Prospect Resources, Inc. v. Travelers Companies, Inc., The et al

Filing 69

ORDER granting 22 Defendants' Motion for Summary Judgment;denying 42 Plaintiff's Motion for Summary Judgment; denying as moot 7 Defendants' Motion to Dismiss. Clerk to enter judgment in favor of defendants on all counts and costs shall be taxed against Plaintiff, by Judge William J. Martinez on 1/30/12.(gmssl, )

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLORADO
Judge William J. Martínez
Civil Action No. 10-cv-01739-WJM-BNB
PROSPECT RESOURCES, INC., a Colorado corporation,
Plaintiff,
v.
ST. PAUL FIRE & MARINE INSURANCE COMPANY, a Minnesota corporation, and
UNITED STATES FIDELITY AND GUARANTY COMPANY, a Connecticut corporation,
Defendants.

ORDER ON CROSS-MOTIONS FOR SUMMARY JUDGMENT

Plaintiff Prospect Resources, Inc. (“Prospect” or “Plaintiff”) brings claims against
Defendants St. Paul Fire & Marine Insurance Company (“St. Paul”) and United States
Fidelity and Guaranty Company (“USF&G”)1 for breach of contract, common-law breach
of the duty of good faith and fair dealing, and failure to pay benefits owed on an
insurance contract in violation of Colo. Rev. Stat. § 10-3-1115 & 1116. (ECF No. 1-1.)
These claims all arise out of Defendants’ denial of coverage and failure to provide a
defense for Prospect in an underlying state court lawsuit.
Before the Court are the following motions: (1) Defendants’ Motion to Dismiss
Plaintiff’s statutory bad faith claim (ECF No. 7); (2) Defendants’ Motion for Summary
Judgment (ECF No. 22); and (3) Plaintiff’s Cross-Motion for Partial Summary Judgment
(ECF No. 42). For the reasons set forth below, Defendants’ Motion for Summary
Judgment is granted, which moots the need to consider the remaining motions.
1

The Court will refer to St. Paul and USF&G collectively as Defendants.

I. LEGAL STANDARD
Summary judgment is appropriate only if there is no genuine issue of material
fact and the moving party is entitled to judgment as a matter of law. Fed. R. Civ. P.
56(c); Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986); Henderson v. Inter-Chem
Coal Co., Inc., 41 F.3d 567, 569 (10th Cir. 1994). Whether there is a genuine dispute
as to a material fact depends upon whether the evidence presents a sufficient
disagreement to require submission to a jury or conversely, is so one-sided that one
party must prevail as a matter of law. Anderson v. Liberty Lobby, 477 U.S. 242, 248-49
(1986); Stone v. Autoliv ASP, Inc., 210 F.3d 1132 (10th Cir. 2000); Carey v. U.S. Postal
Service, 812 F.2d 621, 623 (10th Cir. 1987).
A fact is “material” if it pertains to an element of a claim or defense; a factual
dispute is “genuine” if the evidence is so contradictory that if the matter went to trial, a
reasonable party could return a verdict for either party. Anderson, 477 U.S. at 248.
The Court must resolve factual ambiguities against the moving party, thus favoring the
right to a trial. Quaker State Mini-Lube, Inc. v. Fireman's Fund Ins. Co., 52 F.3d 1522,
1527 (10th Cir. 1995); Houston v. Nat’l General Ins. Co., 817 F.2d 83, 85 (10th Cir.
1987).
II. FACTUAL BACKGROUND
Prospect2 is a geological consulting firm that was involved with managing the
development of gas wells in Trinidad, Colorado in the late 1970s and 1980s. (ECF No.
1-1 ¶¶ 2, 14-18.) Prospect was insured under a general commercial liability policy
2

Prospect was formerly known as Gustavson Associates and is so named in the
underlying action. (ECF No. 1-1 ¶ 2; ECF No. 22-1; ECF No. 22-2.)

