Travelers ordered to pay $8.5 million in insurance coverage dispute over well blowout cleanup costs

by Michael Heygood

Travelers insurance has been ordered to pay $8.5 million in a policy overage dispute with Eagle Oil. The dispute arose from a September 2011 well blowout at an Eagle Oil facility in Reeves County, Texas. Eagle Oil had a well drilling insurance policy with Travelers that provided protection against oil well blowouts and reimbursement for expenses incurred in bringing the well under control.

The blowout occurred when Eagle Oil was attempting to open a stuck frac port sleeve. Eagle Oil was attempting to clear the port by applying various levels of pressure. A piece of casing ruptured inside the well which eventually led to the wellhead being ejected into the air and thus allowing uncontrolled flow of gas and well fluids to the surface.

Travelers investigated and determined that the blowout was caused by Eagle Oil using excessive pressure on the casing that caused the blowout to occur. Accordingly, Travelers denied Eagle Oil’s claim for cleanup costs resulting from the blowout. Travelers maintained that Eagle Oil’s decision to exceed maximum safe fracturing pressure violated the “due care and diligence” clause in the policy.

Eagle Oil filed suit alleging that Travelers breached the policy by denying coverage. In a pre-trial ruling, the federal district court ruled that Travelers had the burden of proof to establish that Eagle Oil did not comply with the due care and diligence clause at trial.

A Texas jury has now ruled that Travelers did not establish that Eagle Oil failed to act reasonably to prevent the well blowout. Thus, the due diligence exclusion to the policy did not apply and Eagle Oil’s claim for the cleanup costs was covered. The final judgment requires Travelers to pay Eagle Oil $5.7 million in actual damages, simple prejudgment interest of $607,000, and $2.2 million in interest under Eagle’s “prompt payment claim” against Travelers under Texas law.

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* Michael Heygood, James Craig Orr, Jr. and Eric Pearson are all Board Certified in Personal Injury Trial Law — Texas Board of Legal Specialization.