New Dominion LLC exploits oil and natural gas reserves that many production companies avoid.
The Tulsa, Oklahoma Corporation operates hundreds of wells that produce saturated hydrocarbon reservoirs from ancient aquifers. When oil or gas is pumped in, wastewater is diverted to a pipeline and injected through a well deep below the surface of the earth.
The operation releases new reserves of oil and gas, but is also suspected of causing earthquakes. New Dominion executives inquired in 2013 whether the company’s commercial liability policy covered earthquake damage. The company says her insurance agent assured her she did, so she renewed the policy with US National Insurance.
As it turns out, the policy with NAICO clearly excluded earthquake damage coverage, the Oklahoma Supreme Court decided Tuesday. In a 7-2 decision, the Supreme Court dismissed New Dominion’s argument that an insurance company could not deny coverage to “multiple earthquake lawsuits” brought against New Dominion because its agent, also a senior claims manager for the insurer, had provided assurances that the earthquakes were covered.
“Had New Dominion taken the time to review the policy before implementing its renewal, it would have known that excluding subsidence and ground movement prevents earthquake-related incidents from being covered,” the court said.
The decision reversed part of a ruling by Lincoln County Judge Ferrell Ashwood that fairness demands that NAICO provide coverage for any claim for alleged bodily injury caused by an earthquake after the document was renewed. This principle is known as fair closure.
But the Supreme Court left New Dominion with a glimmer of hope: It also reversed the portion of Ashwood’s ruling that found “total pollution exclusion” ruling out coverage over the four-year period provided by NAICO. The opinion says the language of exclusion was ambiguous because it did not explicitly include the sewage that New Dominion drains from its wells.
The Supreme Court opinion offers a lesson for executives who take their insurance agent’s word rather than find an independent expert to examine their coverage. The New Dominion memo to the Supreme Court describes a series of alleged misrepresentations via a series of emails and phone calls.
According to a brief filed in support of New Dominion’s appeal, the company was already insured by NAICO when it agreed to make Tedford & Associates its new agent in 2013. Following the NAICO policy renewal, CEO Kevin Easley asked the agency’s owner, Mark Tedford, to see if his company It has no coverage of earthquake allegations.
Tedford responded in an email that the policy paid unlimited defense costs, so there would be no cost to New Dominion unless it lost the lawsuit. But that was not the end of the discussion.
On June 23, 2014, Dominion’s new general counsel Fred Buxton asked Tedford for a copy of his coverage of any earthquake the company had done. Tedford said there is no specific coverage for earthquakes, but that a general liability policy will pay the cost of defending any claims, and if New Dominion becomes legally liable “there will be coverage.” Tedford said he has a covering opinion on the matter.
Buxton requested a copy of this opinion. Tedford replied, but attached the wrong document to the email. The two exchanged a series of emails.
Meanwhile, New Dominion received notice of the first lawsuits that claimed responsibility for earthquake damage, in this case bodily injury.
Harrison asked Dick Harrison, senior claims manager at NAICO, how the insurance company would respond to such a lawsuit. Harrison said the document would cover a lawsuit alleging New Dominion caused bodily injury, but not property damage, if the alleged damages occurred within the coverage period.
On August 18, 2014 – nearly two months after the Buxton investigation – Tedford sent his opinion on the coverage.
“In my opinion, the general liability policy will defend and pay for third party claims (property damage) and (bodily injury) for earthquake damage(s) if it is established that the earthquake resulted from New Dominion’s operations,” the email said, according to the plea . “I think the standard is too high for any third party to prove this and I think the mood of the insurance industry is to aggressively defend these lawsuits as they arise. Since the cost of defense is unlimited in this policy, I think coverage is sufficient for that exposure.”
But after New Dominion sought coverage for a growing number of lawsuits related to alleged earthquake damage, NAICO filed a lawsuit seeking a declaratory ruling that its policies do not provide coverage.
Judge Ashwood held two trials. One to determine if policies provide any such coverage and a second to determine if coverage is due even if earthquakes are ruled out due to Tedford’s offerings.
Tedford, reached by phone on Tuesday, declined to comment due to the ongoing lawsuit. He said New Dominion has filed a separate lawsuit against his agency that has not been resolved.
After Ashwood ruled, New Dominion and NAICO appealed.
NAICO has argued that Oklahoma law has long distinguished between admissible claims and excluded claims. An insurance company that misrepresents the terms of coverage may be dropped from refusing coverage for acceptable risks, but cannot be required to provide coverage for excluded risks.
“This is the case before this court. Earthquake liability was never covered by the terms of any of the policies, and therefore, such coverage cannot be established by closure or assignment,” says the insurer’s brief.
NAICO also said that “the solicitation agent does not have the authority to obligate insurers to the contents of the insurance policy.
The Supreme Court agreed that the land movement exceptions clearly precluded coverage and that New Dominion had “constructive knowledge of any terms that conflict with the statements of Tedford or Harrison”. In some cases, the court said, the court may extend coverage in a policy beyond the terms of the contract, but only if there was a “prior agreement” between the parties.
The court said the communications between New Dominion and Tedford did not amount to an agreement. It was just a question-and-answer question about whether the policies already in place provide the coverage that New Dominion was seeking.
“In reviewing the record, it is clear that NAICO never intended to provide New Dominion coverage of earthquake-related incidents and certainly never agreed to do so,” the opinion says.
However, the court found that the “total pollution exclusions” in the policy were vague, and therefore unenforceable, because they referred to an “irritant or pollutant,” a term that does not necessarily include wastewater.
The Supreme Court returned the case to Lincoln County Court to determine whether a policy that did not exclude pollutants but exclude earthquake damage could provide coverage for any earthquake damage allegedly caused by sewage injection.
Judges James Edmondson and Douglas L. Combs partly on verdict.
Image courtesy of New Dominion LLC.
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