March 30, 2015

Tenth Circuit: Insurance Exclusion for Intentional Acts Must Include Intent to Harm

The Tenth Circuit Court of Appeals issued its opinion in Mid-Continent Casualty Co. v. Circle S Feed Store, LLC on Tuesday, June 17, 2014.

I&W, Inc. owned a solution mining operation in Carlsbad, NM, and was insured by Mid-Continent Casualty Co, who provided CGL and umbrella policies to I&W. Solution mining is a process where fresh water is injected into underground salt formations, which creates brine water. The brine water is then extracted and sold for use in the oil and gas industries, creating an underground cavern. I&W’s mining operations created a cavern so dangerously large that they infringed upon the subsurface property of neighboring Circle S Feed Store and caused damage to the surface property. Circle S filed suit against I&W in state court, where it prevailed and was awarded $703,000 in compensatory damages and $300,000 in punitive damages. I&W subsequently declared bankruptcy.

During the pendency of the state court action, Mid-Continent sought a declaratory judgment in federal court that it owed I&W no duty of indemnification under the insurance policies. Both Mid-Continent and Circle S filed motions for summary judgment. The district court determined that (1) the damages were caused by an “occurrence” within the meaning of the policy; (2) the policy’s “intentional injury” exclusion did not apply; (3) the state court did not award judgment for diminution in value; and (4) nonetheless, indemnification was precluded by an exclusion in one of the umbrella policies for subsurface mining operations. The district court granted summary judgment for Mid-Continent based on the fourth point.

Circle S filed a motion to alter or amend the final judgment, arguing that the district court erred in holding the exclusion applied to the primary insurance policies and seeking clarification. The district court declined to revise its opinion but declared that it would have found coverage but for the exclusion. Circle S then appealed to the Tenth Circuit.

The Tenth Circuit examined the language of the policies and exclusions and determined that the district court had erroneously broadened the scope of the exclusion. The exclusion unambiguously applied to the umbrella policies but it was error to also apply it to the primary policies, since umbrella policies are separate and distinct from primary policies and serve different purposes. The Tenth Circuit then turned its focus to the district court’s resolution of the remaining issues. The district court had stated that but for the exclusion it would have found coverage based on three criteria: “(1) the subsidence I&W caused was an ‘occurrence’ within the
meaning of the policies; (2) the policies’ ‘intentional injury’ exclusion did not apply to exclude coverage; and (3) the damages awarded to Circle S were for a ‘physical injury to tangible property,’ which is covered, rather than for pure diminution in value, which is not.” The Tenth Circuit examined each prong.

Although Mid-Continent argued that the subsurface mining operations were not an “occurrence” under the policy language because I&W knew that its mining operations would create a cavern, the Tenth Circuit disagreed, noting that I&W did not know that the underground cavern had grown dangerously large or was infringing on the neighboring property. This also disposed of the “intentional injury” question, as I&W did not intend to create a dangerous cavern. Finally, the Tenth Circuit assessed whether the awarded damages were for physical injury to tangible property or pure diminution in value, and determined that the diminution in value suffered by Circle S was caused by the tangible injury of the subsurface cavern.

The district court’s judgment was affirmed regarding the application of the exclusion to the umbrella policies, but reversed as to the primary policies and remanded for further proceedings consistent with the Tenth Circuit’s holding.

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