Okla. Supreme Ct. Ruling Shows Policyholders Shouldn’t Depend on Agent’s Representations

New Dominion LLC taps into oil and natural gas reserves that many production companies avoid.

The Tulsa, Oklahoma company operates hundreds of wells that produce from hydrocarbon reservoirs that are saturated with water from ancient aquifers. When oil or gas is pumped, the wastewater is diverted to a pipeline and injected through a well deep beneath the surface of the earth.

The process frees up new reserves of oil and gas, but is also suspected of causing earthquakes. New Dominion executives inquired in 2013 if the company’s commercial liability policy covered earthquake damage. The company says their insurance agent assured them that it did, so it renewed a policy with National American Insurance Co.

As it turns out, the policy with NAICO clearly excluded coverage for damage caused by earthquakes, the Oklahoma Supreme Court decided Tuesday. In a 7-2 decision, the high court rejected New Dominion’s argument that the insurer could not deny coverage for “multiple earthquake lawsuits” filed against New Dominion because its agent, and also a senior claims manager for the insurer, had given assurances that earthquakes were covered.

“Had New Dominion taken the time to review the policy prior to executing its renewal, it would have recognized that the Subsidence and Earth Movement Exclusion precluded coverage for earthquake-related incidents,” the court said.

The decision reversed a portion of a ruling by Lincoln County District Judge Ferrell Ashwood that fairness demands that NAICO provide coverage for any claim that alleged bodily injury caused by an earthquake after the policy was renewed. The principle is known as equitable estoppel.

But the high court left New Dominion with ray of hope: It also reversed a portion of Ashwood’s decision that found a “total pollution exclusion” excluded coverage during the four year-period that NAICO provided coverage. The opinion says the exclusion language was ambiguous because it did not clearly encompass the wastewater that New Dominion discharges from its wells.

The Supreme Court’s opinion offers a lesson to executives who take the word of their insurance agent rather than finding an independent expert to examine their coverage. New Dominion’s brief to the high court describers a series of alleged misrepresentations made over a series of emails and telephone calls.

According to a brief filed in support of New Dominion’s appeal, the company was already insured by NAICO when it agreed to make Tedford & Associates its new agent of record in 2013. After renewing the NAICO policy, Chief Executive Officer Kevin Easley asked the agency’s owner, Mark Tedford, to find out whether his company had any coverage for earthquake claims.

Tedford responded in an email that the policy paid for unlimited defense costs, so there would be no cost to New Dominion unless it lost the lawsuit. But that wasn’t the end of the discussion.

On June 23, 2014, New Dominion General Counsel Fred Buxton asked Tedford for a copy of any earthquake coverage the company had. Tedford said there was no specific earthquake coverage, but the general liability policy would pay for the cost of defending any claims, and if New Dominion becomes legally liable “there would be coverage.” Tedford said he had a coverage opinion on the matter.

Buxton asked for a copy of that opinion. Tedford responded, but attached the wrong document to the email. The two exchanged a series of emails.

In the meantime, New Dominion received notice of the first of several lawsuits that alleged it was liable for earthquake damage, in this case bodily injury.

Harrison asked Dick Harrison, a senior claims manager for NAICO, how the insurer would respond to such a lawsuit. Harrison said that the policy would cover a lawsuit that alleged New Dominion had caused bodily injury, but not property damage, if the alleged damages occurred within the period of coverage.

On Aug. 18, 2014—nearly two months after Buxton’s inquiry—Tedford sent his coverage opinion.

“In my opinion, the general liability policy will defend and pay for third-party (property damage) and (bodily injury) claims for damage caused by earthquake(s) if it is proven that the earthquake was caused by New Dominion’s operations,” the email said, according to the pleading. “I think the bar is set very high for any third party to prove this and I think the mood of the insurance industry is to vigorously defend these lawsuits as they arise. Because defense cost is unlimited in this policy, I think coverage is adequate for this exposure.”

But after New Dominion sought coverage for a growing number of lawsuits for alleged earthquake damage, NAICO filed a lawsuit seeking a declaratory judgment that its policies do not afford coverage.

Judge Ashwood held two trials; one to determine if the policies afford any such coverage and a second to determine if coverage is owed even if earthquakes are excluded because of Tedford’s respresentations.

Tedford, reached by telephone on Tuesday, refused to comment because of ongoing litigation. New Dominion filed a separate lawsuit against his agency that has not been resolved, he said.

After Ashwood ruled, both New Dominion and NAICO appealed.

NAICO argued that Oklahoma case law has long distinguished between accepted claims and excepted claims. An insurer that misrepresents the terms of coverage may be estopped from denying coverage for an accepted risk, but cannot be required to provide coverage for an excepted risk.

“Such is the case before this court. Earthquake liability was never covered by the terms of any of the policies and, therefore, such coverage cannot be created by estoppel or waiver,” the insurer’s brief says.

NAICO said also that a “soliciting agent has no authority to bind an insurers as to the contents of an insurance policy.

The Supreme Court agreed that the earth movement exclusions clearly barred coverage and New Dominion had “constructive knowledge of any terms that contradict statements Tedford or Harrison might have made.” The court said in some instances, a court may expand coverage in a policy beyond the terms of the contract, but only if there was an “antecedent agreement” between the parties.

The communications between New Dominion and Tedford don’t amount to an agreement, the court said. They were merely questions and answers about whether policies already in effect afford the coverage New Dominion was seeking.

“In reviewing the record, it is clear that NAICO never intended to afford New Dominion coverage for earthquake-related incidents and certainly never agreed to do so,” the opinion says.

The court did, however, find that the “total pollution exclusions” in the policy were ambiguous, and thus unenforceable, because they refer to “irritant or contaminant,” a term that does not necessarily include wastewater.

The Supreme Court remanded the case to the Lincoln County court to determine whether a policy that doesn’t exclude pollutants but does exclude earthquake damage can provide coverage for any harm caused by earthquakes that were allegedly caused by the injection of wastewater.

Justices James E. Edmondson and Douglas L. Combs dissented, in part, to the ruling.

Photo courtesy of New Dominion LLC.