A “Blowout and Cratering Coverage Endorsement” did not limit coverage for blowouts but actually expanded it, the Texas Court of Appeals opined, finding that an insurer had a duty to defend third-party lawsuits alleging damage as a result of substances being released from the insured’s disposal operations.

DeLoach Oil and Gas operated a waste disposal well in Daisetta, Texas. A sinkhole formed near DeLoach’s operations, damaging the well and allegedly causing the release of toxic substances from the well onto properties owned by third parties. The third parties brought four separate lawsuits against DeLoach, alleging that the substances released from the well resulted in damage to their property, diminution in value of their property, loss of vegetation and aesthetic value of property, trespass, and loss of use and enjoyment of their property.

DeLoach tendered the suits to its CGL insurer, Century Surety Company. Century declined coverage, relying on the Total Pollution Exclusion and the Oil and Gas Endorsement in its policy. The Pollution Exclusion stated that the policy did not apply to property damage that would not have occurred but for the discharge of “pollutants,” defined as contaminants, chemicals, and waste. The Oil and Gas Endorsement included an exclusion for mold, fungi, virus, bacteria, air quality, contaminants, mineral or other harmful materials, and specifically excluded property damage caused by toxic or hazardous properties of minerals or other substances.

DeLoach argued that application of these exclusions would render coverage under a separate Blowout and Cratering Coverage Endorsement illusory. This endorsement provided coverage for “the ‘blowout & cratering hazard’ arising out of the operations performed by you or on your behalf.” Century, on the other hand, argued that the Blowout and Cratering Endorsement actually limited coverage because DeLoach did not pay any additional premium for the endorsement, and the coverage provided by the endorsement was subject to additional exclusions.

The court agreed with DeLoach, concluding that “the Blowout Endorsement expands coverage rather than limits an existing coverage” as “the express language in the Blowout Endorsement indicated that the purpose of the endorsement was to add coverage for a blowout and cratering hazard.” Further, the court agreed with DeLoach that the Blowout Endorsement conflicted with the Pollution Exclusion. “We do not believe that an occurrence covered under the Blowout Endorsement could necessarily arise in the absence of pollution, which the Pollution Exclusion excludes from coverage,” the court opined. “Thus, the Pollution Exclusion renders the Blowout Endorsement meaningless.” The court came to the same conclusion with respect to the Mold Exclusion. Thus, the court held, Century had a duty to defend DeLoach against the four underlying lawsuits.

To read the decision in Century Surety Co. v. DeLoach, click here.

Why it matters: This case illustrates an important principle: even where an exclusion (or coverage-precluding condition) in a policy seems unambiguously to apply, prudent policyholders will read their entire policy to determine whether the problematic exclusion or condition may be inconsistent with other provisions of the policy. This is particularly true where the policy contains nonstandard endorsements such as the Blowout Endorsement in this case. Because ambiguities in policy language and conflicting policy language typically will be resolved in favor of the insured, failure to read the entire policy may result in loss of coverage for otherwise covered claims.