United States Court of Appeals,
Fifth Circuit.
No. 93-7463.
MERIDIAN OIL PRODUCTION, INC. (formerly known as El Paso
Exploration Company) and El Paso Natural Gas Company, Plaintiffs-
Appellants,
v.
HARTFORD ACCIDENT AND INDEMNITY COMPANY, et al., Defendants-
Appellees.
July 28, 1994.
Appeal from the United States District Court for the Southern
District of Texas.
Before REAVLEY and JONES, Circuit Judges, and JUSTICE,* District
Judge.
REAVLEY, Circuit Judge:
The insured sought indemnity from its insurer for pollution
damages the insured caused a landowner in drilling and plugging an
oil and gas well. The insurer obtained summary judgment in the
district court, upon the holding that the pollution was not a
covered "occurrence." That court also rejected the insured's
Stowers1 settlement claim. We affirm.
BACKGROUND
This insurance coverage dispute stems from an underlying
property damage suit, in which judgment for the landowner was
affirmed by the Tenth Circuit in Marshall v. El Paso Natural Gas
*
District Judge of the Eastern District of Texas, sitting by
designation.
1
See G.A. Stowers Furniture Co. v. American Indem. Co., 15
S.W.2d 544 (Tex.Comm'n App.1929, holding adopted).
1
Co., 874 F.2d 1373 (10th Cir.1989). In the Marshall suit, Meridian
Oil Production, Inc. ("Meridian") (formerly known as El Paso
Exploration Co.), was found liable to Donnie and Christie Marshall
for the damage to their land caused by Meridian's operation of an
oil and gas well on the Marshall property. The evidence in that
case showed that Meridian failed to protect a fresh water aquifer,
discharged contaminants into open pits on sandy soil, and plugged
the abandoned well without guarding against migration between zones
and formations. The Oklahoma jury awarded Marshall $400,000 for
actual damages and $5,000,000 for punitive damages.
The present action followed Meridian's demand for indemnity
for the Marshall damages under its comprehensive general liability
policies issued by defendants Hartford Accident and Indemnity
Company (Hartford), Meridian's primary insurer, and the London
Market insurers, who provided excess and umbrella insurance to
Meridian. The district court rejected the claim for coverage for
the reason that the discharge and release of contaminants was
deliberate, causing damage that was the natural result of intended
action. Alternatively, the court held that the discharge and
release was not sudden and accidental, and was therefore within the
pollution exclusion of the policy.
Meridian further claimed that Hartford breached its duty to
act reasonably in settlement negotiations under Stowers, but the
court held that Hartford committed no breach of duty where it
reserved its rights in defending the insured and succeeded in
declining coverage.
2
DISCUSSION
Coverage of Liability for Occurrence
The Hartford policy defines an "occurrence," the liability
for which it protects Meridian, as "an accident, including
continuous or repeated exposure to conditions, which results in
bodily injury or property damage neither expected nor intended from
the standpoint of the insured." The parties agree that Texas law
applies. Texas courts afford coverage for fortuitous damages but
deny coverage when damages are the natural and probable consequence
of intentional conduct.2 Regardless of whether the policies
involved are worded to cover "accidents" or "occurrences," all
2
See State Farm Fire & Casualty Co. v. S.S., 858 S.W.2d 374,
377-78 (Tex.1993) (applying intentional injury exclusion and
acknowledging that coverage exists only for undesigned injury and
events which do not result as the natural and probable
consequence of actions); Republic Nat'l Life Ins. Co. v.
Heyward, 536 S.W.2d 549, 557 (Tex.1976) ("injuries are
"accidental' and within the coverage of an insurance policy ...
if from the viewpoint of the insured, the injuries are not the
natural and probable consequence of the action or occurrence
which produced the injury; or in other words, if the injury
could not reasonably be anticipated by insured, or would not
ordinarily follow from the action or occurrence which caused the
injury."); Southern Farm Bureau Casualty Ins. Co. v. Brock, 659
S.W.2d 165, 166-67 (Tex.App.—Amarillo 1983, writ. ref'd n.r.e.)
(no coverage because insured intentionally rammed another vehicle
and insured knew or should have known that damage was a natural
and probable consequence of act); Ritchie v. John Hancock Mut.
