No Cover for Faulty Workmanship

Breach of Contract is not an Occurrence

In American Home Assurance Company v. Superior Well Services, Inc., No. 22-1498, United States Court of Appeals, Third Circuit (May 31, 2023) American Home Assurance Co. ("American Home") appealed the District Court's order grant of summary judgment for policy holder Superior Well Services, Inc. ("Superior").

BACKGROUND
The Underlying State Law Claim

U.S. Energy contracted with Superior for hydraulic fracking services to extract natural gas from wells owned by U.S. Energy. In November 2007, Superior notified its insurance provider, American Home, about the potential claim for damage to wells. In February 2008, American Home agreed to provide Superior with defense counsel, but it also sent Superior a letter reserving its right to contest insurance coverage.

U.S. Energy sued Superior in New York state court, alleging that Superior had damaged 97 of its wells. After trial the jury found that Superior breached the contract by failing to perform services with reasonable care, skill and diligence.  The jury found Superior had damaged 53 of the 97 wells and specified that Superior "fail[ed] to perform its contract with U.S. Energy in a workman like manner" and that this "failure" was "a substantial factor in causing damage to the U.S. Energy wells[.]" Accordingly, it awarded U.S. Energy $6.16 million, a figure that was increased to approximately $13.18 million after the state court tabulated interest.

THE DISPUTE BETWEEN SUPERIOR AND AMERICAN HOME

Superior's policy provided coverage for "property damage" arising out of an "occurrence." The policy defined "property damage" as both "[p]hysical injury to tangible property, including all resulting loss of use of that property."

Superior also purchased an "underground resources and equipment coverage" ("UREC") endorsement that amended the CGL policy to provide additional coverage "against risks associated with well-servicing operations[.]" Specifically, the endorsement "added" coverage "with respect to 'property damage' included within the 'underground resources and equipment hazard' arising out of the operations performed by [Superior] or on [Superior's] behalf[.]"

American Home sued seeking a declaratory judgment that Superior's policy does not indemnify Superior for any damages that might be awarded to U.S. Energy and which were caused by Superior's breach of contract.

THE DISTRICT COURT'S OPINION

The District Court granted summary judgment for Superior and, by extension, for U.S. Energy, and it ordered American Home to indemnify Superior for the state court judgment. The Court concluded that each of the 53 damaged wells gave rise to a separate occurrence, triggering an independent coverage limit for each respective well.

DISCUSSION

The definition of "accident" required to establish an "occurrence" under the policies cannot be satisfied by claims based upon faulty workmanship. Such claims simply do not present the degree of fortuity contemplated by the ordinary definition of "accident" or its common judicial construction in this context.

To hold otherwise would be to convert an insurance policy into a performance bond. The Court was unwilling to do so, especially since such protections are already readily available for the protection of contractors.

The UREC endorsement reinstates coverage by providing that the exclusion "does not apply to any 'property damage' included within the 'underground resources and equipment hazard[.]'" Notably, to trigger coverage, the endorsement expressly requires "property damage," which, under the underlying policy, is covered only if it "is caused by an 'occurrence.'" The endorsement incorporates the "occurrence" requirement by way of the "property damage" requirement.

No provision in the endorsement implicitly, let alone expressly, repudiates the "occurrence" requirement.

The Third Circuit Court of Appeal concluded that the endorsement does not displace the underlying policy's occurrence requirement and reversed the District Court's summary judgment order and remanded the case to the District Court with instructions to enter judgment for American Home.

ZALMA OPINION

The key to every liability insurance policy is that for coverage to apply the loss must be fortuitous, that is neither expected nor intended by the insured, and must fit within the generally understood meaning of the term "accident." Under no definition of fortuity is faulty workmanship by the insured. Since the jury found the insured responsible for its breach of contract by means of faulty workmanship there was no occurrence and no coverage

(c) 2023 Barry Zalma & ClaimSchool, Inc.

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