The Oil and Gas Addendum

In its March 14, 2023 decision in Scottsdale Insurance Co. v. Solwind Energy, LLC, Case No. 2:22-CV-00036 (S.D.W.Va. Mar. 14, 2023), the United States District Court for the Southern District of West Virginia ruled that a surface developer’s insurance policies did not cover $4 million damage claims asserted by an oil and gas driller for lost drilling opportunities. This decision not only highlights the need for surface developers to evaluate their insurance coverage but it also reinforces the need for surface developers to coordinate with oil and gas owners to attempt to avoid any liability claims in the first place.

The Scottsdale Insurance Co. matter decided by the federal court is not actually an oil and gas case. Instead, it is an insurance coverage case that arises out of an oil and gas case in the Circuit Court of Mingo County, West Virginia. The Mingo County case involved conflicting uses of a piece of property. The oil and gas in the property, along with a pipeline right of way, were leased in the mid 1990’s and those rights were controlled by Geoex, Inc. On the surface of the property, Solwind Energy, LLC placed structures and powerlines. According to its social media, SolWind Energy was associated with solar and wind powered greenhouses.

Geoex, the oil and gas lessee, sued Solwind Energy in the Mingo County court, claiming that Solwind Energy’s surface structures allegedly blocked Geoex’s ability to develop two planned oil and gas wells on the property. Geoex alleged that it sustained damages of at least $2 million for each of two planned wells that it could not drill due to Solwind Energy’s surface structures.

Upon being sued, Solwind Energy sought coverage from its insurance carrier, Scottsdale Insurance, under two different insurance policies. The insurance company filed suit in the United States District Court for the Southern District of West Virginia against both Solwind Energy and Geoex for declarations that Scottsdale Insurance was not obliged to defend Solwind Energy or to indemnify Solwind Energy against the claims filed by Geoex in the Mingo County court case. The federal district court agreed with Scottsdale Insurance.

Solwind Energy’s insurance policies with Scottsdale Insurance covered “bodily injury” and “property damage” liability caused by an “occurrence” taking place on the “coverage territory” and “during the policy period.” Scottsdale Insurance claimed that this coverage did not apply to the lawsuit filed by Geoex because the complaint that Geoex filed in the Mingo County court “did not allege ‘property damage’ necessary to trigger an ‘occurrence’ under” the two insurance policies.”

The insurance policies between Scottsdale Insurance and Solwind Energy defined “property damage” to be “[p]hysical injury to tangible property, including all resulting loss of use of that property ... or Loss of use of tangible property that is not physically injured.” Id. at *5. Denying coverage on this basis, the federal court reasoned that Solwind’s alleged interference with the properties “. . . does not implicate tangible property.” Id. at *6. The federal court continued that any damages impacted “. . . Geoex's intangible property rights, and do not constitute “property damage” as defined in the policies.” Id. at *6.

Scottsdale Insurance also requested that the federal district court conclude that it had no obligation to indemnify or defend Solwind Energy under a part of the insurance agreement related to liability associated with “‘personal and advertising injury’ to which this insurance applies.” Id. at 7. The insurance policy contained a detailed description of “personal and advertising injury” and only one subsection of that definition was potentially applicable to the situation at-hand. That subsection required Scottsdale Insurance to indemnify and defend Solwind from damages related to “ [t]he wrongful eviction from, wrongful entry into, or invasion of the right of private occupancy of a room, dwelling or premises that a person occupies, committed by or on behalf of its owner, landlord or lessor.” Id.

The federal court concluded that this coverage obligation was not triggered because the insurance policy required that the injury had to be “committed by or on behalf of its owner, landlord or lessor.” According to the federal court, Geoex’s complaint in the Mingo County Court did not identify Solwind Energy as either the owner, the landlord or the lessor of the properties involved in the suit. The federal court also observed that the Mingo County court complaint did not identify that Solwind “. . . was acting at the request of the property owner, landlord, or lessor when erecting certain structures and pipelines on the property.” Id. at 8.

Solwind Energy appealed the federal district court’s conclusion that Scottsdale Insurance was not obliged to indemnify or defend Solwind Energy from the claims asserted by Geoex in the Mingo County court action. While that appeal plays out, there are lessons to be learned from this matter. While this case addressed specific points of certain insurance policies, any individual or entity using or developing the surface of property that is subject to an oil and gas lease or development should carefully review insurance policies to determine if they cover claims like the ones Geoex asserted - that its rights to develop the subsurface were impeded by surface structures.

Additionally, individuals or businesses using or developing the surface of property that is burdened by an oil and gas lease or where oil and gas development is ongoing should work to coordinate development with the individual or business holding the oil and gas lease rights as well as the owners of the underlying oil and gas whose rights would take precedence when the oil and gas lease terminates. Under the accommodation doctrine, subsurface rights take precedence over surface rights. For instance, in West Virginia, when subsurface rights are granted, they carry with them the right to use the surface of the land in a reasonable manner that is fairly necessary in the development and operation of the subsurface resource. See, Squires v. Lafferty, 121 S.E. 90, 91 (W.Va. 1924).

Many individuals or businesses developing the surface of property do not interact with the oil and gas lessee and oil and gas owners, or attempt to come to an agreement with those parties regarding the coordination between surface and subsurface development on a property. Even if a surface developer reserves an undisturbed area for oil and gas development, that still may not be enough to insulate the surface developer from claims that it has interfered with the subsurface owner’s right to the reasonable use of the surface of the property. As the $4 million dollar claim for just two wells in the lawsuit filed by Geoex demonstrate, potential damages related to interference with oil and gas development can be substantial. Therefore, it makes sense for surface developers to attempt to work out agreements with oil and gas owners and lessees to allow for mutually compatible development.

If you have a question regarding the coordination of surface development with oil and gas rights or whether particular insurance policies cover potential claims for impairment of oil and gas development opportunities, contact Attorney Brendan O’Donnell at 412-288-2226.