626 Gemini Ins. Co. v. Drilling Risk Mgmt., Inc. No. 04-15-00318-CV, 2016 WL 3625666 (Tex. App.—San Antonio July 6, 2016, no. pet. h.), rule 53.7(f) motion granted (Feb. 1, 2017)

Richard F. Brown

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

Gemini Ins. Co. v. Drilling Risk Mgmt., Inc. No. 04-15-00318-CV, 2016 WL 3625666 (Tex. App.—San Antonio July 6, 2016, no. pet. h.), rule 53.7(f) motion granted (Feb. 1, 2017) (Blowout insurance) held that the cost of casing and a liner for redrilling expenses under a Control of Well policy were not covered claims. Drilling Risk Management, Inc. (“Driller”) was an additional insured on a policy issued by Gemini Insurance Company (“Insurer”), and Driller sought coverage under the policy after Driller experienced two blowouts on the same well. Drilling commenced with a plan to set intermediate casing (“Casing”) at 10,200 feet. Driller experienced unexpected weak pressure, or a depleted zone, at 6,906 feet. This caused Driller to revise its casing plan to set casing at 9,750 feet (not the original 10,200 feet). Before the well reached 9,750 feet, it encountered an unexpected high pressure zone at 9,674 feet, causing the well to “kick,” resulting in uncontrolled subsurface flow between the kick zone and the weak zone (“Blowout #1”). The hole was plugged at 9,674 feet before any casing was set in the wellbore.

Driller drilled a sidetrack well off of the initial wellbore and set Casing to isolate the high and low pressure zones that caused the initial blowout. Drilling continued below the depth of Blowout #1, but approximately one month later, Driller again encountered an unexpected weak zone followed by an unexpected high pressure kick zone resulting in a second blowout at 10,917 feet (“Blowout #2”). A second sidetrack well was drilled from 10,320 feet, but was unsuccessful due to unexpected pressure zones and uncontrolled flow. Driller then came back up the hole and drilled a third sidetrack well from 9,952 feet, and before it reached the depth of Blowout #2, Driller installed a 7 inch liner (“Liner”) to isolate the high and low pressure zones that caused Blowout #2. The third sidetrack well was successfully completed at total depth.

Insurer paid approximately $4.5 million in covered expenses for bringing the two blowouts under control, and an additional $3 million in covered redrilling expenses for drilling the sidetrack wells. Insurer denied coverage for the Casing and the Liner and contended that a separate $250,000 deductible applied to Blowout #1 and to Blowout #2. The value of the denied claim was approximately $1.7 million.

The primary issues on appeal were (1) whether the non-reimbursed Casing and Liner expenses were covered under the policy and (2) whether the two blowouts constituted a single occurrence. With respect to the first issue, Insurer argued that the Casing used in the first sidetrack well and the Liner used in the third sidetrack well were not covered redrilling expenses because they were caused by pre-existing geologic conditions rather than the “Occurrences.” In support of this argument, Insurer identified specific language in the policy, insisted that the policy was a “named peril” indemnity contract, as opposed to an all-risk insurance contract, and contended that recovery of the redrilling costs in question would place Driller in a better position than if the blowouts had not occurred. Driller argued that “pre-existing hole conditions” was neither a defined phrase nor an explicit exclusion in the policy. The court held that the costs of the Casing and Liner were not caused by either blowout, and therefore, were not covered under the policy. The court further held that the term “pre-existing hole conditions” was clear based on the written opinion of the independent petroleum engineer, and that specific exclusions are not necessary when there is no underlying coverage for the expenses incurred.

On the deductible issue, Insurer argued that two separate blowouts, one month apart, and 1,000 feet apart, constituted two “Occurrences.” Driller relied on policy language providing that if a redrill well becomes a “Well Out of Control,” it is a “continuation of the original Occurrence.” Driller also argued that the definition of “Well” includes the hole, casing, and liner, meaning that expenses for the entire well after restoration or redrill operations, regardless of depth, are covered. The court determined that Driller’s interpretation had isolated advantageous policy language and ignored other provisions that were necessary to give effect to the policy as a whole. Most importantly, there was an express limitation on liability that ended coverage when “redrilling reaches the depth of the blowout and the well is restored to a condition comparable to its condition prior to the blowout.” The Casing and Liner were not covered, two deductibles applied, and judgment was rendered that Driller take nothing.

This case highlights that a Control of Well policy is not insurance against all risks, such as additional well costs attributable to pre-existing geological conditions, and the importance of expert testimony in defining those conditions.