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issued by St. Paul from 1979 through 1988. (ECF No. 1-1 ¶ 9.) USF&G issued
Prospect a commercial liability policy from 1988 through 1999. (Id. ¶ 10.) The Court
will refer collectively to the policies issued by Defendants over this twenty-year span as
the “Policies.”3
In the late 1970s, three wells were drilled on mineral property controlled by the
City of Trinidad to test for the presence of coalbed methane gas. (ECF No. 22-1 ¶ 11.)4
In 1984, the wells were determined to not be commercially viable and, under the field
management of Prospect, were cemented, plugged, and abandoned. (Id. ¶ 12.)
In November 2004, Stephen and Audrey Bouvier (the “Bouviers”) purchased a
parcel of land under which one of these three wells, Trinidad MGP-1, was plugged and
abandoned. (Id. ¶ 1; ECF No. 1-1 ¶ 19.) In August 2006, the Bouviers contracted with
Cornerstone Contractors, Inc. to build a home on their property. (ECF No. 22-1 ¶ 15.)
In April 2007, the Bouviers’ home was approximately 80% to 85% complete when it
exploded due to an accumulation of natural gas that leaked out of the Trinidad MGP-1
well. (Id. ¶ 16.) The explosion and subsequent fire injured three of Cornerstone’s
employees. (Id.) It also destroyed the Bouviers’ home, supplies and materials that

3

Because the Policies span twenty years, there are some minor differences in the way
certain terms are defined. However, the parties agree that, for the most part, the meaning of
the pertinent terms remained unchanged. Thus, the Court will refer to how each phrase or term
is defined in one policy with the understanding that this definition continued to be substantially
similar during the entire twenty-year span at issue here. To the extent that any changes were
made that are significant to the Court’s analysis, such changes will be noted.
4

Many of the facts set forth herein are taken from the complaint and amended
complaint filed in the underlying action. For purposes of the instant motions, the Court accepts
as true all allegations in these pleadings. See Employers' Fire Ins. Co. v. W. Guar. Fund Serv.,
924 P.2d 1107, 1110 (Colo. App. 1996) (court must evaluate duty to defend based solely on the
pleadings in the underlying action and must accept all factual contentions therein as true).

3

were intended for construction, and tools and equipment owned by Cornerstone. (Id.)
On September 24, 2008, the Bouviers, Cornerstone, and the three injured
Cornerstone employees (collectively “Underlying Plaintiffs”) filed suit in Las Animas
County District Court for the damages and injuries suffered as a result of the explosion
(the “Underlying Litigation”). (ECF No. 22-1.) Prospect was one of three named
defendants in that action. (Id.) The complaint in the Underlying Litigation charged
Prospect with negligence in the plugging of the Trinidad MGP-1 well as well as trespass
for the methane gas that was allowed to enter the Bouviers’ property. (Id.)
On October 18, 2008, Prospect notified St. Paul and USF&G of the Underlying
Litigation and sought a defense and coverage of the claim under the Policies. (ECF
No. 1-1 ¶ 28.) On August 25, 2009, Defendants denied coverage for the claims
asserted in the Underlying Litigation. (Id. ¶ 29.) In October 2009, the Underlying
Plaintiffs amended their complaint in the Underlying Litigation. (Id. ¶ 30.) Prospect
again requested coverage and defense from St. Paul and USF&G and its request was
again denied. (Id.) Because St. Paul and USF&G denied coverage under the Policies,
Prospect paid substantial sums to defend the Underlying Litigation and, ultimately, to
settle the claims made therein. (Id. ¶ 32.)
On June 24, 2010, Prospect filed the instant action in Boulder County District
Court bringing three claims: (1) common law breach of contract for the failure to
investigate, adjust, defend, settle, and indemnify Prospect in the Underlying Litigation;
(2) common law breach of the duty of good faith and fair dealing in insurance contracts
based on Defendants’ allegedly “deliberate and unreasonable” failure to defend and

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indemnify Prospect in the Underlying Litigation; and (3) violation of Colo. Rev. Stat. §§
10-3-1115 and 1116 by delaying and denying the payment of benefits owed under the
insurance contract. (ECF No. 1-1.) On July 22, 2010, this action was removed to this
Court based on diversity of the parties. (ECF No. 1.)
III. ANALYSIS
Defendants move for summary judgment on all of Plaintiff’s claims. The Court
will address each in turn below.
A.

