Opinion
2:16cv1065
02-18-2022
AMERICAN HOME ASSURANCE COMPANY, Plaintiff v. SUPERIOR WELL SERVICES, INC., Defendant U.S. Energy Development Corporation, Intervenor Defendant
Joseph Grasso, Susan M. Kennedy, Wiggin and Dana LLP, Philadelphia, PA, P. Brennan Hart, Pietragallo Gordon Alfano Bosick & Raspanti, Pittsburgh, PA, for Plaintiff. Michael G. Connelly, Ralph C. Surman, Jr., Troutman Pepper Hamilton Sanders LLP, Pittsburgh, PA, for Defendant. Robert J. Lane, Jr., William A. Ciszewski, Pro Hac Vice, Hodgson Russ LLP, Buffalo, NY, for Intervenor Defendant.
Joseph Grasso, Susan M. Kennedy, Wiggin and Dana LLP, Philadelphia, PA, P. Brennan Hart, Pietragallo Gordon Alfano Bosick & Raspanti, Pittsburgh, PA, for Plaintiff.
Michael G. Connelly, Ralph C. Surman, Jr., Troutman Pepper Hamilton Sanders LLP, Pittsburgh, PA, for Defendant.
Robert J. Lane, Jr., William A. Ciszewski, Pro Hac Vice, Hodgson Russ LLP, Buffalo, NY, for Intervenor Defendant.
MEMORANDUM OPINION
David Stewart Cercone, Senior United States District Judge
I. INTRODUCTION
Plaintiff, American Home Assurance Company ("AHAC"), filed an Amended Complaint for Declaratory Judgment seeking a declaration that it is not obligated to defend or indemnify Defendant, Superior Well Services, Inc. ("Superior"), in an underlying lawsuit brought against Superior Well by U.S. Energy Development Corporation ("U.S. Energy"), the Intervenor herein. Alternatively, AHAC seeks a declaration that the claim set forth in the underlying lawsuit constitutes a single occurrence under the insurance policies at issue. U.S. Energy has asserted a counterclaim for a declaration that AHAC has a duty to indemnify Superior for the judgment in the underlying lawsuit under insurance policies issued by AHAC. Each of the parties has filed a motion for summary judgment. Responses have been filed and the motions are now before the Court.
The parties agree that because the underlying lawsuit has concluded, a declaration regarding AHAC's duty to defend is moot.
II. STATEMENT OF THE CASE
Insurance Policies at Issue
Superior purchased four (4) primary-level commercial general liability ("CGL") insurance policies from AHAC for the policy years 2004-2005, 2005-2006, 2006-2007, and 2007-2008 (the "Policies"). Superior's Statement of Material Facts ("Superior's SMF") ¶ 10. Each policy is numbered GL360-23-93 and each policy has a period dated August 1 through August 1. Id. The terms of the Policies are not disputed and, subject to differences in limits of liabilities and deductibles, are essentially the same. AHAC Statement of Material Facts ("AHAC SMF") ¶ 47. Each of the Policies includes identical "Coverage A" sections, which provide Superior coverage for "Bodily Injury" and "Property Damage" that occurs during a policy period and caused by an "occurrence." Superior's SMF ¶ 16; U.S. Energy's Concise Statement of Material Facts ("U.S. Energy's CSMF") ¶ 39. In the Policies, "property damage" is defined as "physical injury to tangible property, including all resulting loss of use of that property", as well as "loss of use of physical property that is not physically injured." U.S. Energy's CSMF ¶ 39. "Occurrence" is defined as "an accident, including continuous or repeated exposure to substantially the same general harmful conditions." Id. ; Superior's SMF ¶ 20.
Importantly, as part of each of the Policies purchased from AHAC, Superior also purchased "Underground Resources and Equipment Coverage" ("UREC") endorsements. Superior's SMF ¶ 31. Superior paid an additional premium to have the UREC endorsements appended to the standard-form policies. Superior's SMF ¶ 37.
Each of the endorsements of the Policies specifically read as follows:
THIS ENDORSEMENT CHANGES THE POLICY. PLEASE READ IT CAREFULLY.
UNDERGROUND RESOURCES AND EQUIPMENT COVERAGE
This endorsement modifies insurance provided under the following:
COMMERCIAL GENERAL LIABILITY COVERAGE PART
See U. S. Energy Appx. Ex. 2, p. 33 (AHA 081082). The UREC also specifically states:
The following provisions are added with respect to "property damage" included within the "Underground resources and equipment hazard" arising out of the operations performed by you or on your behalf ...
The UREC endorsements also include a "Description of Operations". U. S. Energy Appx. Ex. 2, p. 33 (AHA 081082).
