Circuit Court Finds No Coverage for “Property Damage” Claims Arising from Insured’s Work

September 30, 2011 | Insurance Coverage

After he was hired to deliver casing and oversee its installation in an oil well, the insured delivered the casing but removed more, as excess, than he should have. As a result of this error, the well was too shallow. The well owner had the well reworked and sued the insured to recover its expenses, asserting claims for breach of contract and negligence. The insured sued his commercial general liability insurance carrier for defense and indemnity. The district court granted the insurer’s motion for summary judgment, and the insured appealed.

In its decision, the U.S. Court of Appeals for the Fifth Circuit explained that the insured’s removal of more casing from the well site than he should have removed, because someone had made a mistake in counting, was an “occurrence” under the terms of the CGL policy, as construed by the Texas Supreme Court. The Fifth Circuit then examined whether the resulting damage alleged by the well’s owner – the failure to complete the well to the desired depth – constituted “property damage” under the policy.

The circuit court determined that the “property damage” – the completion of the well at an incorrect depth – arose out of the insured’s operations, and that it was precisely that well that had to be reworked because the insured had retrieved too much casing from the site, leaving an insufficient quantity of casing to reach the proper depth for completion. Moreover, the circuit court continued, the insured oversaw the running of that insufficient casing.

The policy did not cover this damage, the circuit court ruled, because of an exclusion applicable to property damage that “arises out of” operations that take place while the insured is “performing operations.” The circuit court found that the well was completed to the incorrect depth, i.e., damaged, while the insured was delivering and overseeing the running of casing on the well, as his “work” was characterized in the well owner’s complaint.

The Fifth Circuit also decided that another exclusion, applicable to “property” that had to be restored, repaired, or replaced because the insured’s work was incorrectly performed on it, barred coverage. The circuit court concluded that the insured caused defects in the construction of the well as a whole when he oversaw the installation of the deficient quantity of casing; thus, this exclusion was applicable. [Cook v. Admiral Ins. Co., No. 10-10722 (5th Cir. Aug 19, 2011).] 

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