By Laura A. Foggan and Kathryn C. Siehndel, Wiley Rein LLP, Washington DC
With multiple suits pending in several jurisdictions, notably including New York, Texas and Pennsylvania, it’s only a matter of time before liability is assigned in the first claims resulting from the controversial practice of hydraulic fracturing. Hydraulic fracturing, also known as “hydrofracking” or “fracking,” is the process of forcing a mixture of water, sand and chemicals into underground shale formations to release natural gas. In a time when anxieties are running high on both the economy and fuel supplies, hydrofracking seemingly provides a good source of fuel and commercial opportunities. But as drilling expands, public accusations about the environmental effects of fracking are on the rise, and drilling companies may face litigation from state and federal environmental authorities as well as private individuals and companies. With attention-grabbing headlines asking whether fracking is the next MTBE (methyl-tertiary butyl ether), insurers are following growing questions about the scope of likely litigation as well as the potential exposure of insurers to policyholder claims seeking coverage for fracking suits. Even though general liability coverage may be part of the risk management portfolio of large oil and gas companies involved in fracking, there should be little exposure for such insurers in this emerging area of liability. Depending on individual policy terms, property policies, environmental liability policies, and specialty oil and gas coverages may be more directly at stake. Even for those coverages, however, there will be individual contract terms as well as substantial fortuity issues that could bar coverage for losses arising from fracking.
Hydrofracking Is Increasingly a Target for Regulation and Litigation
Rising gas prices and concerns about the availability of foreign oil led to an explosion in domestic natural gas drilling over the past five to 10 years, much of which involves hydrofracking. To illustrate, the number of drilling permits issued for the Marcellus Shale—an expansive shale formation that underlies Pennsylvania, New York, West Virginia and Ohio—went from 11 in 2005 to 3,403 in 2010. Pennsylvania, New York and Texas are in the forefront in publicity over fracking practices, but other states such as Arkansas, California, Colorado, Maryland, Ohio, Virginia and West Virginia are considered likely sites for future litigation over fracking.
At this point, the biggest public concern is with the composition of fracking fluids, and the claim that fracking chemicals are being released into groundwater and drinking water sources, resulting in harmful contamination. Fracking companies generally have declined to disclose publicly the blend of chemicals used in the fracturing process, claiming that the specific formulations are trade secrets. The New York Department of Environmental Conservation (NYDEC), based on certain confidential submissions by prospective drillers, compiled and published a list of chemicals commonly used in fracturing fluids, including some known carcinogens. For instance, the list includes acetone, acrylamide, benzene, ethylbenzene, formaldehyde, toluene and xylene—all Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA)-designated hazardous substances. In addition to the risk of contamination of water supplies, public concerns from fracking include risks to air quality, the migration of gases and chemicals to the surface and the potential mishandling of waste.
Under the federal Safe Water Drinking Act (SWDA), the Environmental Protection Agency (EPA) is required to establish minimum regulations for states to follow when developing underground injection control programs to protect drinking water sources. But pursuant to the Energy Policy Act of 2005, hydrofracking wells are exempt from being classified as injection wells under the SWDA, which means they are not subject to federal or state drinking water controls. However, both Congress and state legislatures are being lobbied to ban or at least impose stricter regulations on gas and oil companies engaged in hydrofracking. On March 22, 2011, Congress reintroduced the Fracturing Responsibility and Awareness of Chemicals (FRAC) Act to both the House and Senate. Originally introduced in June 2009, the FRAC Act would amend the SWDA to give the EPA authority to regulate hydrofracking. The Act would also require companies to disclose the chemicals used in their fracking fluids (without requiring them to reveal their specific formulas, which the Act recognizes as proprietary). Under intense pressure from constituents, New York state lawmakers placed a moratorium on hydrofracking until July 1, 2011. Although the legislature refused to extend the moratorium, the governor announced that New York would not issue any hydrofracking permits until a comprehensive impact study by the NYDEC was finalized—estimated to be early 2012. A drilling moratorium was also put in place for the Marcellus Shale, while the Delaware River Basin Commission considers regulations for the natural gas industry in its jurisdiction (though some exploratory wells have been allowed to proceed). Concerns over groundwater contamination have also been raised in Colorado, Louisiana, New Mexico, Ohio, Oklahoma, Pennsylvania, Texas, West Virginia and Wyoming. And although no drilling has taken place to date in New Jersey, the state’s legislature approved a bill declaring New Jersey a no-fracking zone in March 2011.
In addition to the legislative actions under way, the Obama administration could be issuing new fracking rules within the next six months. The Secretary of Energy Advisory Board (an independent advisory committee that serves the Energy Secretary) has been tasked with forming a subcommittee to study the potential risks associated with hydrofracking, and to identify immediate steps that can be taken to improve the safety and environmental performance of fracking, and to develop consensus recommendations on practices for shale extraction to ensure the protection of public health and the environment.
