Great Am. Ins. Co. v. Compass Well Servs., LLC

GREAT AMERICAN INSURANCE COMPANY OF NEW YORK, Appellant v. COMPASS WELL SERVICES, LLC, Appellee

No. 02-19-00373-CV

Court of Appeals Second Appellate District of Texas at Fort Worth

December 17, 2020

On Appeal from the 67th District Court Tarrant County, Texas

Trial Court No. 067-280567-15

Before Gabriel, Kerr, and Bassel, JJ.

Memorandum Opinion by Justice Gabriel MEMORANDUM OPINION

In this insurance-coverage dispute, appellant Great American Insurance Company of New York (GAIC) appeals from a jury's verdict that GAIC had knowingly engaged in unfair insurance-settlement practices after GAIC's insured, appellee Compass Well Services, LLC, sought coverage for a direct physical loss to its covered property. GAIC challenges the legal sufficiency of the evidence to support the jury's findings that GAIC was not prejudiced by Compass's destruction of the property before GAIC could inspect it, that Compass's property sustained a direct physical loss, and that GAIC's conduct was knowing. GAIC also argues that the trial court erred by failing to grant GAIC an offset or credit based on the amount Compass realized in its settlement with the company that had caused the property damage.

We conclude that the evidence was legally sufficient to support the challenged jury findings and that GAIC was entitled to a settlement credit against the jury's award of actual damages. Thus, we reverse and remand the actual-damages award in the trial court's judgment for application of the settlement credit, which will also require the trial court to recalculate other specified monetary awards in the judgment, but affirm the remainder.

I. BACKGROUND

A. THE POLICY

Fort Worth-based Compass provided hydraulic-fracturing services—fracking—to Texas oil-and-gas operators. Fracking involves mixing water, sand, and chemicals and pumping the fluid at high pressure into a well to facilitate extraction. In May 2013, Compass was fracking three wells for Cinco Resources in Atascosa County; Cinco had hired GE Oil & Gas Pressure Control to operate the wells' fracking manifolds and had hired StrataGen Engineering to ensure safe operations. The fracking on each well involved several pieces of interconnected equipment: Compass's fracking pipe; a GE manifold trailer; pipe and a connector joint that linked GE's manifold and the wellhead, which Compass had leased from FMC Technologies; pumps that were owned by Compass; and Compass's "fluid ends," which were located on the ends of the pumps. The equipment was rated to withstand 15,000 psi and would be considered "fence post"—irretrievably damaged and no longer serviceable—if the pressure exceeded 16,500 pounds per square inch (psi), which is 10% over the equipment's maximum rated pressure. Compass's equipment was approximately seven months old and would have begun to depreciate at eighteen months.

Because of the value of Compass's oil-and-gas equipment (approximately $30 million, including $500,000 of pipe), Compass bought a GAIC high-deductible, all-risk insurance policy that would cover "'loss' to Covered Property from any of theCovered Causes of Loss."¹ A covered cause of loss was defined as a "Risk of Direct Physical 'Loss' to Covered Property." "Loss," in turn, was defined as "accidental loss or damage." The policy also delineated several "Duties" for Compass to complete "in the event of loss or damage to Covered Property."² For example:

• "Give [GAIC] prompt notice of the loss or damage. Include a description of the property involved."

• "Take all reasonable steps to protect the Covered Property from further damage . . . . Also, if feasible, set the damaged property aside and in the best possible order for examination . . . ."

• "As often as may be reasonably required, permit us to inspect the property proving the loss or damage and examine your books and records. Also permit us to take samples of damaged and undamaged property for inspection, testing and analysis . . . ."

Regarding any leased equipment, Compass was required to "make a reasonable effort to submit claims for damage to [GAIC] prior to returning the equipment to the owner of the equipment and prior to any repairs being made to the equipment."

B. THE ACCIDENT

At the Cinco site and before each stage of pumping,³ StrataGen would pressure test the entire system with plain water at approximately 10,000 psi to ensure the correct assembly and the integrity of the equipment. The in-line transducers, whichmeasure and monitor pressure in the equipment approximately once every second, were also checked before each stage to ensure the equipment was operating properly.