... the Underground Resources and Equipment Hazard Property Damage Aggregate shown in the Schedule or in the Declarations as subject to the endorsement is the most we will pay under Coverage A for the sum of damages because of all "property damage" included within the "underground resources and equipment hazard" and arising out of operations in connection with any one well.
Id. (Emphasis added).
The UREC endorsements provide a separate "aggregate limit" for "Underground Resources and Equipment Hazard Property Damage," subject to the aggregate limits of the Policies. Superior's SMF ¶ 39. The UREC endorsements define the "Underground resources and equipment hazard" as follows:
2. "Underground resources and equipment hazard" 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;
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.
Superior's SMF ¶ 40; U.S. Energy's CSMF ¶ 44; AHAC SMF ¶ 55.
The Policies also contain a Contractual Liability exclusion, which, subject to certain specific exceptions, precludes coverage for: " ‘Bodily injury’ or ‘property damage’ for which the insured is obligated to pay damages by reason of the assumption of liability in a contract or agreement." AHAC SMF ¶ 51.
The Policies also contain an "Impaired Property" exclusion. This exclusion provides that the Policies do not cover:
"Property damage" to "impaired property" or property that has not been physically injured, arising out of:
(1) A defect, deficiency, inadequacy or dangerous condition in "your product" or "your work"; or
(2) A delay or failure by you or anyone acting on your behalf to perform a contract or agreement in accordance with its terms.
AHAC SMF ¶ 52; U.S. Energy's CSMF ¶ 41.
"Impaired Property" is further defined in the Policies as:
tangible property ... that cannot be used or is less useful because:
a. It incorporates "your product" or "your work" that is known or thought to be defective, deficient, inadequate or dangerous; or
b. You have failed to fulfill the terms of a contract or agreement;
If such property can be restored to use by:
a. the repair, replacement, adjustment or removal of "your product" or "your work"; or
b. Your fulfilling the terms of the contract or agreement.
AHAC SMF ¶ 53; U.S. Energy's CSMF ¶ 42.
Underlying Action
U.S. Energy owned interests in certain natural gas wells in western New York. U.S. Energy's CSMF ¶ 7. Superior was a natural gas well servicing company engaged in a number of well-servicing operations, including hydraulic fracturing or "fracking". Superior's SMF ¶ 1. In or around 2005, U.S. Energy hired Superior to perform fracking services for its wells. U.S. Energy's CSMF ¶ 8.
Fracking is a multi-step process by which an underground geological formation is fractured by injecting fracking chemicals into the rock formation under high pressure, allowing the natural gas or oil trapped inside the formation to escape to the surface. U.S. Energy's CSMF ¶ 1; Superior's SMF ¶ 3. Once the rock formation has been fractured, a gel-like combination of sand and fluids is pumped into the well to hold the fractures open. U.S. Energy's CSMF ¶ 2; Superior's SMF ¶ 4. After the fracking chemicals are introduced to a well, a "breaker" is subsequently applied to dissolve the fracking gel, lowering its viscosity, and allowing the water and gel to flow back out of the formation, leaving the sand behind to keep the fractures open. U.S. Energy's CSMF ¶ 3; Superior's SMF ¶ 5. The open fractures act as a conduit through the formation to the wellbore allowing the oil or natural gas to be collected. U.S. Energy's CSMF ¶ 3; Superior's SMF ¶ 6.
From June 2005 to October 2007, Superior performed fracking services on natural gas wells owned by U.S. Energy in the state of New York. U.S. Energy's CSMF ¶ 4. All work was performed pursuant to a contractual arrangement between Superior and U.S. Energy which generally consisted of the bid documents and pricing information submitted by Superior to U.S. Energy, along with negotiation communications. AHAC SMF ¶ 3; Superior's Response ¶ 3; U.S. Energy's Response ¶ 3. These documents, however, did not set forth any terms related to the amounts of each product(s) that would be used in each well or the amount of natural gas that would be produced from each well. Superior's Response ¶ 3; U.S. Energy's Response ¶ 3. Further, the contract documents contained no specifications regarding the work to be performed by Superior. Id.
Superior used fracking fluids jointly designed by Superior and Kroff Chemical Company, LLC ("Kroff") (the "SAS Products") on the U.S. Energy wells. Superior's SMF ¶ 73. The fracking products Superior utilized at the U.S. Energy wells included the gel fracking fluids SAS-1, SAS-2, and CW-3K, and the "breaker" products SAS Breaker 2 and OB-Fe Breaker. Superior's SMF ¶ 74; U.S. Energy's CSMF ¶ 10.
