Texas Jury Awards Millions to Fracking Company For Insurer’s Bad Faith Denial of Claim For Broken Well Equipment
Time 4 Minute Read
Categories: Bad Faith, Property

Following a six-day trial, a Texas jury found that Great American Insurance Company breached its policy with a hydraulic fracturing company and engaged in unfair settlement practices when it refused to pay for loss the company sustained in a well accident. The decision highlights the need to vigorously pursue coverage using all information available and the benefits of leveraging state statutory protections governing unfair claims settlement practices to ensure that insurers handle claims in a prompt, fair, and reasonable manner.

In Compass Well Services, LLC v. Great American Insurance Company of New York, Compass sued Great American following a dispute over coverage for damages sustained in a well accident. In May 2013, a contractor mistakenly closed a master pressure valve on a three-pad well that Compass was fracturing. The valve closure caused a pressure buildup that significantly damaged equipment and resulted in a three-day emergency shutdown of operations.

Compass submitted a $1.5 million claim for its damaged equipment. Great American denied coverage on the grounds that Compass had failed to adequately prove overpressure in the valve or resulting damage to the equipment. In particular, Great American alleged that Compass’ untimely notice and destruction of equipment prejudiced the insurer’s investigation of the claim. When Compass became aware of new information supporting its claim and presented it to Great American, however, Great American refused to reconsider its position and maintained its denial. Compass initiated litigation, and the case went to trial.

The jury found in favor of Compass and awarded more than $5 million. In its verdict form, the jury concluded that Great American failed to comply with the terms of the policy and knowingly engaged in unfair insurance settlement practices under the Texas Insurance Code. Specific violations included Great American’s refusal to pay the claim without conducting a reasonable investigation, failing to affirm or deny coverage within a reasonable time, and failing to attempt in good faith to effectuate a prompt, fair, and equitable settlement of the claim when Great American’s liability had become reasonably clear. The jury also found that Great American failed to communicate with Compass in a timely manner when it received all required information and did not state whether the claim was accepted or rejected within 15 business days.

Compass received more than $2 million in compensatory damages for its covered losses under the policy, plus statutory penalty interest, $2 million in treble damages for violations of the Texas Insurance Code, and nearly $950,000 in attorneys’ fees through trial and post-verdict proceedings. Great American will also be responsible for paying additional attorneys’ fees in the event Compass successful defends of any appeal.

When accidents like those in the Compass case involve significant equipment damage and prolonged shutdowns, companies understandably focus on doing what is necessary to resume normal business operations rather than maximizing insurance recoveries. This may be particularly true in industries where regulatory or other legal issues (such as the cleanup, disposal, or destruction of damaged equipment) dictate that initial efforts focus on a broader emergency response strategy, resulting in the deferring of consideration of insurance issues.  Those efforts may take precedence over preserving property to facilitate an insurer’s investigation, which many times can last for weeks or months.

Even if the insurer raises defenses like late notice or prejudice related to the disposal or destruction of covered property, policyholders should present all available evidence to support the claim and continue to pursue coverage as soon as possible, and should update that evidence as soon as new information is discovered. An understanding of the relevant state insurance code and claims settlement practices can be important in evaluating the adequacy and thoroughness of the insurer’s investigation. Arguments relying on requirements of state insurance code provisions can offer increased damages, including treble damages and attorneys’ fees, which can be leveraged to resolve a claim before litigation and obtain extra-contractual recoveries if litigation is necessary. Retaining experienced coverage counsel early in the claim process can help these efforts.

  • Partner

    Geoff works closely with corporate policyholders and their directors and officers to resolve high-stakes insurance disputes.

    As a partner in Hunton’s top-ranked insurance coverage practice, he has recovered hundreds of ...

  • Partner

    A nationally recognized insurance coverage litigator, Lorie handles all aspects of complex, commercial litigation and arbitration for policyholders. Chambers-ranked and recognized as a “top 10 Super Lawyer,” Lorie has ...

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