Breach of Contract
Prospect alleges that Defendants breached their insurance contracts, i.e., the

Policies, by failing to defend against the Underlying Litigation and failing to indemnify
Prospect for the damages it paid to the Underlying Plaintiffs. Under Colorado law,5 an
insurance company owes its insured both a duty to defend and a duty to indemnify.
See Hecla Mining Co. v. N.H. Ins. Co., 811 P.2d 1083, 1086, n. 5 (Colo. 1991). The
duty to indemnify relates to the insurer’s duty to satisfy a judgment entered against the
insured and is narrower than the duty to defend, which “concerns an insurance
company’s duty to affirmatively defend its insured against pending claims.” Cyprus
Amax Minerals Co. v. Lexington Ins. Co., 74 P.3d 294, 299 (Colo. 2003) (internal
quotations and citations omitted). Because these duties are separate and distinct, see
id., the Court will examine the duty to defend separately from the duty to indemnify.

5

Because this case is in federal court based on diversity jurisdiction, the Court applies
the law of the forum state, in this case, Colorado. James River Ins. Co. v. Rapid Funding, LLC,
658 F.3d 1207, 1216-17 (10th Cir. 2011).

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1.

Duty to Defend

It is undisputed that Defendants refused to provide a defense for Plaintiff in the
Underlying Litigation. Plaintiff alleges that this refusal breached the Policies. “An
insurer seeking to avoid its duty to defend an insured bears a heavy burden.” Hecla
Mining, 811 P.2d at 1089. “[T]he insured need only show that the underlying claim may
fall within policy coverage; the insurer must prove it cannot.” Compass Ins. Co. v. City
of Littleton, 984 P.2d 606, 614 (Colo. 1999) (internal citations and quotations omitted).
“An insurer has a duty to defend unless it can show that: (1) the allegations in the
complaint against the insured describe only situations which are within the policy
exclusions; and (2) there is no factual or legal basis on which the insurer might be held
liable to indemnify the insured.” TerraMatrix, Inc. v. U.S. Fire Ins. Co., 939 P.2d 483,
486 (Colo. App. 1997). The obligation to defend is not determined by the insured’s
actual liability to the claimant; instead, the duty to defend arises when the allegations in
the complaint, if sustained, would impose a liability covered by the policy. See Hecla
Mining, 811 P.2d at 1089.
A court’s determination of whether an insurer has a duty to defend is confined to
its examination of the four corners of the underlying complaint. See Weitz Co., LLC v.
Mid–Century Ins. Co., 181 P.3d 309, 311 (Colo. App. 2007) (internal quotations and
citations omitted). “[T]he duty to defend must be determined based solely on a
comparison of the allegations of the complaint made against the insured with the
insuring provisions of the policy.” Employers’ Fire Ins. Co. v. W. Guar. Fund Serv., 924
P.2d 1107, 1110 (Colo. App. 1996). The interpretation of the policy provisions is

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“based upon the principles of contract interpretation.” Hecla Mining, 811 P.2d at 1090
(internal citations omitted). Because determination of a duty to defend is based solely
on the allegations in the underlying pleading and the terms of the insurance contract,
whether a duty to defend exists is a question of law. See Bumpers v. Guarantee Trust
Life Insurance Co., 826 P.2d 358, 360 (Colo. App. 1991); see also Apartment Inv. and
Management Co. (AIMCO) v. Nutmeg Ins. Co., 593 F.3d 1188, 1193 (10th Cir. 2010).
The Policies at issue here provide that Defendants will “pay amounts any
protected person is legally required to pay as damages for covered bodily injury,
property damage or fire damage that: [1] happens while this agreement is in effect; and
[2] is caused by an event.” (ECF No. 42-2 at 30.) Thus, to invoke Defendants’ duty to
defend, the complaint in the underlying action had to allege the following: (1) bodily
injury, property damage or fire damage; (2) that occurred while the policy was in effect;
and (3) was caused by an “event”.
It is undisputed that any bodily injury and fire damages sustained by the
Underlying Plaintiffs was suffered in 2007—approximately eight years after the Policies
expired. Thus, the only type of injury possibly covered under the Policies was property
damage. The Policies defined “property damage” as “physical damage to tangible
property of others, including all resulting loss of use of that property; or loss of use of
tangible property of others that isn’t physically damaged.” (ECF No. 42-2 at 31.) An
“event” is defined as “an accident, including conditions or repeated exposure to
substantially the same general harmful conditions.” (Id.)