In late-October of 2007, U.S. Energy first advised Superior that it believed Superior may have damaged certain of U.S. Energy's wells alleging that Superior's fracking operations damaged U.S. Energy's well formations, rendering them incapable of producing expected levels of natural gas. Superior's SMF ¶¶ 75 & 76. In November 2007, Superior provided notice to AHAC of a potential insurance claim arising out of Superior's services on U.S. Energy's wells (the "Underlying Claim"). AHAC SMF ¶ 4. On February 6, 2008, AHAC sent Superior a reservation of rights letter regarding the Underlying Claim, reserving all its rights under the terms of the Policies. AHAC SMF ¶ 7.
Between November 2007 and August 2010, Superior and U.S. Energy engaged in intermittent discussions in attempt to resolve the Underlying Claim, including discussions about re-fracturing and/or re-drilling certain wells. AHAC SMF ¶ 10. Superior attempted to re-fracture and otherwise treat the alleged damaged wells, but was unable to fix the well damage. Superior's SMF ¶ 121. Superior informed AHAC that the Underlying Claim was unlikely to be resolved amicably and that a lawsuit was possible, and AHAC informed Superior that it would continue to defend the claim subject to the 2008 reservation of rights. AHAC SMF ¶ 11.
On September 7, 2010, U.S. Energy filed a Complaint against Superior in the New York Supreme Court alleging generally that Superior's fracking products did not function properly in several of U.S. Energy's wells causing the wells to "be incapable of producing the volume of natural gas ... they would have otherwise been capable of producing." Superior's SMF ¶ 125. On September 28, 2010, Superior removed the case to the United States District Court for the Western District of New York. Superior's SMF ¶ 127. On July 22, 2013, U.S. Energy filed a Third Amended Complaint asserting five (5) causes of action: (1) Breach of Contract; (2) Subordination of Payments; (3) Promissory Estoppel; (4) Unjust Enrichment; and (5) Negligence. AHAC SMF ¶ 17. In February, 2015, the District Court determined that certain entities on whose behalf U.S. Energy had brought the lawsuit were non-diverse; accordingly, the case was remanded to the New York state court. Superior's SMF ¶ 161.
Following cross-motions for summary judgment, the court issued a ruling on the motions on March 2, 2016. AHAC SMF ¶ 22; Superior's SMF ¶ 167. The court granted U.S. Energy's motion for partial summary judgment and held that a contract existed between the parties, leaving the issue of whether the contract had been breached for the jury. Specifically, the trial court found that the contract consisted of: Superior's bid proposal, containing a description of the services and products to be used together with pricing information; the representations made by representatives of Superior and U. S. Energy; and U. S. Energy's acceptance of Superior's offer by hiring Superior to perform fracking services and paying Superior's invoices. See Superior Appx. Ex. 21, pp. 4,5 &7.
The cross-motions with respect to the other causes of action were denied. AHAC SMF ¶ 24; Superior's SMF ¶ 167. On interlocutory appeal, the Appellate Division modified the underlying court's ruling and dismissed the causes of action for Promissory Estoppel and Unjust Enrichment because a valid and enforceable contract existed between the parties. AHAC SMF ¶ 26. The Appellate court also affirmed the trial court's rejection of the economic loss doctrine, holding that "the allegedly negligent fracking operations caused damage to the wells themselves, thus rendering the economic loss doctrine inapplicable." Superior's SMF ¶ 172.
The underlying action was tried before a jury in April and May 2018. AHAC SMF ¶ 28; Superior's SMF ¶ 177. Prior to submitting the matter to the jury, the court dismissed the negligence claim against Superior, specifically holding that U.S. Energy "failed to present any evidence establishing that Superior owed it a legal duty independent of the contract." AHAC SMF ¶ 29. The court also dismissed the negligent misrepresentation claim finding U.S. Energy presented no evidence in support of the claim. AHAC SMF ¶ 30. The court further determined that U.S. Energy's "breach of contract" claim was reduced to factual issues of "whether Superior fractured [U.S. Energy's] wells to a reasonable standard of care and/or whether Superior executed the contract in a workmanlike manner," rather than whether Superior actually breached a term of its agreement with U.S. Energy. Superior's SMF ¶ 185. The trial court dismissed U.S. Energy's claim for "lost profits or lost revenue," stating "there's no evidence that Superior contracted to guarantee profits" and "plaintiff is seeking compensation for damage to its wells." Superior's SMF ¶ 186.
At the conclusion of trial, the jury entered a verdict for U.S. Energy concluding that Superior failed to perform its contract with U.S. Energy in a workman like manner, and that such failure was a substantial factor in causing damage to U.S. Energy's wells. U.S. Energy's CSMF ¶ 30. The New York trial court, New York appellate court, and the jury all found that the wells themselves were physically damaged and that U.S. Energy was not simply attempting to recover "lost profits" or "economic loss." Superior's SMF ¶ 184.
