FEDERAL COURT EXAMINES SCOPE OF CGL EXCLUSION J(5): “THAT PARTICULAR PART OF REAL PROPERTY” IN OIL WELL CASE

In this recent case involving damage to an underground oil well casing, a federal district judge in San Antonio was called upon to construe the scope of the CGL policy’s Exclusion J(5) and determine exactly how much of the damage to the well fell within its scope.  While Exclusion J(5) only applies to “that particular part of real property on which you… are performing operations,” the factual question of its exact meaning and scope varies in different circumstances.  In CBX Res., LLC v. ACE American Ins. Co., 5:17-CV-17-DAE, 2017 WL 4639233 (W.D. Tex. Oct. 16, 2017), well casing was damaged during a fracking operation and could not be recovered from the well bore, resulting in the well having to be plugged and abandoned.

ACE argued the well was a singular unit with no severable non-essential components, and therefore the exclusion covered the entire well, while the judgment holder argued it only applied to the casing itself. The court noted that unlike other cases cited by the parties, the insured was hired to oversee construction of the entire well and the scope of its work included all parts of the well. And Fifth Circuit precedent holds a well casing is not an independently functioning component of a well. Therefore, the court agreed with ACE and held that Exclusion J(5) barred coverage for all the damage to the entire well.  The court went on to hold that coverage was also barred by the Professional Services exclusion, and that nothing in the Underground Resources and Equipment Coverage endorsement restored coverage for the loss.