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The relevant portion of the amended complaint6 in the Underlying Litigation
(hereafter “Amended Complaint”) is as follows:
13.

In 1984, a decision was made by Defendant APGA,
after recommendation by Defendant [Prospect], that
the Trinidad MGP-1, Trinidad MGP-2 and Trinidad
MGP-3 wells were not commercially viable and that
they should be plugged and abandoned. These three
wells were thereafter plugged, abandoned and buried
at the instruction of Defendant APGA and under the
direction and supervision of Defendants [Prospect]
and Trinidad, acting as operators on behalf of
Defendant APGA. Defendant APGA, through
Defendants [Prospect] and Trinidad, retained the
services of Defendant Haliburton and directed and
supervised, and were ultimately responsible for the
plugging and abandoning of the Trinidad MGP-1,
Trinidad MGP-2 and Trinidad MGP-3 wells.

...
17.

On or about April 17, 2007, the retirement home,
which was under construction and approximately 80
to 85% complete, exploded, due to an accumulation
of natural gas that leaked out of the Trinidad MGP-1
well and was ignited. The explosion injured Plaintiffs
Velasquez, Kinder and Coberly, destroyed the
Bouvier home and supplies and materials which had
not yet been incorporated into the home under
construction and damaged and destroyed tools and
equipment owned by Plaintiff Cornerstone.

18.

As a result of the explosion, Plaintiffs have incurred
the following damages and losses:
...
c.

Bouvier Plaintiffs have incurred damages,
including, but not limited to, a loss in value of

6

The Court has compared the original and amended complaints filed in the Underlying
Litigation and finds that the factual allegations relevant to this case are identical. Thus, the
Court will refer solely to the allegations set forth in the amended complaint.

8

the Bouvier property as well as expenses
incurred due to the explosion and in
connection with the development of the
Bouvier Property which are no longer of value.
...
Seventh Claim for Relief
[Trespass to Land—All Defendants]
...
43.

The Bouvier Plaintiffs are owners of real and personal
property destroyed or damaged by the explosion.

44.

The Defendants caused the explosion by the
accumulation of natural gas from property not
belonging to the Bouvier Plaintiffs.

45.

The Defendants caused natural gas to enter upon the
real property of the Bouvier Plaintiffs without their
permission, materially interfering with the Bouvier
Plaintiffs’ use of their real property and caused
damages and losses to the Plaintiffs.