The jury concluded that Superior damaged 53 of U.S. Energy's wells, and awarded U.S. Energy $6,160,000. U.S. Energy's CSMF ¶ 31. After tabulation of interest on U.S. Energy's award, a judgment in favor of U.S. Energy was entered on January 9, 2019 in the total amount of $13,178,963.06. U.S. Energy's CSMF ¶ 32. The judgment sets forth the particular amount of damages attributable to each U.S. Energy well that Superior improperly fracked and the associated interest. Id.
AHAC denied coverage of the claim based upon the jury verdict, and the judgment in the Underlying Suit has not been satisfied by Superior.
III. LEGAL STANDARD FOR SUMMARY JUDGMENT
Pursuant to Rule 56(c) of the Federal Rules of Civil Procedure, summary judgment shall be granted when there are no genuine issues of material fact in dispute and the movant is entitled to judgment as a matter of law. To support denial of summary judgment, an issue of fact in dispute must be both genuine and material, i.e. , one upon which a reasonable fact finder could base a verdict for the non-moving party and one which is essential to establishing the claim. Anderson v. Liberty Lobby , 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). When considering a motion for summary judgment, the court is not permitted to weigh the evidence or to make credibility determinations but is limited to deciding whether there are any disputed issues and, if there are, whether they are both genuine and material. Id. The court's consideration of the facts must be in the light most favorable to the party opposing summary judgment and all reasonable inferences from the facts must be drawn in favor of that party as well. Whiteland Woods, L.P. v. Township of West Whiteland , 193 F.3d 177, 180 (3d Cir. 1999), Tigg Corp. v. Dow Corning Corp. , 822 F.2d 358, 361 (3d Cir. 1987).
When the moving party has carried its burden under Rule 56(c), its opponent must do more than simply show that there is some metaphysical doubt as to the material facts. See Matsushita Elec. Indus. Co. v. Zenith Radio Corp. , 475 U.S. 574, 586, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986). In the language of the Rule, the nonmoving party must come forward with "specific facts showing that there is a genuine issue for trial." FED. R. CIV. P 56(e). Further, the nonmoving party cannot rely on unsupported assertions, conclusory allegations, or mere suspicions in attempting to survive a summary judgment motion. Williams v. Borough of W. Chester , 891 F.2d 458, 460 (3d Cir. 1989) (citing Celotex Corp. v. Catrett , 477 U.S. 317, 325, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986) ). The non-moving party must respond by pointing to sufficient cognizable evidence to create material issues of fact concerning every element as to which the non-moving party will bear the burden of proof at trial. Simpson v. Kay Jewelers, Div. Of Sterling, Inc. , 142 F. 3d 639, 643 n. 3 (3d Cir. 1998), quoting Fuentes v. Perskie , 32 F.3d 759, 762 n.1 (3d Cir. 1994).
Under Pennsylvania law it is well-established that the interpretation of an insurance policy is a matter of law that may be properly resolved at summary judgment. Nationwide Mut. Ins. Co. v. Nixon , 453 Pa.Super. 70, 682 A.2d 1310, 1313 (1996).
IV. DISCUSSION
Under Pennsylvania law, interpretation of an insurance contract is a question of law that is properly decided by the court. Gardner v. State Farm Fire and Cas. Co. , 544 F.3d 553, 558 (3d Cir. 2008) (citing Donegal Mut. Ins. Co. v. Baumhammers , 595 Pa. 147, 938 A.2d 286, 290 (2007) ); Liberty Mut. Ins. Co. v. Treesdale, Inc. , 418 F.3d 330, 334 n.8 (3d Cir. 2005) ; Reliance Ins. Co. v. Moessner , 121 F.3d 895, 900 (3d Cir. 1997). The Court must interpret the plain language of the contract read in its entirety, giving effect to all its provisions. Am. Auto. Ins. Co. v. Murray , 658 F.3d 311, 320 (3d Cir. 2011). Moreover, when interpreting an insurance contract, the court must determine the intent of the parties "as manifested by the language of the written agreement." Travelers Cas. & Sur. Co. v. Castegnaro , 565 Pa. 246, 772 A.2d 456, 459 (2001).
