Recently, a Texas appellate court reversed a $9.63 million jury verdict against insurers ruling the insured was not entitled to additional coverage and penalties in a lawsuit involving coverage sought for two well blowouts off the Louisiana coast. In Gemini Insurance Company v. Drilling Risk Management, Inc., No. 04–15–00318–CV, 2016 WL 3625666 (Tex. App. - San Antonio July 6, 2016), Drilling Risk Management Inc. filed suit over a partial denial of coverage by Gemini Insurance Co. and Berkley Oil & Gas Specialty Services LLC claiming the insurers should have paid for casing and lining equipment used to shore up a well after two previous blowouts.

Drilling Risk Management Inc. was hired to drill a well off the Louisiana coast under a turnkey fixed price drilling contract. DRMI first encountered an unexpected weak pressure zone and then a high pressure zone both causing a blowout.  DRMI was then forced to drill a second “sidetrack” well. The second well then hit another weak pressure zone and high pressure zone, causing another blowout. DRMI was finally able to successfully drill a third sidetrack well after installing a liner to protect against the high and low pressure zones.

DRMI was an additional insured on a policy that covered “well out-of-control” events like blowouts and the redrilling costs that follow. DRMI made policy claims for each blowout and was paid close to $4.5 million in covered expenses for bringing the two blowouts under control and another $3 million for the expense of drilling the multiple sidetrack wells. However, the insurers denied coverage for $1.7 million of other redrilling expenses including the additional casing and liner because those costs were not caused by the blowouts. The insurers concluded that the casing and liner costs were costs DRMI knew they would have prior to drilling the well.

DRMI sued Gemini alleging they improperly denied covered claims and, committed unfair claim settlement practices. The trial court granted a summary judgment for DRMI on coverage and the claims for unfair settlement practices went to the jury. After a trial, the jury agreed with DRMI and the court entered judgment for roughly $3.5 million in actual damages and another $4 million for unfair settlement practices under the Texas Insurance Code. DRMI was also awarded $1.1 million in interest penalties and about $1 million in attorneys’ fees.

On appeal, Gemini argued that that the high-pressure zones that caused DRMI to utilize well casing and a liner were not incurred “as a result of” an occurrence under the policy. DRMI argued that the policy language should mean once a well had been lost or damaged as a result of a blowout, all costs and expenses reasonably incurred to redrill the well are covered.

The Fourth Court of Appeals in San Antonio reversed and rendered a take-nothing judgment against DRMI.  The court agreed with Gemini that the driller would have incurred those costs anyway because of pre-existing geologic conditions and was not entitled to compensation. The court also rejected DRMI’s “too-broad” interpretation of the policy that once a blowout occurs, all costs and expenses reasonably incurred were covered. Because the court found there was no coverage, it did not reach the merits of the unfair settlement claims.

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