Am. Home Assurance Co. v. Superior Well Servs., Inc.

586 F.Supp.3d 365

AMERICAN HOME ASSURANCE COMPANY, Plaintiff

v.SUPERIOR WELL SERVICES, INC., Defendant

U.S. Energy Development Corporation, Intervenor Defendant

2:16cv1065

United States District Court, W.D. Pennsylvania.

Filed February 18, 2022

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 defend¹ 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.

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 operations² 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 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...