The guiding principle in interpreting an insurance contract is to effectuate the reasonable expectations of the insured. Reliance Ins. Co. v. Moessner , 121 F.3d 895, 903 (3d Cir. 1997) (citations omitted). Under Pennsylvania law, even if the terms of the insurance contract are clear and unambiguous, the insured's reasonable expectations may prevail over the express terms of the contract. Bensalem Twp. v. Int'l Surplus Lines Ins. Co. , 38 F.3d 1303, 1309 (3d Cir. 1994). Nonetheless, the language of the insurance contract itself serves as the best evidence of the parties’ reasonable expectations. Safe Auto Ins. Co. v. Berlin , 991 A.2d 327, 331 (Pa. Super. 2010). Where the language of the policy is clear and unambiguous, the court must give effect to the plain language of the agreement. UPMC Health System v. Metro. Life Ins. Co. , 391 F.3d 497, 502 (3d Cir. 2004). When an ambiguity exists in a provision of an insurance policy, the provision must be construed in favor of the insured and against the insurer. Meyer v. CUNA Mut. Ins. Soc'y , 648 F.3d 154, 163-164 (3d Cir. 2011) ; Med. Protective Co. v. Watkins , 198 F.3d 100, 103 (3d Cir. 1999) ; St. Paul Fire & Marine Ins. Co. v. Lewis , 935 F.2d 1428, 1431 (3d Cir. 1991).
An insurer is required to indemnify only where the insured is held liable for a claim actually covered by the policy. USX Corp. v. Adriatic Ins. Co. , 99 F. Supp. 2d 593, 611 (W.D. Pa. 2000) (citing Pacific Indemnity Co. v. Linn , 766 F.2d 754 (3d Cir. 1985)) ; see also Winner International Corp. v. Continental Casualty Co. , 889 F. Supp. 809, 816 (W.D. Pa. 1994) ("While an insurer must defend its insured if the complaint alleges conduct that potentially falls within the scope of the policy, it must indemnify its insured only if liability is found for conduct that actually falls within the scope of the policy."); see also Allstate Ins. Co. v. Brown , 834 F. Supp. 854, 857 (E.D. Pa. 1993) (there is no duty to indemnify "if the conduct for which the insured is found liable does not come within the scope of the policy."). The duty to indemnify does not arise until the liability imposed against the insured is conclusively established. USX Corp. v. Adriatic Ins. Co. , 99 F. Supp. 2d at 612 (citations omitted). Where the underlying action has been resolved by a jury, the insurer's duty to indemnify is determined by the material facts established at trial. Id.
The burden of proving that a particular claim falls within the coverage of a policy is on the insured. Erie Ins. Exch. v. Transamerica Ins. Co. , 516 Pa. 574, 533 A.2d 1363, 1366-1367 (1987). Where the insured meets that burden and the insurer relies on a policy exclusion as the basis for denying coverage, the insurer then has the burden of proving that the exclusion applies. State Farm Fire & Cas. Co. v. Estate of Mehlman , 589 F.3d 105, 111 (3d Cir. 2009).
AHAC argues that it is entitled to summary judgment based almost entirely on its contention that the U.S. Energy claim does not constitute an "occurrence" under the policy based upon the jury's conclusion that Superior failed to perform its contract with U.S. Energy in a "workman like manner". Reading and interpreting its own Policies with "tunnel vision," AHAC fails to address fundamental interpretation tenets with regard to: (1) the intent of the parties; (2) the reasonable expectations of the insured: and (3) the effect of an endorsement on a CGL policy, in this case the UREC endorsement.
A. Occurrence
AHAC argues that Superior and U.S. Energy are unable to demonstrate an "occurrence" because the underlying judgment for which they seek coverage is based on an explicit finding by the jury that Superior had breached its contract with U.S. Energy through faulty workmanship. Specifically, the jury found that Superior "fail[ed] to perform its contract with U.S. Energy in a workman like manner."
AHAC admits that its indemnification obligations are triggered for covered "property damage only if ... [it] is caused by an ‘occurrence’." Relying on Sapa Extrusions, Inc. v. Liberty Mut. Ins. Co. , 939 F.3d 243 (3d Cir. 2019) and Kvaerner Metals Div. of Kvaerner U.S. Inc. v. Commercial Union Ins. Co. , 589 Pa. 317, 908 A.2d 888 (2006), and equating the jury's particular finding with "faulty workmanship," AHAC argues that there is no coverage because "faulty workmanship" does not constitute an "occurrence" as that term is defined in the Policies. Under the Policies, "occurrence" is defined as "an accident, including continuous or repeated exposure to substantially the same general harmful conditions." U.S. Energy's CSMF ¶ 39; Superior's SMF ¶ 20. "Accident" is not defined in the Policies.