(ECF No. 22-2.)
Plaintiff argues that Defendants had a duty to defend because the Amended
Complaint alleged an event that occurred while the Policies were in effect. The Court
disagrees. In Samuelson v. Chutich, 529 P.2d 631 (Colo. 1974), a homeowner had a
gas line installed in 1960. A reaction between the soil and the material used for the gas
line resulted in the deterioration of the gas line over the next six years. In 1966, the
homeowners were severely injured when gas that had leaked into their home exploded.
The homeowners sued the installer of the gas line, who in turn sought coverage under
its insurance policy that was in effect when the gas line was installed in 1960.
The insurance policy at issue covered only “accidents which occur during the
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policy period”. The homeowners argued that the “accident” was a continuing process
which began when the pipe was allegedly negligently installed in 1960, and culminated
in an explosion in 1966, and therefore coverage was warranted under the 1960 policy.
The court of appeals disagreed and held that the “‘accident’ causing injury in this case
occurred at the time of the explosion, not when the allegedly wrongful act was
committed.” Id. The Colorado Supreme Court affirmed and held that “[t]o stretch the
scope of the ‘accident’ backward in time to reach the date of the earliest beginning of
any prior event which might be regarded as having a causal relation to the unlookedfor
mishap would introduce ambiguity where none now exists.” Samuelson, 529 P.2d at
635.
Thus, the salient question is not when the negligent act that ultimately results in
the injury occurs; the Court must focus on when the actual injury happened. Under this
reasoning, the fact that the MGP-1 well was negligently capped while the Policies were
in effect does not mean that there was a potential claim against the Policies. The Court
must determine whether any injury—in this case property damage—was alleged to
have occurred while the Policies were in effect.
The most relevant Colorado case on the issue of when property damage occurs
is Leprino v. Nationwide Prop. and Cas. Ins. Co., 89 P.3d 487 (Colo. App. 2004). In
Leprino, a developer was sued by homeowners who had purchased homes from the
developer. The homeowners alleged that, between 1991 and 1993, the developer
negligently prepared the lots on which the homes were built in disregard of the soils
reports and that such negligence resulted in a landslide in 1998. The relevant
paragraph from the homeowners’ complaint follows:
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In or about March, 1998, the culmination of a continuous
and progressive geologic hazard process manifested itself in
the form of slope failure, landslide and/or landcreep on
Green Mountain, damaging and/or otherwise significantly
impairing all of the Plaintiffs’ homes and underlying land.
This process has resulted in actual property damage, a loss
of the use of enjoyment of all or part of the Plaintiffs’ homes
and land, and in an interruption of and eviction from some or
all of the Plaintiffs’ right of private occupancy, among other
damages, losses and injuries.
Id. at 491. The developer tendered defense of this lawsuit to the companies that
insured it between 1991 and 1998. Nationwide—the developers’ insurer between 1991
and 1993—denied coverage and refused to defend; the developer sued for breach of
contract and bad faith. Id. at 489.
Interpreting policy terms that were virtually identical to those at issue in the
above-captioned action, the Colorado Court of Appeals held that the Nationwide owed
no duty to defend. The developer argued that the complaint’s allegation of “continuous
and progressive geologic hazard” brought a claim for property damage that occurred
beginning in 1991. The court disagreed noting that the complaint “itself did not
characterize such ‘geologic hazard process’ as property damage, but alleged that it ‘has
resulted in actual property damage.’” Id. The court was also compelled by the fact that
the complaint did not specifically allege when the geologic hazard process began. Id.
As a result, the court held that “the reference in the underlying complaint to a
‘continuous and progressive geologic hazard process’” could not be “construed to
allege property damage within the defendants’ policy periods.” Id. at 491. Thus, there
was no duty to defend. Id.
In this case, Plaintiff argues that the Amended Complaint brings a possible claim
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under the Policies because it alleges that the that the explosion and the trespass were
caused by an “an accumulation of natural gas that leaked out of the well”. (ECF No. 42
at 12-14.) Plaintiff contends that the accumulation of natural gas is an “event” for
purposes of the Policies because “accumulation” necessarily implies that there was
repeated exposure to the harmful condition. (Id. at 14.) Plaintiff also argues that the “it
may be reasonably inferred based on the allegations in the Underlying Complaint that
the accumulation of natural gas caused property damages to the Bouviers’
predecessor-in-interest while the Policies were in effect.” (Id. at 15.)
For many of the reasons set forth in Leprino, the Court disagrees with Plaintiff’s
arguments. Like the underlying complaint in Leprino, the Amended Complaint does not
characterize the accumulation of natural gas, in and of itself, as property damage.
Rather, the accumulation of natural gas is referred to solely as the cause of the
explosion and the cause of the trespass. (ECF No. 22-2 ¶¶ 17 & 45.) The Amended
Complaint also fails to allege when the accumulation of natural gas began. Thus, like
the Colorado Court of Appeals in Leprino, the Court finds that the allegation that certain
acts were caused by “an accumulation of natural gas” cannot be construed to allege
property damage that occurred while the Policies were in effect. See Leprino, 89 P.3d
at 491.
In sum, at the time the Policies were in effect, it is undisputed that there was only
raw land on the situs of the Bouvier home. Thus, the only property damage that could
possibly have occurred while the Policies were in effect was damage to that raw land.
Having reviewed the allegations in the Amended Complaint, the Court finds there is no

