Mistaken Work is an Occurrence but Exclusions Prevent Coverage
The insured brought an action against the insurer seeking a declaration that the insurer had a duty to defend and indemnify him. This case is Cook v. Admiral Insurance Company, 2011 WL 3652590 (C.A.5, Tex. ).
Brogdin retained Cook to deliver casing to a well and to oversee its installation in the well bore. Cook was required to haul any excess casing away from the drill site. Cook made a counting error and hauled away too much casing and this resulted in an insufficient string of casing being installed in the well bore. This, in turn, caused the well to be completed ineffectively at a depth that was shallower that that of the zone intended for completion and production. Brogdin had to have the well reworked before it could be completed at the correct depth, costing Brogdin $336,745.63. Brogdin then sued Cook for the cost of reworking the well.
Cook notified Admiral Insurance of the lawsuit and the insurer responded that the CGL policy would only provide $100,000 in damages due to an endorsement relating to underground work. Cook sued Admiral seeking a declaratory judgment that the policy's full $1 million coverage was applicable. The insurer then filed a motion for summary judgment asserting that it had no duty to defend or indemnify Cook. The district court ruled in favor of the insurer and this appeal followed.
The appeals court said that it had to determine whether the allegations made against Cook fall within the scope of coverage in the CGL policy.
The first issue to settle in this quest was whether an occurrence happened. The court said that claims for damages caused by an insured's defective performance or faulty workmanship may constitute an occurrence when property damage results from the unexpected, unforeseen, or undesigned happenings or consequences of the insured's negligent behavior, regardless of whether the occurrence injures a third party's property or the insured's work. In this case, Cook's removing more casing from the well site than he should have because someone made a mistake in counting was an occurrence.
The question then was whether the resulting damage was property damage as defined in the policy. The complaint against Cook was the failure to complete the well to the desired depth. The trial court ruled that there was no property damage as defined and the appeals court determined that it had no reason to pursue this opinion further because it affirmed the ruling on different grounds.
The “different grounds” were exclusion (j)(5) and exclusion (j)(6).
Exclusion (j)(5) precluded coverage for property damage to that particular part of real property on which the named insured was performing operations if the property damage arises out of those operations. Here, the court found that damage undeniably arose out of Cook's operations. Cook claimed that the exclusion did not apply because there was a gap between the occurrence and the loss of use. Cook said that the occurrence was the removal of the casing, and after this occurrence was performed, the loss of use (the property damage) occurred. However, the court found no suspension of activities in this instance. The well was completed to the incorrect depth, that is, damaged, while Cook was delivering and overseeing the running of casing on the well.
Exclusion (j)(6) declares that there is no coverage for property damage to that particular part of any property that must be restored, repaired or replaced because the named insured's work was incorrectly performed on it. The court said that the plain meaning of the exclusion is that property damage only to parts of the property that were themselves the subject of the defective work is excluded. In this instance, Cook was hired to provide casing for the well as an integral part of the drilling and completion of the well as a whole, and oversee the running of the casing that he provided. And as the insurer pointed out, casing is not a component of a well that functions independently and without which the rest of the well would continue to function. Therefore, because Cook negligently recovered and hauled off too much of the casing from the well site, he caused defects in the construction of the well as a whole when he oversaw the installation of that deficient quantity of casing. Cook's work was performed during the overall drilling and completion operation of the well and thus, caused damage to the entire well when his work was incorrectly performed.
Based on the applicability of the exclusions, the court ruled that Admiral had no duty to defend or indemnify Cook. The ruling of the district court was affirmed.
Editor's Note: The facts of this case may seem confusing to those who are not familiar with the drilling of wells. However, the ruling is clear about a mistake on the part of the insured being an occurrence. Even though the actions of the insured (removing the casing) were intentional, the insured made a mistake in removing too much casing, and that meant to the court that an accident, an occurrence, happened.
Whether property damage occurred is another issue that often arises in defective construction claims, but the Court of Appeals did not dwell on this point and instead, focused on the business risk exclusions. The court interpreted the facts of the claim and the allegations against the insured as falling under the scope of the exclusions.