Legislative and regulatory activity may both set standards for hydrofracking practices, and prompt more litigation in the form of environmental enforcement activity and private suits alleging harm from practices that do not comply with applicable federal and state standards.
Litigation over alleged harms from fracking already has begun, with the primary focus—as anticipated—on contamination of water supplies and exposure to allegedly toxic fracking substances. Other possible claims include those arising from air pollution from diesel engines; compressor stations; and flaring, radioactivity that is a characteristic of shale fields; and claims concerning improper storage and disposal of hazardous wastes and byproducts from fracking operations. In February 2011, nine families initiated litigation in New York against Anschutz Exploration Corporation and its subcontractors for contamination of drinking water in Horseheads, NY. They seek compensatory damages for loss of property value and punitive damages. The plaintiffs also seek health monitoring costs, but do not allege or seek damages for any actual bodily injury. In Pennsylvania, a landowner filed suit in November 2009 alleging property damage as a result of toxic chemicals released during hydrofracking. And, in September 2010, 13 Pennsylvania families filed suit alleging exposure to contaminated groundwater—this time, alleging actual bodily injury to a child. Further, in November 2010, the Brockway Borough Municipal Authority in Pennsylvania filed suit against a drilling company seeking an order to protect the community water supply. In addition to the existing litigation, well-known plaintiffs’ firms, including Weitz & Luxenberg and Baron & Budd, reportedly are recruiting potential plaintiffs who may have suffered injuries from hydrofracking. Many of these plaintiffs’ firms were involved in hundreds of suits over the last two decades against gas and oil companies for contamination of water supplies with MTBE.
In 2004, the EPA concluded that hydrofracking was not necessarily hazardous and that there was “no unequivocal evidence” of health risk associated with the process. Since then, the gas industry has insisted that any water contamination is not a result of drilling activities. But in a study of hydrofracking in the Marcellus Shale over the last three years (prior to the moratorium), Pennsylvania’s Department of Environmental Protection logged 1,435 violations of the state’s oil and gas laws. There were 30 investigations of gas migration from wells, and five explosions that allegedly contaminated ground or surface water between 2006 and 2010. Recent investigations by both The New York Times and Congress also assert that toxic chemicals used in the fracking process have leaked into nearby water sources. In 2010, Congress tasked the EPA with conducting a thorough study of the effects of hydrofracking on drinking water and groundwater. Results are expected by the end of 2012.
To the extent studies suggest a link between fracking activities and environmental contamination, they will be utilized by plaintiffs’ firms to erode a major causation hurdle that litigants now face. Drilling companies and their insurers should anticipate additional claims arising in at least the following contexts:
- Individuals alleging bodily injury resulting from exposure to chemicals in soil and water, seeking incurred medical costs and future damages;
- Individuals who have not suffered bodily injury, but seek medical monitoring costs for any
potential health issues as a result of exposure;
- Property owners claiming environmental contamination, loss in property value and/or damage to crops and livestock;
- Water suppliers seeking recovery of compensatory damages, costs of removing contaminants from the water supply and injunctive relief to abate harmful practices; and
- State and federal environmental regulatory bodies seeking injunctive relief, contamination cleanup, mitigation efforts, fines and penalties (contamination from hydrofracking will likely be subject to CERCLA).
Assessing Potential Liability to Insurers
Today, the gas produced from hydrofracking makes up around 25% of America’s natural gas supply. But even as late as 2000, it was just 1%. And the real hydrofracking boom wasn’t until 2008. Accordingly, insurance policies issued within the last decade are most likely to be on the risk for hydrofracking claims. Companies prominently associated with hydrofracking efforts include Chesapeake Appalachian, El Paso/Tennessee Gas Pipeline, Exxon Mobil, Halliburton, Hess Corp., Range Resources, Schlumberger and Spectra Energy Partners. Oil and gas companies like these generally will have several different types of coverages that may be applicable to their fracking activities, including specialty drilling policies, property policies, environmental liability coverage and general liability policies.
Insurers will have strong defenses to coverage for fracking claims under most general liability policies, however. In particular, general liability policies issued within the past decade almost certainly will contain a variation of an absolute or total pollution exclusion, which will bar coverage for fracking-related liabilities in most, if not all, cases.
According to the gas industry, there are some instances where water alone can be used to fracture rock, but the vast majority of natural gas fracking requires a blend of chemicals. Although hydrofracking companies have not generally made public the chemicals used in their fracking fluids, many fracking chemicals are known hazardous materials and would almost certainly be deemed “pollutants.” “Pollutants” are commonly defined as some variation of “any solid, liquid, gaseous, or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste.” Thus, the pollution exclusion will be a major bar to general liability coverage for claims against policyholders for damages due to third-party bodily injury or property damage as well claims for testing or cleanup by the government.
