3rd Circuit Finds Insurer Not Liable for Botched Fracking Operation

A well servicing company that damaged 53 natural gas wells by using a defective chemical during a hydrofracking operation is not entitled to insurance coverage for a $13 million jury verdict because there was no accident, a panel of the 3rd Circuit Court of Appeals ruled Wednesday.

The appellate panel reversed a US District Court decision that found American Home Assurance Co. liable under a general liability insurance policy it issued to Superior Well Service. Even though a jury did not use the exact words “faulty workmanship” in its award, the verdict did say that Superior’s failure to act “in a workman like manner” caused the damage, which means there was no “occurrence” that triggered coverage, the panel said.

The opinion said “under Pennsylvania law, faulty workmanship, such as rendering a substandard service or causing damage by use of an unsuitable product, as was the case here, does not constitute an ‘occurrence’ when an insurance policy defines an ‘occurrence’ as an ‘accident.’”

In 2007, US Energy Development Corp. contracted with Superior Well Service to use a process known as hydrofracturing to extract natural gas from 97 wells it owned in western New York state. The fracturing, or “fracking” process involves the use of various chemicals, including liquid emulsions, to “stimulate” wells so that they produce more gas.

US Energy alleged that Superior used a type of liquid emulsion that was not suitable for its wells. It filed a lawsuit in New York state court alleging that it lost at least $17 million in revenues because its wells did not produce as much natural gas as they should have.

In May 2018, a jury determined that Superior had damaged 53 of US Energy’s wells and awarded approximately $6.2 million in damages. With interest calculated by the state court, the total award amounted to $13.2 million.

Before the jury returned its verdict, American Home filed a lawsuit seeking a declaration from the US District Court for the District of Western Pennsylvania that there was no coverage for damage to the wells. The insurer cited a 2006 Pennsylvania Supreme Court decision that held faulty workmanship is not an “occurrence” that triggers coverage from an insurance policy that defines occurrence as an accident.

The District Court, however, granted summary judgment in favor of Superior. Judge David S. Cercone noted in his order that the jury did not use the term “faulty workmanship” in its ruling. What’s more, the judge said an underground resources and equipment coverage endorsement in the liability policy superseded or expanded the definition of occurrence and provided coverage even if Superior’s own failure to perform the contract in a “workman like manner” caused the damage.

The appellate panel didn’t see it that way. The panel said an endorsement can supersede other policy language only if it conflicts with that language. There was nothing in the endorsement that conflicted with the occurrence requirement, the opinion says.

The opinion says the Pennsylvania Supreme Court’s ruling established that poor workmanship is too “forseeable to be considered an accident.”

“The phrases ‘faulty workmanship’ and ‘failure to perform in a workman like manner’ are equivalent in this respect,” the opinion says.

The 3rd Circuit panel reversed the District Court and remanded the case with instructions to enter judgment in favor of American Home.