No Property Damage, No Coverage

 

June 24, 2013

The insured well-drilling company brought an action against its insurer alleging breach of the duty to defend under a commercial general liability policy. This case is PPI Technology Services v. Liberty Mutual Insurance Company, 2013 WL 829040.

Royal Production Company is the lessor and operator of three leases for well-drilling, and hired PPI as the representatives of the working interest owners and to assist in the well-planning and overseeing of the drilling of wells on the leases. A well was dug on the wrong lease, plugged, and abandoned. Royal sued PPI, contending that PPI caused the drilling rig to be towed to and placed on the wrong lease, resulting in the well being drilled in the wrong location. Royal claimed that drilling in the wrong location caused Royal to spend in excess of $4,200,000.00 and alleged that PPI caused property damage to Royal as the owner of the property where the well was being drilled.

PPI tendered the lawsuit to Liberty Mutual which had issued a commercial general liability policy to PPI covering property damage defined as physical injury to tangible property and loss of use of that property. The policy also covered property damage to oil, gas, water, or other mineral substances, any well, hole, formation, or area in which exploration for any substance is carried on, and any casing, pipe, bit, tool, pump or other drilling or well servicing machinery. The insurer declined coverage stating that the underlying lawsuit did not contain factual allegations of property damage caused by an occurrence as defined in the policy.

The insured filed a lawsuit against the insurer. The district court ruled in favor of the insurer and this appeal followed.

The Fifth Circuit Court of Appeals said that the duty to defend arises only when the facts alleged in the underlying lawsuit, if taken as true, would potentially state a cause of action falling within the terms of the policy. At issue in this case is whether the underlying allegations raise facts that come within the coverage, and the court focused on the definition of property damage. The court found that the underlying complaints contained no factual allegations of actual damage to or loss of use of tangible property. The allegations were found to be for economic damages, which are not covered under terms of the policy. Also, the court said that the underlying allegations were legal conclusions rather than factual allegations as required.

The ruling of the district court was affirmed.

Editor's Note: The U.S. Court of Appeals, Fifth Circuit, following the eight-corners rule in Texas, focused on the factual allegations in the underlying lawsuit against the insured, and found that the allegations did not contain factual allegations of property damage as required by the general liability policy. The court said that it is not the cause of action alleged that determines coverage, but the facts giving rise to the alleged actionable conduct that determines coverage.

In this instance, the complaint against the insured alleged loss of money and property damage, but loss of money is not property damage, and facts showed that there was no actual physical damage to tangible property or loss of use of that tangible property; no property damage, no coverage.