3rd Cir. / PA Law 

No Coverage for Faulty Workmanship on Fracking Wells 

The Third Circuit, applying Pennsylvania law, held that an insurer did not have to indemnify its insured for its allegedly faulty fracking services. Ultimately, the court determined that the damage the insured caused in conducting its fracking services did not constitute an “occurrence.” 

In the underlying suit, U.S. Energy Development Corporation (“U.S. Energy”) sued Superior Well Services (“Superior”), alleging that Superior had damaged 97 of its wells in connection with Superior’s hydraulic fracking services. The jury in the underlying suit found Superior breached its contract with U.S. Energy by “failing to perform its contract in a workman like manner,” and awarded U.S. Energy $6.16 million, which was increased to $13.18 million after interest. 

American Home Assurance Co. (“American Home”) then filed a declaratory judgment action against Superior, arguing that it was not required to indemnify Superior for the judgment because the property damage was caused by Superior’s own faulty workmanship. The District Court granted summary judgment for Superior and ordered American Home to indemnify Superior because it interpreted an endorsement in the policy to cover Superior’s fracking operations regardless of whether Superior failed to perform under the contract “in a workman like manner.” The District Court concluded that each of the 53 out of the total 97 damaged wells gave rise to separate occurrences. 

On appeal, the Third Circuit reversed the District Court’s ruling and remanded the case with instruction to enter judgment for American Home. The Third Circuit analyzed Pennsylvania law and held that the “damage to U.S. Energy’s wells was not caused by an ‘occurrence,’ which was defined in the policy as ‘an accident.’” While the policy did not define “accident,” the Third Circuit applied Pennsylvania precedent, construing the term to mean “‘unexpected,’ which implies a degree of fortuity that is not present in a claim for faulty workmanship.” The poor workmanship that Superior provided was too “foreseeable to be considered an accident,” and “such substandard service does not constitute an ‘occurrence’ when an insurance policy defines an ‘occurrence’ as an ‘accident.’” 

Concerning the fracking endorsement, the Third Circuit held that the endorsement retained the policy’s “occurrence” requirement. By reading the endorsement and the “occurrence” requirement together, the Third Circuit concluded that the endorsement “expressly required ‘property damage,’” which was covered under the policy only if it was caused by an “occurrence.” Thus, the endorsement did not displace the underlying policy’s occurrence requirement. Am. Home Assurance Co. v. Super. Well Services, Inc., 75 F.4th 184 (3d Cir. July 25, 2023).