Why it matters: An insurer was required to indemnify the operator of a brine well facility in a suit brought by a neighboring landowner alleging damages resulting from the collapse of an underground cavern created by the insured’s mining operations, the federal court in New Mexico ruled on remand from the U.S. Court of Appeals for the Tenth Circuit. However, the court rejected the insured’s position that coverage was available under all of the general liability policies its insurer purchased from 2000 to 2009. The court ruled that the property damage resulted from a single occurrence, and under the terms of the policies, there was no basis for stacking all the policies issued to the insured, or for a finding that coverage exists under all the policies under a “continuous injury” theory. Accordingly, the insurer was required to cover the damages under one policy period. To ensure the policyholder received the full benefit of its premiums and reasonable expectations of coverage, the court concluded that the indemnity limit applied should be the highest that existed during the policy period—which in this case was enough to cover the insured’s entire liability.

Detailed discussion: I&W, Inc., owned and operated a brine well facility in Carlsbad, New Mexico. The operation involved the solution mining of salt from brine water by drilling a well in a salt zone and injecting fresh water into the salt zone, where it dissolved the salt. The resulting brine water is pumped out and sold. As a result of the mining process, however, the salt zone dissolves away from the earth and leaves an underground cavern.

I&W’s property was adjacent to land owned by Circle S Feed Store, LLC (“Circle S”). In a lawsuit against I&W, Circle S alleged that it sustained property damage when the roof of an underground cavern created by I&W’s operations collapsed. A jury found I&W to be negligent, as well as reckless or wanton, and awarded Circle S $703,000 in compensatory damages and $300,000 in punitive damages.

I&W purchased commercial liability policies from Mid-Continent Casualty (“MCC”) over a nine-year period between June 2000 and June 2009, all of which had limits of $1 million per occurrence and $2 million aggregate, with the exception of a single year with a $2 million-per-occurrence limit. The policies provided coverage for “property damage” caused by an “occurrence,” with “occurrence” defined as an “accident including continuous or repeated exposure to substantially the same general harmful conditions.”

In an earlier proceeding, when I&W requested a defense, MCC relied on an Oil Endorsement exclusion in the policy to deny coverage. In the resulting declaratory action, the court originally sided with the insurer but the Tenth U.S. Circuit Court of Appeals reversed, finding that the exclusion did not preclude coverage.

On remand, the U.S. District Court reversed and granted summary judgment to the policyholder. The property damage was caused by an “occurrence” in the policy periods and the policies were triggered by Circle S’s damage, the court concluded. The amount of coverage remained a question: how much coverage was available—was it $19 million, as argued by the insured, seeking to stack the policies, or was coverage limited to just one policy, the position taken by MCC?

According to I&W, the policies already contemplated that an “occurrence” could be continuous and thus continually cause damage; therefore, as long as the damage occurred sometime during the policy period, coverage was triggered under all the policies that existed during that period. However, the court held that there was no evidence concerning exactly what damage took place during any policy period. Because I&W could not establish when any such “loss” occurred, the analytical framework of a “continuous injury” theory was inappropriate, and there was no support for a finding that coverage was triggered across all the policies.

In addition, the court further declined to allow I&W to stack its coverage. The court reasoned that there was no language in the MCC policies that could be interpreted as allowing stacking.

Following a Texas Supreme Court decision, the court explained that the MCC policies “were issued for consecutive years, did not overlap in time, and the injury to the Circle S property resulted from a single, indivisible injury. Even where an ‘occurrence’ triggers more than one policy because it covered different policy periods, the appropriate conclusion is not to stack the consecutive policies because ‘different limits may have applied at different times.’ ”

To read the decision in Mid-Continent Casualty Co. v. I&W, Inc., click here.