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A natural gas company recently won a breach of contract suit against its insurer in a case that could provide guidance for any policyholder trying to get coverage under its commercial general liability coverage.

At the heart of the case--Washington Energy Co. LLC v. Century Surety Co.--were the standard-form business risk exclusions in the gas company's policy. These exclusions, such as impaired property and product recall, are in most commercial general liability policies, and can be troublesome for many policyholders looking to claim on said policies.

Brendel and associate Roberta D. Anderson led the K&LNG team representing Seattle-based Washington Energy.

The difference in this case was that the United States District Court for the Western District of Pennsylvania did a thorough job of analyzing each exclusion. The resulting opinion was 37 pages long, said Brendel, and was an exhaustive, even scholarly, look at their intent and underlying purpose.

In finding for the insured, Washington Energy, the court declared each business risk exclusion to be vague. Century Surety has since paid out the energy company's claim.

"We had an insurer that kind of raised every conceivable business risk exclusion that they thought could be raised in order not to pay the claim," Brendel said. "And the court went through all of these exclusions, and basically found them to be, number one, ambiguous, and number two, inapplicable to the circumstances."

The finding has particular significance for oil and gas producers, said Brendel, or for companies in Pennsylvania. But the ruling could also be a benchmark for any future case where a policyholder is staring down these exclusions--in large part because there is so little else out there in the law books to guide judges and attorneys on the subject.

"It's a good milestone what the limitations of these exclusions are," Brendel said.

James M. Davis and Paul Walker-Bright, managing shareholder and shareholder, respectively, of Anderson Kill & Olick's Chicago office, agreed on the finding's impact. It could have an impact in Keystone State cases and national cases involving gas companies. And though other federal district or state courts aren't required to follow the decision, they just may.

"It (this ruling) may essentially eliminate these exclusions in many cases," said Davis, who is also the chair of Anderson Kill's Energy and Chemical Industries Insurance Recovery Group.

The legal trend, said Davis and Walker-Bright, is that insurers will eventually have to write general liability policies to better fit the context and needs of a given business.

Washington Energy operates gas wells in western Pennsylvania. The claim event in question occurred in March 2004, when a component part failure at one of its pumps caused air to be introduced into the gas line. The third-party company that normally receives and distributes the gas--Columbia Gas--had to then shut down its lines and halt distribution to its customers. When the insured tried to claim on its policy for injury to this third party, the insurer denied coverage, arguing that it fell under the product recall, impaired product and various other exclusions. Century Surety did not respond to a request for comment.

May 1, 2006

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