused materials; . . . .

       The endorsement at issue, entitled “OIL AND GAS COVERAGE
LIMITATION”, states that it modifies the insurance that is otherwise being
provided.      This endorsement then sets forth the exclusion quoted above
regarding “Oil and Gas Working Interests” and “Property damage” claimed by

      10
           There is also a $100,000 limit for “Damage To Premises Rented To You.”
      11
         The policy defines “Your work” to include “Work or operations performed by you or
on your behalf. . . .”
      12
         Even this exclusion is arguably ambiguous due to the placement of the word “yet”.
Grammatically, the policy does not apply to property damage arising out of “[w]ork that has
not yet been completed” or “[w]ork that has not yet been . . . abandoned.”

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Mainland and “any ‘co-owner of the working interest.’” That exclusion appears
to except from the exclusion property damage “from the blowout or cratering of
a well resulting from or in connection with operations performed by [Mainland]
or on [Mainland’s] behalf unless [Mainland] at [its] own cost and expense,
promptly and diligently take[s] whatever steps are necessary or legally required
of [Mainland] . . . to bring such well under control.” From this section of the
policy, it is fair to conclude that Mainland has coverage from claims for property
damage resulting from blowouts or cratering, provided Mainland responds
appropriately to the occurrence.
      However, the next section of the endorsement, regarding “LIMITS OF
INSURANCE”, seems in tension with, if not in direct conflict with, the foregoing
exclusion and its limited exception for blowouts and well cratering.           The
“LIMITS OF INSURANCE” provision identifies property damage hazards in
addition to the blowout or cratering of a well, which are the only exceptions to
the exclusions contained in the first section of the endorsement, if that exclusion
applies in circumstance in which Mainland is not the owner or a co-owner of the
working interest that is damaged. In addition to blowout and cratering hazards,
the “LIMITS OF INSURANCE” section identifies “explosion”, “collapse”, “saline
substance contamination”, and “underground resources and equipment” hazards.
The limits of liability for property damage resulting from each of these hazards
is reduced to $250,000 for each occurrence and $250,000 in the aggregate, as
compared to the higher limits of $1,000,000 and $2,000,000, respectively, shown
on the Declarations page for “Products Completed Operations Aggregate Limit.”
The endorsement then adds definitions of each of the hazards identified in the
“LIMITS OF INSURANCE” section of the endorsement to the definitions section
of the main policy. (These definitions are quoted in part I of this opinion, above,
at footnote 2.) It is apparent that hazards are identified other than those that
might occur during a blowout or cratering of a well. One example is “Structural

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property damage,” defined as “the collapse of or structural injury to any building
or structure due to . . . grading of land, excavating, . . . or . . . [m]oving, shoring,
underpinning, raising or demolition of any building or structure. . . .” Another,
pertinent to the claims made against Mainland in the underlying suit, is
property damage to “any well, hole, formation, strata or area in or through which
exploration for or production of any substance is carried on. . . .”
      Why would the endorsement take such great pains to define various
potential hazards to an oil and gas working interest and place separate dollar
limits of liability on these hazards if all but two of them were expressly excluded
by the first section of the endorsement? To the extent that the section in the
endorsement limits hazards and the succeeding sections expand them, the policy
is ambiguous.
      The apparent conflict between the exception of only property damage from
a blowout or cratering from the exclusions set forth in the first section of the
endorsement and the identification of other hazards in the immediately
succeeding sections of the endorsement does not appear to be the only conflict.
As discussed earlier, the definition of “Products-completed operations hazard”,
contained in the main body of the policy, includes only damage to property
arising out of Mainland’s completed work. It specifically excludes “[w]ork that
has not yet been completed.” Yet, both the definition of “[p]roperty damage” in
the exclusion section of the endorsement and the hazards identified in the
section regarding “LIMITS OF INSURANCE” in the endorsement, indicate that
there is coverage for certain property damage that results from the blowout or
cratering of a well. A blowout or cratering of a well would seem to arise in many
instances before Mainland completed its work. More pertinent to the present
dispute is the question of whether “[u]nderground resources and equipment
hazards” are only covered if the property damage occurs after Mainland’s work
is completed, but are not covered if the property damage occurs before

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Mainland’s work is completed or after Mainland abandoned its work under a
contract.
                                       IV
      It is far from clear precisely what coverage was extended to Mainland for
property damage arising out of its work as a driller of oil and gas wells. I must
conclude that the policy is ambiguous in this regard. I would therefore remand
this case to the district court for further proceedings consistent with Texas law.

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