On May 13, 2013, at 5:00 p.m., Thomas Papiernik, a StrataGen engineer, arrived at the Cinco site for his overnight shift and first surveyed the Skeeter well⁴ to check how the equipment was "rigged up." He saw nothing out of the ordinary; none of the pipe looked fatigued or corroded, and all equipment appeared correctly assembled and configured. At 2:25 a.m. on May 14, the sixth pressure test of the equipment at the Skeeter well was successfully completed. At 3:46 a.m. while Compass was actively fracking the Skeeter well during the seventh stage, GE employee David Salinas mistakenly shut the master valve to the Skeeter well, stopping the flow of liquid through the valve. Salinas heard a loud "pop," and operations at the well were immediately halted. Compass's leased pipe had separated from its connection to the wellhead and was bent. The threading on the connector joint to the leased pipe had been sheared or bent. Compass and GE took multiple photographs of the well site after the accident; some of the pictures showed visible damage to the leased pipe and connector joint and to GE's manifold.

Compass also completed an incident report the day of the accident and noted that the connector joint "blew off the wellhead and hit other surrounding joints" while fracking at "45 bbl/in at 6925psi." The report listed the names of some of thewitnesses and described the damage: "FMC fitting on well head was stripped. Iron piping was bent. Compass Frac equipment subjected to excessive pressure in all iron. Fluid ends and pumps may be damaged." Salinas lost his job and was told that by closing the wrong valve, he had caused over $2 million in damages.

Compass believed that the failure of the connector joint resulted from pressure that exceeded the manufacturer's test pressures, which was caused when the valve was shut during Compass's high-pressure fracking. In short, Compass's "initial assessment" was that "[t]here had been a severe overpressure event." At the time of the accident, in-line transducers located at three places in the pipe system showed that the fluid pressure rose to no more than 8,800 psi, which was within the allowable fluid pressures for the equipment. But Papiernik noted the day after the accident that the data from the in-line transducers could not be relied on for causation:

[The accident] happened so quickly, that the 1 sec[ond] data acquisition record is not representative of the true maximum pressure that was reached inside the treating lines during the failure. One of the pressure transducers on the high pressure pumps recorded a maximum pressure of 15,111 psi, so it must be assumed that the true maximum pressure was at least this high.

Cinco required Compass to immediately "switch all [of the] equipment out," even equipment that was not visibly damaged. Cinco's demand was based on the manufacturer's and seller's recommendations that all pipe and fluid ends needed to be replaced because all of the pipe had been exposed to overpressure (specifically, 20,000 psi) and, therefore, could not be recertified for use. Based on these recommendationsand on a concern that the switched-out pipe could accidentally be used at another site, Compass "scrapped it." Compass received approximately $5,000 for the scrap value of its equipment. GE tested its equipment from the Cinco site and determined that it had been overpressurized and damaged; thus, GE discarded it. FMC immediately retrieved its portion of the pipe and the connector joint from the well site and later scrapped both in December 2013 without having it inspected.

Before FMC discarded its affected equipment, Compass hired Becht Engineering in June 2013 to determine if a pressure spike could have resulted in more pressure than was shown by the in-line transducers. Becht concluded, based on its admittedly incomplete analysis,⁵ that the maximum pressure at the connector joint had been "below the rated pressure of 15,000" psi. This pressure, however, was "based on slowly applied pressures"; "dynamically applied pressure loads can produce stresses and deformations in a component as much as twice that vs. statically (slowly) applied pressure loads."

C. THE CLAIM AND THE DENIAL

Compass first sought reimbursement from GE because GE had "caused the damages clearly . . . so why would [Compass] go make a claim with [GAIC] and drive [Compass's] rates up when [Compass] should just be going after GE who made the mistake." After four to five months of attempted negotiations, GE stoppedcommunicating with Compass. Compass, therefore, submitted an insurance claim to GAIC on October 16, 2013—five months after the accident. Compass sought coverage for $1,620,737.98 in losses, representing damage to "pump parts, rented [pipe], Compass-owned [pipe], pressure valve, fluid ends, and missile iron." Matthew Beaver, a GAIC adjuster, was assigned the claim.

The day after the claim was filed, Colin Raymond, Compass's CEO, responded to Beaver's initial email and described the accident at the site. When Beaver asked about looking at the pipe, Raymond stated that "it had already been scrapped." Raymond informed Beaver that manufacturer overpressure policies prevented its equipment from being put back into service. At Beaver's request, Compass provided GAIC with Compass's incident report, photographs of the damage, Compass's contract with Cinco, contact information for GE, an...