Fifth Circuit Holds Negligent Drilling Did Not Result in Property Damage

In its recent decision in PPI Tech. Servs., L.P. v. Liberty Mut. Ins. Co., 2012 U.S. App. LEXIS 24571 (5^thCir. Nov. 29, 2012), the United States Court of Appeals for the Fifth Circuit, applying Texas law, had occasion to consider what damages qualify as “property damage” for the purpose of a general liability policy.

The insured, PPI, was hired by a lessor and operator of three oil leases located in Louisiana to oversee the drilling of well on a specified lease. The drilling resulted in a dry hole, which ultimately was filled in and abandoned. It was subsequently determined that PPI drilled the well on the wrong lease. PPI was later named as a defendant in two lawsuits as a result of this incident, both of which were referred to arbitration. In one of the arbitrations, claimants sought $4.2 million for PPI having drilled the well in the wrong location. In the other, claimants sought in excess of $700,000 in delay rentals to maintain the lease. Additionally, and presumably to trigger PPI’s insurance coverage, one of the arbitrations alleged that PPI’s actions caused“property damage” in the form of “physical injury to tangible property, including all resulting loss of use of the property.”

PPI was insured under a general liability policy issued by Liberty Mutual. Liberty’s policy contained a standard general liability definition of “property damage” encompassing:

a. Physical injury to tangible property, including all resulting loss of use of that property. All such loss of use shall be deemed to occur at the time of the physical injury that caused it; or

b. Loss of use of tangible property that is not physically injured. All such loss of use shall be deemed to occur at the time of the "occurrence" that caused it.

Liberty disclaimed coverage to PPI on the basis that the underlying arbitrations did not allege “property damage” resulting from an “occurrence.” Liberty argued that notwithstanding the reference to “property damage”in one of the arbitration petitions, the petition contained no specific allegations of physical injury to tangible property or actual loss of use. PPI argued, on the other hand, that the mere reference to “property damage” was sufficient to trigger a duty to defend.

The court rejected PPI’s contention, stating that it did “not consider mere use of the phrase ‘property damage’ and parroted Policy language as sufficient factual allegation.” Rather, explained the court, a claimant must identify actual property damage rather than simply allege that an insured’s activities resulted in physical injury to tangible property or loss of use thereof. “Hallow” and “cursory” allegations of “property damage” do not rise to the level of an allegation of actual property damage. The court therefore looked to the remaining allegations in the petitions, which it concluded were devoid of any allegations falling within the definition of “property damage,” such as “destruction from penetration or scorching from a blowout or fire,” or even constructive eviction caused to the owner of the lease on which the insured wrongly drilled. As such, and because the underlying petitions did not otherwise allege “loss of use,” the court agreed that there was no allegation of property damage that triggered Liberty’s duty to defend.