In Kvaerner Metals , Bethlehem Steel hired Kvaerner Metals to construct a coke oven battery. Kvaerner Metals Div. of Kvaerner U.S. Inc. v. Commercial Union Ins. Co. , 908 A.2d at 891. Bethlehem alleged that the battery did not meet the contract specifications and warranties and sued Kvaerner for breach of contract. Id. Kvaerner notified its insurer, National Union, seeking defense and indemnity under two occurrence-based CGL insurance policies. Id. at 891-92. National Union disclaimed coverage, and Kvaerner filed a declaratory judgment action. Id. at 892. The policies at issue defined "occurrence" as an "accident". Id. at 897. In denying coverage, the Supreme Court of Pennsylvania held:
the definition of "accident" required to establish an "occurrence" under the policies cannot be satisfied by claims based upon faulty workmanship. Such claims 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 a policy for insurance into a performance bond. We are unwilling to do so, especially since such protections are already readily available for the protection of contractors.
Kvaerner Metals Div. of Kvaerner U.S. Inc. v. Commercial Union Ins. Co. , 908 A.2d at 899. In its analysis, the Court found instructive a decision of the Supreme Court of South Carolina in L-J, Inc. v. Bituminous Fire & Marine Ins. Co. , 366 S.C. 117, 621 S.E.2d 33 (2005). There the Court stated that a CGL policy may provide coverage where faulty workmanship caused bodily injury or damage to another's property, but not in cases where faulty workmanship damages the work product alone. Kvaerner Metals Div. of Kvaerner U.S. Inc. v. Commercial Union Ins. Co. , 908 A.2d at 898-899 (citing L-J, Inc. v. Bituminous Fire & Marine Ins. Co. , 621 S.E.2d at 36 n. 4 ). See also Evanston Ins. Co. v. Tristar Prods. , 537 F. Supp. 3d 798, 814 (E.D. Pa. 2021). The Kvaerner Court then stated:
The underlying suit in this case avers only property damage from poor workmanship to the work product itself. In its complaint, Bethlehem alleged that that the construction of the coke battery "did not meet the contract specifications and warranties, or the applicable industry standards for construction, and accordingly was in breach of the Contract and its warranties." ... [Bethlehem] list[ed] construction defects and a series of workmanship related irregularities. As faulty workmanship does not constitute an "accident" as required to set forth an occurrence under the CGL policies, we hold that National Union had no duty to defend or indemnify Kvaerner in the action brought by Bethlehem.
Kvaerner Metals Div. of Kvaerner U.S. Inc. v. Commercial Union Ins. Co. , 908 A.2d at 900.
Similarly, in Sapa Extrusions, Inc. v. Liberty Mut. Ins. Co. , the Third Circuit found that Sapa's faulty workmanship did not amount to an "occurrence" under the CGL policies at issue. Sapa supplied "organically coated extruded aluminum profiles" to Marvin Lumber and Cedar Company and Marvin Windows of Tennessee, Inc. which Marvin incorporated into its manufacture of aluminum clad windows and doors. Sapa Extrusions, Inc. v. Liberty Mut. Ins. Co. , 939 F.3d at 246. Marvin contended that Sapa's aluminum profiles "did not perform as intended, represented, and agreed." Id. at 256. Marvin sued Sapa alleging that Sapa had sold it extrusions that failed to meet Marvin's specifications. Id. at 246. Liberty Mutual disclaimed coverage.
Relying on Kvaerner and its progeny, the Sapa court held that that the factual allegations in the Marvin Complaint did not amount to an "occurrence" that would trigger coverage because the allegations in the complaint did not amount to an unforeseeable, fortuitous event. Id. at 256. The court further stated it was " ‘largely within [Sapa's] control whether it supplie[d] the agreed-upon product,’ so any liability flowing from Sapa's failure to deliver a product that met the agreed specifications was ‘too foreseeable to be considered an accident.’ " Id.
The instant case, however, is distinguishable from Kvaerner and Sapa. In Kvaerner and Sapa , the courts found property damage from faulty workmanship was to the work product only and resulted from the insureds’ failure to comply with the contractual specifications and warranties. Here, Superior did not provide products to U.S. Energy, it provided only specific mining services. Nor did the jury find in the underlying action that Superior failed to comply with any specifications or warranties in the contract. The property damage resulting from Superior's operation, therefore, was not to "work product alone," but to the property of a third party-U.S. Energy.
