Great American unit loses policy dispute over fuel leak

A policyholder has prevailed in a dispute with a Great American Holding Inc. unit that hinges in part over a policy’s cooperation clause.

The complex case involving San Antonio-based Petroleum Solutions Inc. and Tulsa, Oklahoma-based Mid-Continent Casualty Co. arises from a leak in an underground fuel storage tank installed underneath a truck stop that PSI had constructed in 1997, according to Tuesday’s ruling by the 5th U.S. Circuit Court of Appeals in New Orleans in Mid-Continent Casualty Co. v. Petroleum Solutions Inc.

The company for which the tank was installed, Columbus, Georgia-based Bill Head Enterprises Inc., which is no longer in business, discovered fuel had leaked under the system in 2001, according to the ruling.

PSI notified Mid-Continent, with whom it had a commercial general liability policy of the potential claim against it. Both Mid-Continent and PSI believed the leak was caused by a faulty flex connector manufactured by Springfield, Massachusetts-based Titeflex Corp.

Head sued PSI in February 2006, arguing PSI was responsible for the faulty flex connector and the leak. Mid-Continent assumed PSI’s defense under a reservation of rights. PSI then brought a third-party claim against Titeflex, which countersued PSI.

Despite Mid-Continent’s urging, PSI refused to accept a settlement offer in the Titeflex case, which proceeded to trial, with the jury returning a verdict in Head and Titeflex’s favor, according to the ruling.

Mid-Continent then filed suit in U.S. District Court in Houston seeking a declaratory judgment in the case. It also alerted PSI it was denying coverage for the Titeflex judgment because PSI had breached its policy’s cooperation clause by failing to cooperate with it in Titeflex’s counterclaim investigation and settlement. It also said an exclusion to a professional liability endorsement in its policy precluded coverage, according to the ruling.

At a subsequent trial on the issue of whether PSI complied with the cooperation clause, the jury found in PSI’s favor. The District Court also ruled that the professional liability exclusion does not cover the entire Titeflex judgment.

On appeal, a three-judge panel of the 5th Circuit unanimously ruled in PSI’s favor on the issue of whether the District Court’s jury instruction about the cooperation clause was an abuse of discretion.

The panel also reversed the District Court and held that “Mid-Continent owes PSI coverage for the entire Titeflex judgment.”

The case was remanded for further proceedings.

“We have tremendous respect for the (three) justices who heard this case and issued yesterday’s decision but we believe they overlooked or failed to properly consider several issue-dispositive facts which our client believes should lead to a different conclusion on several key holdings,” Mid-Continent attorney Christopher W. Martin, a partner with Martin, Disiere, Jefferson & Wisdom LLP in Austin, Texas, said in a statement.

“Our client is evaluating a motion to reconsider and, if requested to do so, we will timely move for and request such relief.”

PSI’s attorney could not immediately be reached for comment.