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Pickup in Fracking Activity Could Cause Headaches for Insurers, Case Warns

Source: Claims Management

Posted on 29 Jan 2013 by Neilson

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Fracking lawsuitsLawsuits associated with high-volume, hydraulic fracturing (fracking) are increasing amid the escalation in fracking activity. In the wake of several multi-million dollar settlements, the insurance industry has a major stake in understanding the scope and extent of risks potentially posed by fracking, writes LeClairRyan partner Michael J. Case in an article in the January issue of Claims Management magazine.

Landowners who allow gas exploration or production activity on their property, typically through lease agreements, may be held responsible under common law for dangerous conditions on their property, explains Case, And oil and gas leases often contain provisions indemnifying the landowner for claims arising from a gas company's operations and requiring the developer to obtain liability insurance covering the landowners for claims arising from such operations. This places the lease terms at the forefront in analyzing fracking-related liability, he notes in the article entitled "Fracking Know-How: Risks and Risk Allocation in High-Volume Hydraulic Fracturing for Shale Gas."

Insurance adds another layer of complexity, adds Case, who represents insurers and reinsurers in litigation and arbitration, as well as businesses and individuals in environmental liability and insurance cases. For example, well operators or landowners whose liability has not been transferred in the lease documents may look to their insurers to assume their retained liability. However, he advises, the likelihood of payment under such circumstances is far from certain.

Many insurers had already issued policies to landowners, contractors and well-site operators at a time when the volume of fracking activity was more limited. The exponential expansion of high-volume fracking activity may give rise to increased claims against policyholders, he warns in the article. Examples include Chesapeake Energy's $1.6 million payment to settle allegations of water well pollution in Bradford County, Pa., and a reported $4.1 million settlement with Cabot Oil & Gas Corp. by residents of Dimock, Pa., who claimed that their drinking water was contaminated by fracking-related methane gas.

Some state and federal courts have held that costs incurred pursuant to a governmental remedial directive may be recovered under a general liability insurance policy, Case notes. Although recently-issued policies likely contain a pollution exclusion barring coverage for discharge or other release of pollutants, New York's highest court has limited the exclusion to environmental claims, declaring that the exclusion may not be relied upon to defeat coverage for injuries involving exposures that are not deemed to be environmental in nature.

Case also notes that general liability policies often include a separate coverage grant for personal injury, which includes wrongful entry, eviction or other invasion of the right of private occupancy. Many state courts have held that claims for environmental contamination do not fall within the separate coverage grant for personal injury. However, he cautions, policyholders may seek to test the principle in the fracking context.

Generally, a threshold step in evaluating the potential claims arising from high-volume fracking involves clearly comprehending the roles potentially insured persons and entities are likely to play in the gas development process, as well as the legal and liability stage upon which those roles are played, writes Case. Ultimately, the facts giving rise to liability, coupled with the applicable policy provisions, will determine whether and to what extent, liability arising from fracking-related risks comes to rest upon the insurance industry.