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546 Prime Natural Resources, Inc. v. Certain Underwriters at Lloyd’s, London, Syndicate Numbers 2020, 1084, 2001, 457, 510, 2791, 2987, 3000, 1221, 5000

Tuesday, February 2nd, 2016

Richard F. Brown

The following is not a legal opinion. You should consult your attorney if the case may be of significance to you.

Prime Natural Resources, Inc. v. Certain Underwriters at Lloyd’s, London, Syndicate Numbers 2020, 1084, 2001, 457, 510, 2791, 2987, 3000, 1221, 5000 held that an insurer’s obligation to cover costs incurred to restore a well to its pre-loss condition did not include coverage for all costs incurred to restore a producing well to its pre-loss production capabilities. Prime Natural Resources, Inc. (“Company”) insured its interest in the off-shore H2 Well (“Well”), the adjacent H2 Platform (“Platform”), and related pipelines (“Pipelines”) under two nearly identical policies (“Policy”) underwritten by Lloyd’s of London, et al. (“Underwriters”). The forces of Hurricane Rita bent the Well about seven feet above the mudline, toppled the Platform away from the Well, and damaged the Pipelines. The Underwriters paid the Company approximately $4 million under the Policy. The Company sought reimbursement from Underwriters for additional costs incurred to repair the Platform and remove debris from the Platform necessary to restore production. Underwriters denied the request, asserting that they had already paid the Company the policy limits or the additional claims were not covered. Because the policy limits on the physical damage to the Platform were far short of the amount necessary to replace the Platform, the principal issue in the case was whether other Policy provisions included coverage for repairs to equipment or appurtenances which are necessary to restore a producing well to its pre-loss production capabilities.

The Company primarily relied on Section IB of the Policy to support its assertion that Underwriters were required to cover costs incurred by the Company in order to repair the Platform and return the Well to its pre-loss production capabilities. The plain language of Section IB covered expenses incurred in recompletion and salvage efforts to restore an insured well to its pre-loss condition and expressly listed various costs and expenses directly related to the wellbore. To support its contention that Section IB also covered repairs to the Platform, the Company argued that because the Well was producing before the loss, all costs incurred by the Company to restore the Well to its pre-loss production capabilities, including repair of the Platform, were covered by Section IB, so long as those activities were necessary to restore the Well to production. Underwriters argued that restoring the Well to its pre-loss condition simply involved restoring the internal components of the Well.

The term “well” was not defined in the Policy. When interpreting insurance policies, “[t]he policy’s terms are given their ordinary and generally accepted meaning unless the policy shows the words were meant in a technical or different sense.” The court relied on the commonly understood meaning of the term “well” as “borehole, hole, or wellbore,” which does not “include a production platform or other ‘appurtenances’ associated with the well itself.”

The Company also argued that because Section IB provided coverage for “salvage operations as may be necessary to recover or restore [a well],” it also covered the removal of debris from the Platform (which actually fell away from the Well). The terms “debris” and “salvage” were not defined in the Policy. The court relied on the commonly understood meanings of “debris” and “salvage” in order to draw a distinction between the two terms and support its finding that an insurance policy that covers salvage operations does not implicitly cover debris removal. Based on common definitions and the use of the words elsewhere in the Policy, the Court concluded that “salvage” related to recovering something of value and “debris” was simply refuse. The Policy referred to salvage operations by specific reference to the Well, which cannot be reasonably read as including the removal of debris and wreckage of the Platform. Therefore, the court affirmed the judgment holding that Section IB did not provide coverage for costs incurred to replace, repair, or refurbish the Platform or Platform equipment or to remove Platform debris.

This case is significant because of the holding that an insurer’s obligation to cover costs incurred to restore a well to its pre-loss condition is strictly limited to the wellbore and does not include coverage for other costs incurred to restore a producing well to its pre-loss production capabilities.