Northern District of Texas Dismisses Bad Faith Claims in Well-Control Policy Dispute

by Saul Ewing Arnstein & Lehr LLP

Eagle Oil & Gas Co. v. Travelers Prop. Cas. Co. of Am., No. 7:12-cv-00133-O (N.D. Tex. Jul. 14, 2014)

Northern District of Texas dismisses bad faith claims against insurer and adjuster in dispute over coverage for well blowout under well-control policy.

Defendant Travelers Property Casualty Company of America (“Travelers”) issued a Control of Well Policy to Plaintiff Eagle Oil & Gas Company (“Eagle Oil”), which, among other things, provided protection against oil well blowouts and reimbursement for expenses incurred in bringing the well under control related to a well in Reeves County, Texas.  Plaintiffs Eagle Wolfbone Energy Partners, LP and Eagle Oil & Gas Partners, LLC were non-operating working-interest owners in the well and were additional insureds under the Travelers policy.  Following a September 22, 2011 well blowout, Plaintiffs incurred costs and expenses in attempting to regain control of the well, drilling a replacement well, cleaning up pollution, and in regard to damaged oil field equipment owned by others.  Plaintiffs submitted their losses to Travelers, and Travelers assigned BC Johnson Associates (a trade name of Defendant York Risk Services Group) to investigate the claims.  BC Johnson’s preliminary report concluded that Eagle Oil may have violated the policy’s “due care and diligence” clause and, in so doing, caused the blowout.  Travelers then hired Greg Sones, a petroleum engineer, to further review the information regarding the cause of the blowout.  Sones concluded that Eagle Oil caused the blowout, and Travelers denied coverage. 

Plaintiffs brought suit alleging (1) breach of contract for denial of the claim, (2) breach of the common law duty of good faith and fair dealing, (3) violations of sections 541 and 542 of the Texas Insurance Code, and (4) violations of the Texas Deceptive Trade Practices Act.  Claims (2) through (4) encompassed Plaintiffs’ allegations that Travelers engaged in bad faith by denying their claims without a reasonable basis.  Travelers moved for summary judgment on Plaintiffs’ bad faith claims, and the court granted Travelers’ motion.

The court found that Travelers had a reasonable basis to deny coverage.  In denying coverage under the policy’s “due care and diligence” clause, Travelers relied on the report of a licensed, professional petroleum engineer (Greg Sones).  After reviewing well records and meeting with Eagle Oil’s engineers, Sones concluded that Eagle Oil had exceeded industry-standard maximum pressure allowances for casing, and Eagle Oil’s own maximum pressure tolerance for the well, and failed to follow prudent engineering practices.  Plaintiffs argued that it was unreasonable for Travelers to rely on Sones’s opinion to deny coverage under the “due care and diligence” clause because: (1) the opinion was not in written form; (2) Sones was retained by, and worked with, Travelers’ coverage counsel; (3) the claim notes did not reflect the substance of Sones’s opinions, creating the impression that Travelers did not know the basis for the expert opinion when it denied coverage; (4) Plaintiffs’ experts disagreed with Sones’s opinions; (5) Sones was biased against operators who use certain engineering standards; and (6) Sones ignored critical facts and/or failed to relay critical facts to Travelers. 

The court rejected each of these arguments, explaining that “courts are concerned with whether the insurer knew or had reason to know that the substance of the opinion was unreasonable or unreliable, or demonstrated bias.”  In evaluating bias, Texas courts “look to the expert’s qualifications, methodology and whether the expert has a reputation for reaching a certain conclusion.”  In this case, Sones reviewed all information that Plaintiffs made available to him.  The court also noted that “[c]onflicting expert opinions, by themselves, do not establish that the insurer acted unreasonably in relying on its own expert” and that disagreement about the meaning of contractual terms (here, the “due care and diligence” clause) does not give rise to a bad faith claim.  The court concluded that, having failed to present evidence that Travelers lacked a reasonable basis to deny coverage, and thus having “failed to present evidence that establishes a genuine issue of material fact concerning their claim for breach of the duty of good faith and fair dealing . . . [Plaintiffs’] Texas Insurance Code section 541 and [Deceptive Trade Practices Act] claims fail.”

Alternatively, the court held that even were the denial of coverage found to be unreasonable, it would grant summary judgment in Travelers’ favor because Plaintiffs failed to raise a fact issue that Travelers’ actions caused them injuries independent of the unpaid insurance policy proceeds.  Plaintiffs’ only allegation of independent tort damages is that Travelers’ delay in making a coverage decision caused them to drill a vertical replacement well instead of a more profitable horizontal well.  Plaintiffs, however, provided the court with no evidence that they had the necessary lease acreage to redrill a horizontal well.  Furthermore, under the policy, Travelers had no duty to decide coverage or advance funds for a redrill claim before the redrill costs were incurred.  For this reason, too, the court concluded that summary judgment for Travelers was appropriate.

The court also granted summary judgment in favor of Defendant York Risk Services Group on Plaintiffs’ common law and statutory bad faith claims against it because Plaintiffs similarly failed to raise a genuine issue of material fact of an injury independent of the insurance benefits.  The summary judgment evidence demonstrated that Plaintiffs’ damages (if any) arose “from Travelers’ denial of policy benefits based on Sones’s engineering opinion, not from B.C. Johnson’s [the division within York that performed the investigation and adjustment] preliminary investigation and report.”  The court explained that “[t]here can be no recovery for extra-contractual damages unless the complained of actions or omissions caused injury independent of that which would have resulted from a wrongful denial of policy benefits.”  Because Plaintiffs failed to provide “any evidence that York’s actions or omissions were the producing or proximate cause of an injury separate from the denial of policy benefits,” the court granted summary judgment on Plaintiffs’ bad faith claims in favor of York.

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Saul Ewing Arnstein & Lehr LLP

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