Lay v. Aetna Insurance Co.
599 S.W.2d 684, 1980 Tex. App. LEXIS 3451 (1980)
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Rule of Law:
Under a comprehensive general liability insurance policy, coverage for "property damage" defined as "physical injury to or destruction of tangible property" does not extend to purely economic losses, such as the cost to acquire property rights or lost profits from unrealized resources.
Facts:
- J. & J. Oil Venture hired J. D. Lay to supervise the location and drilling of an oil well on its leasehold in Caldwell County.
- Due to Lay's error in reading surveyor's stakes, the oil well was drilled on an adjoining tract of land not under lease to J. & J.
- The well successfully produced oil, but the location error was discovered after J. & J. had already spent approximately $40,000 on it.
- During the delay caused by resolving the location issue, approximately 1500 barrels of oil were drained from the reservoir by adjacent wells.
- To resolve the issue, J. & J. reached a settlement with the owner of the adjoining tract, Jerry Sauer, by purchasing an assignment of the drilling rights for the property where the well was located.
Procedural Posture:
- J. & J. Oil Venture sued J. D. Lay in a state trial court to recoup losses from the negligently located well.
- Lay tendered the defense of the suit to his liability insurer, Aetna Insurance Company.
- Aetna refused to defend Lay and denied coverage.
- Following a trial to the court, a judgment was entered against Lay for $34,034.56 plus interest and costs.
- Lay subsequently filed a separate suit against Aetna in a district court (trial court of first instance), seeking a declaration of coverage and indemnification for the judgment.
- The district court entered a take-nothing judgment against Lay, ruling in favor of Aetna.
- Lay, as appellant, appealed the district court's judgment to this Court of Civil Appeals.
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Issue:
Does an insured's negligent mislocation of an oil well, resulting in purely economic damages for a third party (such as the cost to purchase a lease and lost potential profits), constitute "property damage" defined as "physical injury to or destruction of tangible property" under a comprehensive general liability insurance policy, thereby triggering the insurer's duty to defend?
Opinions:
Majority - Smith, Justice
No. The insured's negligent act did not cause "property damage" as defined by the policy because the resulting losses were purely economic and did not involve physical injury to tangible property. The policy defines "property damage" as "physical injury to or destruction of tangible property" or the "loss of use of tangible property." The court reasoned that the costs J. & J. incurred—purchasing the new lease assignment and paying attorney/surveyor fees—were economic transactions, not physical damage to property. Similarly, the loss of oil to adjacent wells was not damage to J. & J.'s tangible property. At the time the drainage occurred, J. & J. had no ownership interest in that oil or the land; any cause of action belonged to the landowner at that time (Sauer) and did not transfer to J. & J. with the subsequent purchase of the lease. Because the underlying lawsuit against Lay did not allege any damages falling within the policy's definition of "property damage," Aetna had no duty to defend or indemnify him.
Analysis:
This decision narrowly construes the definition of "property damage" in standard commercial general liability policies, reinforcing the distinction between tangible property damage and purely economic loss. The case establishes that financial harm alone, such as the cost of acquiring intangible rights or lost business opportunities, does not trigger coverage under policies limited to physical injury to tangible property. This interpretation significantly limits the scope of liability coverage for professional negligence cases where the primary harm is financial rather than physical, forcing insureds to seek more specific errors and omissions (E&O) policies for such risks.
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