Life Ins. Co., 521 S.W.2d 367, 368 (Tex.App.—Waco 1975, no writ)
(when one in all reasonable probability expects event to result
from his voluntary conduct, event is not an accident); Chen v.
Metropolitan Ins. and Annuity Co., 907 F.2d 566, 568-69 (5th
Cir.1990) (applying Texas law, question was whether coverage did
not exist because death was the "natural and probable"
consequence of ingesting too much alcohol at a Chinese festival);
Travelers Insurance Co. v. Volentine, 578 S.W.2d 501, 503
(Tex.App.—Texarkana 1979, no writ) (in an occurrence policy,
accident means an "unexpected, unforeseen or undesigned happening
or consequence.")
3
offer minor variations of the same essential concept; coverage
does not exist for inevitable results which predictably and
necessarily emanate from deliberate actions.
At oral argument, Meridian attempted to demonstrate that
damage to the Marshall property was accidental by equating itself
with one who intentionally goes over the speed limit and
subsequently is involved in an unexpected collision; coverage
would still exist. Although we agree with that scenario,
Meridian's actions are closer to those of a reckless driver who
careens down a busy street while blindfolded and later claims he
had "good intentions" but didn't see the stop signs; the resulting
damage cannot be characterized as "unexpected." Although the
extent of monetary recovery for the damages in the present case
might have been unexpected, damage to the surface and subsurface
was a necessary companion event to Meridian's conduct. An operator
knows when the drill stem goes through a fresh water aquifer and
knows that if no surface casing or string of pipe is set in place
to protect the water from drilling mud, fluids and subsequent
contaminants, the fresh water will be polluted.3 The operator
knows that the pollution will continue if no plug or cemented pipe
prevent migration of fluids up and down the well bore. Likewise,
3
As the judge in the Marshall trial noted, Meridian
proceeded to drill without using water stringers "knowing the
geology of the area, a decision that was exacerbated in that they
proceeded as they did after meeting with the Oklahoma Corporation
Commission officials, a meeting in which the problem was pointed
up and which was followed by a letter in October 1981 specifying
the problem and directing the use of stringers." The judge also
noted that the subject matter was general knowledge within the
drilling industry.
4
contaminants dumped on sandy, permeable soil without adequate
lining will always pollute. The Marshall record establishes as a
matter of law that the damages to the Marshall's land were not
unexpected from the standpoint of the insured. Because Meridian's
conduct inevitably and predictably caused the pollution, summary
judgment for Hartford was correct.
The Stowers Claim
Because there was no coverage, Hartford had no duty to settle
the case in response to the Marshall offer. See American
Physicians Insurance Exchange v. Garcia, 876 S.W.2d 842, 848-850
(Tex.1994). We are not prepared to say, however, that an insurer
who defends an insured is absolved from all extra-contractual
duties in every case where the insurer is ultimately held to be
responsible for no coverage under the policy.4 If there is a duty
to defend, or if the insurer assumes that duty, the insurer must
perform with reasonable care. The insurer may not prejudice the
possibilities of settlement for the insured. In the instant case,
however, Hartford paid over a million dollars in defense costs;
the attorney was chosen by Meridian; Meridian was informed of
events, told that coverage was a disputed matter, and told to
4
We have previously acknowledged that the Texas Supreme
Court has held that a plaintiff can recover damages from an
insurer's breach of the duty of good faith and fair dealing even
when there is no recovery under the policy. See First Texas Sav.
Ass'n v. Reliance Ins. Co., 950 F.2d 1171, 1178 (5th Cir.1992)
(explaining Viles v. Security Nat'l Ins. Co., 788 S.W.2d 566, 567
(Tex.1990)). However, the Texas Supreme Court has recently
granted a writ of error to hear Republic Ins. Co. v. Stoker, 867
S.W.2d 74 (Tex.App.—El Paso 1993), which squarely addresses the
question of whether an extra-contractual bad faith claim can
exist when coverage is lacking.
5
negotiate a settlement for its own benefit if it chose. Meridian's
opportunity to settle was not prejudiced by Hartford and there was
no issue of lack of care in the defense. Under the Texas law
represented by Garcia, we believe the summary judgment against
Meridian's Stowers claim was correct.
AFFIRMED.
6