Both U.S. Energy and Superior argue that the damage to the mines did not result from "faulty workmanship" and the jury in the underlying action made no such finding. An insured's "faulty workmanship" has been defined as the "improper performance of contractual obligations"—i.e., an "insured's failure to deliver the product or perform the service it contracted to provide." Pennsylvania Manufacturers Indem. Co. v. Pottstown Indus. Complex LP , 215 A.3d 1010, 1015 (Pa. Super. 2019). Specifically, the jury found that Superior failed to perform its contract with U.S. Energy in a "workman like manner." Because the Court finds that this case turns on the manifest intent of the parties based on the clear language of the UREC endorsement, and Superior's reasonable expectations, there is no need for the Court to decide whether "faulty workmanship" and "workman like manner" are equivalent phrases.
AHAC's contends that Superior and U.S. Energy failed to show that the damage to the U.S. Energy's wells resulted from an "occurrence," as defined in the Policies, because the jury in the underlying action explicitly found Superior had breached its contract with U.S. Energy "through faulty workmanship." The jury made no such explicit finding. Moreover, AHAC's myopic reading of the Policies fails to give effect to all the contract provisions, and makes the UREC endorsement a nullity . AHAC's argument in this regard, therefore, fails. Further, based on the discussions below, whether the damages caused by Superior were "foreseeable" or sufficiently "fortuitous" are irrelevant to the Court's analysis.
The law does not countenance illusory coverage. Glen Lincoln, Inc. v. Zurich Ins. Co. , 945 F. Supp. 844, 847 (E.D. Pa. 1996) (citing Murray Ohio Mfg. Co. v. Continental Insurance Co. , 705 F. Supp. 442, 444 (N.D. Ill. 1989) ).
B. Endorsement, Intent and Reasonable Expectations
Under Pennsylvania law, an endorsement "will be considered part of the insurance contract if it appears that the parties intended that is should be so considered." Young v. U.S. Fidelity & Guaranty Co. , 299 Pa.Super. 237, 445 A.2d 542, 544 (1982) ; Kyle v. McCarron , 201 Pa.Super. 403, 192 A.2d 253, 255 (1963) (holding that the "whole policy, including the endorsement must be considered in determining the liability of the insurance company and the risk the policy was issued to cover"). The parties do not dispute that the UREC endorsement was incorporated into the Policies. Therefore, the Policies herein and the UREC endorsement together constitute the contract of insurance and are to be read together to determine the contract actually intended by AHAC and Superior. See Whole Enchilada, Inc. v. Travelers Prop. Cas. Co. of Am. , 581 F. Supp. 2d 677, 690-691 (W.D. Pa. 2008) (Citations omitted).
Pursuant to certain rules of construction developed by Pennsylvania courts, if there is a conflict between the terms of the endorsement and those in the body of the main policy, then the endorsement prevails, particularly when it "favors the insured." St. Paul Fire and Marine Insurance Co. v. U.S. Fire Insurance Co. , 655 F.2d 521, 524 (3d Cir. 1981) ; Lexington Ins. Co. v. W. Pa. Hosp. , 318 F. Supp. 2d 270 (W.D. Pa., 2004). Moreover, "when a specific form of insurance is provided by an endorsement tailored to meet the particular needs of the insured ...., that language must be followed to carry out the intentions of the parties." St. Paul Fire and Marine Insurance Co. v. U.S. Fire Insurance Co. , 655 F.2d at 524. Therefore, if there is any conflict between the terms of Coverage A in the CGL and the coverage terms of the UREC endorsement, the endorsement prevails and effectively changes the terms of the standard insuring agreement set forth under Coverage A.
AHAC admits that Superior was a natural gas well servicing company engaged in a number of well-servicing operations, including hydraulic fracturing or "fracking". See Superior's SMF ¶ 1 and AHAC's Response to Superior's SMF ¶. Based upon such well-servicing operations, Superior purchased the UREC endorsements to expand its liability coverage to specific damages. The endorsement explicitly "modifies" the insurance provided under the "COMMERCIAL GENERAL LIABILITY COVERAGE". The endorsement, therefore, changes the language of the standard CGL agreement to include insurance coverage for those specific damages set forth in the "Underground resources and equipment hazard" below:
2. "Underground resources and equipment hazard" 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;
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.
The damages to U.S. Energy's wells in this instance fall directly under Sections 2(a) and 2(b) of the UREC endorsements.
AHAC argues that the UREC Endorsement contains "no independent insuring agreement (such as would be present if it was, in fact, an independent grant of coverage)." All parties agree that the UREC endorsement was incorporated into the Policies and must be read as a whole. Accordingly, there is no need for an independent insuring agreement in the endorsement. The manifest language of the endorsement acknowledges that the endorsement "modifies" the insurance provided under the "COMMERCIAL GENERAL LIABILITY COVERAGE".
