ESOTERIC ~ BUT INTERESTING:

{This is a periodic column on unique, nerdy and fascinating questions posed by my fastidious readers.  If you have a burning insurance or indemnity issue that you want me to address, drop me a line.  I will research and write about it in a future post.} 

 DOES AN UNDERGROUND RESOURCES & EQUIPMENT ENDORSEMENT (CG 22 62 10 01) TRULY CONFLICT WITH A CGL POLLUTION EXCLUSION CLAUSE? 

An Underground Resources & Equipment Exclusion Coverage (UREC) clause is a standard endorsement in some CGL policies, especially those that cover oil and gas exploration.

The ISO endorsement form CG 22 62 10 01 modifies the main form exclusion for pollution.  This “modification” has generated an argument by some policyholders that the endorsement irreconcilably conflicts with the pollution exclusion.  Policyholders have argued that the UREC changes coverage under the primary policy by adding further provisions and definitions.  For this reason, they argue, the UREC Endorsement supersedes the written terms of the total exclusionary clause in the primary policy, and it does provide some pollution coverage to the policyholder.

Is this true?  It is a creative argument.  Let’s see what the courts have done with it.     

The case of Investors Inc. Co. of America v. Breck Operating Corp., 2003 WL 21056849 (U.S. Dist., N.D. Abilene, TX 2003) addresses this issue head on.  There, the plaintiff was the insurer of a company that used large quantities of a saline solution typical in oil and gas exploration.  Over a number of decades, the salt water escaped and contaminated the soil and sub-strata of a neighboring leasehold.  The negligent company tendered the case.  The insurer denied a defense and indemnity.

As for indemnity, the court ultimately found that the UREC Endorsement did not create an ambiguity with the main form total pollution exclusion clause.

UREC SUPERSEDES POLLUTION EXCLUSION

The court began by reviewing the standard rules with regard to policy interpretation.  Courts must construe insurance policies strictly against the insurer and liberally in favor of the insured, “particularly when dealing with exceptions and words of limitation and when an ambiguity exists in the policy.”  Id., slip op. at 10.  “The court must afford the words of an insurance contract their plain, ordinary, and generally accepted meaning unless the instrument shows that the parties used them in a technical or different sence.”  Id. (citations omitted).

The court applied these rules and decided that the UREC’s Endorsement language covering salt water contamination is not mutually exclusive of the Endorsement language extending broad coverage for property damages caused by other occurrences.

     Here, because a plain reading of the UREC endorsement appears to cover the saltwater contamination at issue, this Court finds that the UREC endorsement directly and irreconcilably conflicts with Coverage A’s pollution exclusions which excludes such saltwater contamination coverage.  That the UREC endorsement would also cover, for example, depletion of another person’s reservoir, loss of drilling equipment in a well hole, well blow-out, and cratering, it does not necessarily follow that the endorsement consequently excludes coverage for any one or all of the other instances of coverage clearly included by the plain language of the endorsement, viz, saltwater contamination.   In addition, when the UREC endorsement is construed with the rest of the insurance contract as a whole, including the conspicuous absence of the above-referenced footer alert (referencing a standard footer on most ISO forms that states: ALL OTHER TERMS AND CONDITIONS OF THIS POLICY REMAIN UNCHANGED), this Court concludes that the UREC endorsement does, indeed, change, modify and add coverage that would otherwise be excluded by the main policy.

     Consequently, because the UREC endorsement embracing saltwater contamination cannot be construed together with the Primary Policy’s pollution exclusion without being rendered, in all or in part, meaningless, this Court finds that the UREC endorsement was intended to supersede, rather than augment, the Primary Policy’s terms. 

Id., slip op. at 11.   We can only conclude here that, for the Judge in the Northern District of Texas, it all came down to the absence of a typical sentence often placed at the bottom of a form endorsement:  ALL OTHER TERMS AND CONDITIONS OF THIS POLICY REMAIN UNCHANGED.  Without that caveat, the court found that the endorsement did, indeed, add coverage for this considerable loss.

UREC DOES NOT SUPERSEDE POLLUTION EXCLUSION

Another case on the subject matter found just the opposite:  Mesa Operating Co. v. California Union Ins. Co., 986 S. W.2d 749 (Tex. App. 1999).  There, the plaintiff was the owner of an abandoned well.  The well casing later corroded.  It caused salt water to leach into a fresh water aquifer.  Clean up costs were tendered to the insurer, California Union Ins. Company, who denied the claim.

The plaintiff held a CGL policy with a UREC endorsement.  The clause insured Mesa for property damage to oil, gas, water or other mineral substances that have not been reduced to physical possession.   Id., 986 S.W.2d at 752.   This included salt water contamination.  The court decided its job was to determine what impact the pollution exclusion in the primary policy has on the endorsements as they apply to the contamination at issue.  Id. at 754.  It ruled that the two provisions do not conflict:  

      (W)e conclude the pollution exclusion in the primary policy does not conflict with the Underground Resources and Equipment Coverage endorsement.  Unlike the saline contamination endorsement, the underground resources endorsement states that its provision are in addition to those of the main policy.  Specifically, the endorsement states that “the following additional provisions apply with respect to property damage included within the underground resources and equipment hazard….” (emphasis added).  This language clearly indicates that the terms of the main policy remain in effect with respect to underground resources and equipment coverage, and the endorsement was intended to augment, rather than supersede, those terms.      

     Although the language of the underground resources and equipment endorsement is broad enough to cover salt water contamination of a fresh water aquifer, the endorsement is clearly intended to cover more damages than those caused by pollution.  For example, damage to oil, gas, or water under the endorsement may be caused by the depletion of another person’s reservoir.  The exclusion of coverage for non-sudden and non-accidental pollution would not render the endorsement meaningless.  The endorsement and the exclusion, therefore, may be construed together.  

Id., at 755 (emphasis theirs).  The Mesa court ultimately held that the policyholder there needed to prove that the loss was both included in the UREC endorsement language, and that it was sudden and accidental – which was a requirement of the main policy form for pollution coverage.  In comparison, the court in Breck, above, did not need to prove this loss element.

TAKE-AWAY

What I find interesting here is that both of these cases are out of Texas, and both apply the general principles of Texas insurance contract interpretation to their facts.  Yet diametrically different results are reached – one finding coverage under the UREC and another not.  The take-away here is important.  The decisions turned on the inclusions of certain language in the policy that alerts the policyholder to how the UREC endorsement is to be read.  By failing to add a phrase such as  ALL OTHER TERMS AND CONDITIONS OF THIS POLICY REMAIN UNCHANGED, the first insurer did not provide clarity to how the UREC endorsement was to be construed along with the rest of the policy.

Thus, underwriters are well advised to make sure that this phrase is included on the Endorsement.  This way the insured knows that the endorsement is to augment, rather than overtake, the original policy form language.