The pollution exclusions used in recent general liability policies take a variety of forms, but each appears likely to bar coverage for most fracking-related claims. For instance, the 1985 ISO pollution exclusion bars coverage for discharges at or from premises “you own, rent or occupy” and “a site or location on which you or contractors or subcontractors working directly or indirectly on your behalf are performing operations . . . if pollutants are brought on to the site or location in connection with such operations.” The 1988 ISO total pollution exclusion bars coverage for, inter alia, bodily injury or property damage arising from discharges of pollutants at or from a site that was “at any time owned or occupied by, or rented or loaned to, any insured” and a site “on which you or any contractors or subcontractors working directly or indirectly on any insured’s behalf are performing operations . . . if the pollutants are brought on to the . . . site . . . in connection with such operations by such insured, contractor or subcontractor.” Similarly, 1998 ISO language also excludes coverage for bodily injury or property damage arising out of the actual, alleged or threatened discharge, dispersal, seepage, migration, release or escape of pollutants from any site occupied by an insured, or from any premises on which any insured or contractors are performing operations if the pollutants are brought on or to the premises by such insured or contractor. It further excludes any losses arising out of any request or demand that an insured test, monitor, clean up or in any way assess or respond to the effects of pollutants; or claims by the government for damages from assessing or responding to pollutants.
Although questions regarding coverage might arise where a targeted defendant did not directly own, rent or occupy a fracking location (such as where a separate company conducted fracking operations for the benefit of a targeted defendant), the arguments for the application of pollution exclusions to fracking generally are very strong, given that the anticipated claims will allege traditional environmental pollution (e.g., contamination of groundwater) and will concern alleged discharges onto “land, the atmosphere, or any water course or body of water,” so that even exclusions with this language would apply in a straightforward manner.
It is possible some issues also will arise under a widely used clause stating that there is no coverage for “[a]ny loss, cost or expense arising out of any governmental direction or request that you test for, monitor, clean up, remove, contain treat detoxify, or neutralize pollutants.” Although this clause plainly is applicable to actions by federal and state environmental authorities directing a clean up or response to contamination, there are interesting questions about the extent to which this clause also bars coverage for potential claims by water districts or water agencies. In other settings, such as cases alleging MTBE contamination of water supplies, water contamination claims seeking cleanup have been brought by a variety of entities ranging from private parties to investor-owned water utilities, to water districts and public agencies established by regulation or code, to and including cities and states. The application of the language linking the loss, cost or expense section of the exclusionary clause to a “governmental direction or request” may be challenged depending on the entity requesting or directing cleanup of water supplies. However, more recent pollution exclusions often do not include the “governmental direction or request” language in their provisions barring coverage for loss, cost or expense of responding to cleanups.
Another variation of the pollution exclusion seen in some recent general liability policies is the time element pollution exclusion, under which coverage is allowed for bodily injury or property damage arising from accidental, short-duration releases of pollutants, if certain conditions (including prompt reporting) are met. It is possible that some fracking-related accidents could trigger limited time element coverage for pollution incidents, although most anticipated claims will focus on the migration of fracking fluids into a groundwater supply over time.
Beyond the pollution exclusion, policyholders may face additional barriers to coverage for these types of claims arising from allegations of water contamination. General liability policies cover only liability for bodily injury or property damage that is neither expected nor intended. Dangers from fracking practices are under intense scrutiny by both the public and the government. Plaintiffs’ attorneys will attempt to show that, at least at some point in time, drilling and gas companies became aware of the dangers, including potential groundwater contamination, and continued the same fracking practices that allegedly cause harm. A typical strategy used by plaintiffs’ firms is also to look to activities by industry trade associations to demonstrate knowledge of harms and to cast targeted defendants in an unflattering light as companies that sought individually or through trade group efforts to downplay the potential problems and dangers of their activities. The American Petroleum Institute as well as regional oil and gas industry groups have been active in addressing fracking issues. In light of the public awareness of potential harms, it may be difficult for drilling or gas companies to contend they did not expect or intend the very harms that have widely been discussed. Thus, fortuity issues will loom large in any possible coverage claims that are not barred by pollution exclusions. Indeed, fortuity questions could bar insurance coverage under other types of coverages as well as in general liability contracts.
Obviously, various other general liability coverage limitations may also be implicated, depending on the particular claims and applicable policy language; for instance, many courts have held that claims for medical monitoring costs based on fear of illness or increased risk do not constitute insured claims for bodily injury. To the extent general liability coverage might exist in limited circumstances, there would be issues concerning the trigger of coverage and allocation of loss as well. However, it appears that fracking claims will be excluded from coverage under most general liability policies by pollution exclusions. In rare cases where such an exclusion is not applicable, the expected or intended clause and the fundamental fortuity requirement will be obstacles to any general liability coverage claim.
 Fracking practices may present issues other than contamination and toxic exposure claims as well. For instance, well blowouts and claims of earthquake tremors have been associated with fracking practices. In many cases, these types of claims will present coverage questions under specialty, property or environmental liability policies, which are beyond the scope of this article.