In Crown Energy Co. v. Mid-Continent Cas. Co., Case No. 116989, 2022 WL 2128667 (Okla. June 14, 2022), the Oklahoma Supreme Court concluded that seismic activity caused by water waste disposal wells in oil and gas operations constituted an “occurrence” that was covered under a commercial general liability (CGL) policy. The Court also found that the pollution exclusion did not bar coverage.
Crown Energy is an oil and gas producer that produces large volumes of waste water, which it stores in underground disposal wells. Mid-Continent issued two CGL policies to Crown Energy. Each policy contained standard language providing coverage for damages because of bodily injury or property damage caused by an “occurrence.” In addition, the policies contained a modified pollution exclusion in an oil and gas endorsement, which replaced the standard pollution exclusion. The modified exclusion provided that bodily injury or property damage arising out of the “discharge, dispersal, release or escape of smoke, vapors, soot, fumes, acids, alkalis, toxic chemicals, liquids or gases, waste materials or other irritants, contaminants or pollutants into or upon the land, the atmosphere or any water course or body of water” were not covered under the policy.
In 2016, Crown Energy was named a defendant in a class action suit (the “Reid Lawsuit”), alleging that Crown Energy’s waste water disposal caused increased underground pressure, leading to seismic activity which damaged the plaintiff’s property. Crown Energy submitted a claim to Mid-Continent requesting defense and indemnity, however the claim was denied because the damages were not deemed an “occurrence” under the policy, and even if the damages were an “occurrence”, the modified pollution exclusion barred any coverage.
Crown sued Mid-Continent, seeking declaratory judgment that the claims in the Reid Lawsuit are covered under the policies. The District Court of Oklahoma County granted Crown’s motion for summary judgment in part, finding that Mid-Continent had a duty to defend Crown in the Reid Lawsuit. Mid-Continent then appealed the lower court’s order granting Crown’s motion for summary judgment, which was assigned to the Court of Civil Appeals. The Court of Civil Appeals issued a published opinion affirming the lower court’s order. Mid-Continent then filed a Petition for Certiorari, which was granted.
The Supreme Court of Oklahoma affirmed the Court of Civil Appeals opinion that Crown’s wastewater disposal activity did constitute an “occurrence” under the policy, and was not barred by the pollution exclusion. The policy defined “occurrence” as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” Mid-Continent argued that because Crown Energy was intentionally injecting waste water underground, its actions did not constitute an accident because it was foreseeable, natural, and probable. Yet, the Court found that in terms of insurance, “it is only when the consequences of the act are so natural and probable as to be expected by any reasonable person that the result can be said to be so foreseeable as not to be accidental.” In the instant case, the Court found Crown Energy’s actions did not rise to this level. “The fact that there is some risk of seismic activity associated with Crown’s waste water disposal activities does not mean that seismic activity is such a natural and probable consequence of those activities that it should be expected.” Thus, the incident was considered an “occurrence.”
The Court also found that the pollution exclusion did not bar coverage. Mid-Continent argued that the claims arose out of toxic liquids and waste materials, which unambiguously falls within the language of the exclusion for damage “arising out of the discharge, dispersal, release or escape of … toxic chemicals, liquids or gases, [or] waste materials.” On the other hand, Crown Energy argued the damage arose from the resulting pressure and displacement of the injections, rather than the polluting nature of the waste water. Crown Energy also argued that the exclusion is ambiguous as to whether it bars coverage for property damage claims when the damage is not caused by the polluting nature of the water, and that the Court should use the “reasonable expectations doctrine” to determine whether there is coverage under the policy. Under the reasonable expectations doctrine, where an ambiguity in an insurance contract exists, it should be resolved in accordance with the reasonable expectations of the parties. In other words, whether an insured could have reasonably expected coverage under the terms of the policy. It is important to note that the reasonable expectations doctrine is not recognized in every state.
The Court ultimately found in favor of Crown Energy that the exclusion was ambiguous, at least as to whether it applies to the claims in the Reid Lawsuit, and that Crown could have reasonably expected coverage under the policies. Because of the Court’s finding that the claims in the Reid Lawsuit were covered, the Court affirmed the judgment of the lower court.
This blog was prepared with the help of Zachary Weiss, a summer associate at Cozen O’Connor.