Delta Seaboard Well Serv's, Inc. v. American Int'l Specialty Lines Ins.

Citations: 602 F.3d 340; 602 F. Supp. 3d 340; 2010 U.S. App. LEXIS 6195; 2010 WL 1080914Docket: 09-20311

Court: Court of Appeals for the Fifth Circuit; March 25, 2010; Federal Appellate Court

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Delta Seaboard Well Services, Inc. filed a lawsuit against American International Specialty Lines Insurance Co. (AISLIC) seeking coverage under an excess commercial liability Umbrella policy after being held liable for negligence in a separate suit brought by Fort Apache Energy, Inc. The underlying issue arose from Delta's plugging of a well, which Fort Apache claimed was negligently performed despite Delta’s knowledge of persistent well-head gas pressure. Delta had a commercial liability policy with Gemini Insurance Company, which denied coverage due to a "loss of hole" exclusion, a ruling later affirmed by a Texas state court.

Delta purchased the Umbrella policy from AISLIC after the completion of the well plugging but before the Fort Apache lawsuit. AISLIC denied coverage when informed of the Fort Apache suit nearly three years after the fact, citing the same "loss of hole" exclusion present in the Gemini policy. The district court upheld AISLIC's denial of coverage on multiple grounds: it confirmed that the Gemini policy was the primary policy under the Umbrella policy, that Delta's late notification prejudiced AISLIC, and that the exclusion had already been ruled on by the state court, barring Delta from contesting it again. The court granted summary judgment in favor of AISLIC, leading to Delta's appeal.

Summary of the legal document excerpt:

The standard of review for a grant of summary judgment is de novo, particularly regarding the interpretation of insurance contracts and their exclusions, which are also subject to de novo review. Summary judgment is appropriate when, viewing the evidence favorably for the nonmoving party, there are no genuine issues of material fact, and the moving party is entitled to judgment as a matter of law. In diversity cases, federal courts apply the forum state's choice of law rules; Texas law governs this case as both parties agree on its applicability. Under Texas law, insurance policies are interpreted using contract construction rules. Policies that can be assigned a definitive legal meaning are not ambiguous, while those with multiple reasonable interpretations are considered ambiguous, necessitating a construction that favors the insured, unless unreasonable.

Delta argues that summary judgment should be reversed based on genuine issues of material fact regarding (1) coverage exclusions in the Gemini and Umbrella policies, (2) potential issue preclusion on coverage, and (3) compliance with the Umbrella policy’s notice provision. However, the Umbrella policy's unambiguous “follow-form” endorsement adopts the exclusions of the Gemini policy, specifically the exclusion for loss of hole, which is pivotal. The dispute centers on the relationship between the Umbrella and primary insurance policies from 2003 to 2006, with the Umbrella policy providing excess coverage over the primary policy's limits. The Umbrella's “follow-form” provision states that it does not apply to Commercial General Liability unless specified by the Scheduled Underlying Insurance, which outlines coverage limits without naming specific policies. The Umbrella policy's “sunrise” endorsement limits its coverage to the period of May 1, 2005, to May 1, 2006, while expanding excess coverage to encompass occurrences outside these dates. It is agreed that the Gemini policy is the primary commercial general liability policy for the 2003 period and explicitly excludes coverage for loss of hole.

The Umbrella policy's "follow-form" endorsement indicates that AISLIC provides coverage only in excess of and limited by the underlying Gemini policy. The key issue is whether the Gemini policy excludes coverage for loss of hole. If it does exclude coverage, there can be no excess coverage under the Umbrella policy. Delta contends there is a genuine issue of material fact regarding whether the Gemini policy is the applicable underlying policy. Delta argues that the Schedule's general reference to policy limits and the “sunrise endorsement” suggests the 2005-2006 primary policy as the underlying policy. However, this interpretation is deemed unreasonable and unsupported by the record. 

According to precedent, a covered occurrence occurs when actual physical damage to property takes place, which in this case is linked to the Gemini policy for the period of 2003-2004. The Gemini policy is confirmed as the relevant underlying insurance for the loss occurring in 2003, as it was the undisputed primary commercial general liability policy during that time. Delta failed to prove that any policy other than the Gemini policy provided primary coverage, as its arguments were not substantiated by evidence. 

Furthermore, the Umbrella policy clearly states that it only provides coverage if an underlying primary policy does. The sunrise endorsement expands excess coverage but does not change the requirement for an identifiable underlying policy. The only policy that satisfies this requirement for the 2003 period is the Gemini policy, which is fully aligned with the Schedule's description. Delta's attempts to challenge this by implying the 2005-2006 policy lacks merit, especially since Delta did not present the 2005-2006 policy as evidence. Consequently, the district court's decision to grant summary judgment is upheld.