AHAC further contends that the UREC Endorsement "merely modifies certain specifical provisions of Coverage Part A of the Policies" and does not alter the definition of an "occurrence" or the Insuring Clause. Such argument ignores the plain language of the endorsement and is contrary to Pennsylvania law. AHAC's reading of occurrence to disallow coverage to any damage arising out of a contractual arrangement, or arising out of its own definition of faulty workmanship, conflicts with the plain language of the UREC endorsement.
In order to give effect to the provisions of both the standard CGL agreement and the UREC endorsement, this Court's analysis begins with the type of damage at issue. In this instance the damage to U.S. Energy's natural gas wells falls directly under Sections 2(a) and 2(b) of the UREC endorsements. Once such damage is found, the endorsement either expands or supersedes the definition of occurrence in the GCL based upon the following language:
The following provisions are added with respect to "property damage" included within the "Underground resources and equipment hazard" arising out of the operations performed by you or on your behalf ...
... the Underground Resources and Equipment Hazard Property Damage Aggregate shown in the Schedule or in the Declarations as subject to the endorsement is the most we will pay under
The UREC endorsements also include a "Description of Operations". U. S. Energy Appx. Ex. 2, p. 33 (AHA 081082).
Coverage A for the sum of damages because of all "property damage" included within the "underground resources and equipment hazard" and arising out of operations in connection with any one well.
See U. S. Energy Appx. Ex. 2, p. 33 (AHA 081082). The clear intent of the parties to the insurance agreement, and Superior's reasonable expectation, was that any property damage described in Sections 2(a), 2(b), and 2(c) of the UREC endorsements must be covered if such damage arose out of Superior's operations as clearly defined in the endorsement. The Court finds, therefore, that the damage to the U.S. Energy wells, as determined by the verdict in the Underlying Action, are covered property damages under the Policies .
Under the Policies, AHAC also agrees pay any prejudgment and postjudgment interest on any judgment against the insured, and that such payments will not reduce the limits of insurance under the Policies. U.S. Energy Appx Ex. 1-4, "Supplementary Payments – Coverages A and B," §§ 1.f. & g.
The Court further finds that each of Superior's fracking incidents that caused damage to separate and distinct mines were each a separate occurrence. Pennsylvania follows the "cause" test for determining the number of occurrences arising from a given claim. Donegal Mut. Ins. Co. v. Baumhammers , 595 Pa. 147, 938 A.2d 286, 294 (2007). The court held that, in applying the "cause" approach, it is necessary to focus on the act of the insured that gave rise to the insured's liability. Id. Moreover, Pennsylvania's cause approach has been interpreted to mean that "all injuries arising from the same source arise from one occurrence[,]" Liberty Mut. Ins. Co. v. Treesdale, Inc. , 418 F.3d 330, 336 (3d Cir. 2005), so long as there is a single "proximate, uninterrupted, and continuing cause which resulted in all of the injuries and damage." Flemming ex rel. Estate of Flemming v. Air Sunshine, Inc. , 311 F.3d 282, 295 (3d Cir. 2002) (quoting Appalachian Ins. Co. v. Liberty Mut. Ins. Co. , 676 F.2d 56, 61 (3d Cir. 1982) ).
Here, the damages to U.S. Energy's wells were not the result of a single, proximate, uninterrupted, and continuing cause. To the contrary, the damages occurred to different wells, at different locations, at different times and resulted from separate Superior fracking incidents. Each time a Superior fracking operation damaged a well was a separate occurrence under Pennsylvania's cause test. Further, on their verdict slip, the jury in the Underlying Action specifically listed 53 separate wells that "were damaged." See U.S. Energy Appx. Ex. 33. Accordingly, the damage to the 53 U.S. Energy wells are separate occurrences.
The Court further finds that neither the Contractual Liability exclusion nor the Impaired Property exclusion are applicable in this matter. The Contractual Liability exclusion precludes coverage for: " ‘Bodily injury’ or ‘property damage’ for which the insured is obligated to pay damages by reason of the assumption of liability in a contract or agreement." AHAC SMF ¶ 51. There is no evidence that Superior entered into a contract or agreement in which it agreed to assume any liability.
With regard to the Impaired Property exclusion the Court finds that U.S. Energy's claim does not involve "impaired property" or property that has not been physically injured. Further, in its fracking operation, Superior did not incorporate any of its products into the U.S. Energy wells. The geological formations in the wells were irreparably damaged as the wells were essentially plugged. Accordingly, the Impaired Property exclusion is inapplicable.
V. CONCLUSION
Based on the foregoing, American Home Assurance Company's motion for summary judgment shall be denied. The motions for summary judgment filed on behalf of Defendant, Superior Well Services, Inc., and on behalf of Intervenor, U.S. Energy Development Corporation, shall be granted. An appropriate Order follows.