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allegation of property damage to that raw land between 1979 and 1999. Paragraph 17
of the Amended Complaint sets forth the Underlying Plaintiffs’ injuries and focuses
solely on the explosion in 2007 – eight years after termination of the insurance policy
most recently in effect – and its effect on the home then under construction, supplies
and materials, and the individuals constructing the home. (ECF No. 22-2 ¶ 17.) There
is no mention, in this paragraph of the Amended Complaint or any other, of separate
property damage to the raw land itself. Because the improved real property, supplies
and materials did not exist in or before 1999, and because the individuals who
sustained the personal injuries at issue in the Underlying Litigation did not work on the
Bouvier property in or before 1999, it was an existential impossibility for the Underlying
Plaintiff’s injuries to have occurred during the time period the Policies were in effect.
Thus, the Amended Complaint fails to state a factual or legal basis that could possibly
lead to a claim under the Policies. Therefore, Defendants had no duty to defend
Plaintiff in the Underlying Litigation. See TerraMatrix, Inc., 939 P.2d at 486.
2.

Duty to Indemnify

The Colorado Supreme Court has held that “[w]here there is no duty to defend, it
follows that there can be no duty to indemnify.” Constitution Assoc. v. New Hampshire
Ins. Co., 930 P.2d 556, 563 (Colo. 1996). Because the Court has held that Defendants
owed Plaintiff no duty to defend against the Underlying Litigation, it follows that there
was no duty to indemnify. Id.
Because Plaintiff has failed to show a trial-worthy issue as to whether
Defendants breached the insurance contracts either by failing to defend or failing to
indemnify, summary judgment is appropriate Plaintiff’s breach of contract claim. Thus,
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Defendants’ Motion for Summary Judgment is granted as to this claim.
B.

Common Law and Statutory Bad Faith Claims
Plaintiff alleges that Defendants’ refusal to defend or indemnify it constituted a

breach of the common law duty of good faith and fair dealing that is read into every
insurance contract. (ECF No. 1-1 ¶¶ 39-45.) Plaintiff also alleges that the refusal to
indemnify breached Colo. Rev. Stat. §§ 10-3-1115 and 1116 by unreasonably delaying
or denying payment of benefits owed on an insurance contract.7 (Id. ¶¶ 46-50.) Under
Colorado law, the central issue in both common law and statutory bad faith claims is
whether “‘a reasonable insurer under the circumstances [would] have denied or delayed
payment of the claim under the facts and circumstances.’“ TPLC, Inc. v. United Nat.
Ins. Co., 44 F.3d 1484, 1496 (10th Cir. 1995) (quoting Travelers Ins. Co. v. Savio, 706
P.2d 1258, 1274 (Colo. 1985)). Because the Court has held that Defendants had no
duty to defend or indemnify, no reasonable juror could find that it was unreasonable for
the Defendants to deny payment of the claim in this case. Berry & Murphy, P.C. v.
Carolina Cas. Ins. Co., 586 F.3d 803, 815 (10th Cir. 2009) (“Because [insurer] had no
legally cognizable duty to defend or indemnify a claim, plaintiffs’ bad faith claim also
cannot survive.”). Accordingly, Defendants’ Motion for Summary Judgment is granted
with respect to Plaintiff’s common law and statutory bad faith claims.

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Defendants have also filed a Motion to Dismiss the statutory bad faith claim arguing
that Plaintiff’s claim does not fall within the purview of these statutes because it is a third-party
rather than a first-party claim. (ECF No. 7.) Because, as discussed below, the Court grants
summary judgment in favor of Defendants on the statutory bad faith claim, it need not address
the arguments raised in the Motion to Dismiss.

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IV. CONCLUSION
For the reasons set forth above, the Court ORDERS as follows:
1.

Defendants’ Motion for Summary Judgment (ECF No. 22) is GRANTED;

2.

Plaintiff’s Motion for Partial Summary Judgment (ECF No. 42) is DENIED;

3.

Defendants’ Motion to Dismiss (ECF No. 7) is DENIED as MOOT;

4.

The Clerk shall enter Judgment in favor of Defendants on all counts; and

5.

Costs shall be taxed against Plaintiff.
Dated this 30th day of January, 2012.

BY THE COURT:

William J. Martínez
United States District Judge

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