In March 2010, the EPA announced that it would conduct a research study to investigate the potential impacts of hydraulic fracturing on drinking water resources. In performing its study, the EPA followed water through all fracking-related phases—water acquisition, chemical mixing, well injection, collection of wastewater, and wastewater treatment and disposal. On June 3, 2015, the EPA released its draft assessment, finding no evidence that hydraulic fracturing has led to widespread, systemic impacts on drinking water. According to the assessment, although there is a potential to contaminate drinking water, the number of documented impacts to drinking water resources is relatively low when compared to the number of fractured wells. Thus, the draft assessment confirms that, if performed responsibly, hydraulic fracturing does not pose a threat to drinking water.
In a move that one journalist has described as politics trumping science, New York Governor Cuomo has announced that his administration will ban hydraulic fracturing statewide. With this ban, New York will join ranks with Vermont, which became the first state in the U.S. to ban the practice of fracking more than two years ago. At the time of Vermont’s ban, however, Vermont did not have any drilling projects underway, and there was no information to suggest that the state has underground gas reserves that could be tapped by fracking. Thus, arguably, the ban was largely symbolic. In contrast, the ban in New York will seal off about 12 million acres of Marcellus Shale.
Given New York’s natural gas reserves, there may be incentive for a constitutional challenge to its fracking ban, under either the Interstate Commerce Clause or the Supremacy Clause. Even if the ban is not successfully challenged, however, Governor Cuomo’s decision likely will not have a significant impact on the oil and gas economy because, traditionally, New York has not been a major energy-producing state. Those most significantly impacted by the ban may be New York citizens, who have witnessed – but will not share in – the prosperity experienced in neighboring Pennsylvania. For example, in Pennsylvania, energy companies have generated $2.1 billion in states and local taxes, and employment in the energy sector has doubled from approximately 13,000 in 2010 to over 28,000 in 2014.
The Sixth Circuit Court of Appeals recently held that an insurance agent did not have a duty to advise a petroleum company that the company should obtain pollution coverage, which would have covered a costly diesel spill. See Hardy Oil Co., Inc. v. Well Fargo Insurance-Indiana, Nos. 13-6373/6445 (6th Cir. Sept. 22, 2014) (unpublished opinion).
Yesterday, June 17, 2014, the Pennsylvania Commonwealth Court entered a decision regarding four matters that remained unsettled after the Pennsylvania Supreme Court’s ruling in the Robinson Township v. Commonwealth decision.
One, the Court held that it is not unconstitutional to limit notice by the DEP of spills to public water system facilities only. In reaching this decision, the Court found there are valid reasons for treating differently notification to public drinking water suppliers versus to private well owners. For example, the DEP does not regulate private wells, the DEP may have no knowledge of the location of all private wells, and public drinking water systems cannot be replaced easily if affected by a spill.
Two, the Court dismissed the issue of whether eminent domain powers are available to those private companies storing, selling, or transporting gas because the challenged statutory language “only confers upon a public utility possessing a certificate of public convenience the power to condemn property for the injection, storage and removal of natural gas for later public use.” In other words, the at-issue provision confers the right of eminent domain on a public utility only.
Three, the Court upheld the prohibition precluding medical professionals from disclosing chemicals associated with gas drilling. The Court found that the statute does not preclude a physician from sharing the disclosed confidential and proprietary information with another physician for purposes of diagnosis or treatment or from including such information in a patient’s medical records or evaluation.
Four, the Court enjoined the application and enforcement of the provision conferring the Public Utility Commission with the authority to review local zoning ordinances and to withhold impact fee money to municipalities.
In the wake of the Parr v. Aruba Petroleum, Inc. verdict, the media has speculated extensively on the potential impact of this purported “anti-fracking” result. In Parr, on April 22, a Texas jury awarded $ 2.9 million to a family after finding that Aruba Petroleum’s neighboring drilling activity had created a private nuisance. The significance of Parr jury verdict is diminished, however, when viewed in context with the jury verdicts recently entered in two other Texas lawsuits alleging that the defendant’s drilling operations constituted a nuisance, Anglim v. Chesapeake Operating, Inc., No. 2011-008256-1 (County Ct. at Law No. 1, Tarrant County, TX), and Crowder et al. v. Chesapeake Operating Inc., No. 2011-008169-3 (County Ct. at Law No. 1, Tarrant County, TX).
In the Anglim case, decided two weeks prior to the Parr verdict, the plaintiff-landowner lost. The jury found that the defendant’s natural gas operations were not a private nuisance. In Crowder, which was decided a month after Parr, the jury awarded $20,000 to the plaintiff-landowners after finding that the defendant’s drilling operations were a temporary nuisance. Thus, although these verdicts show that nuisance claims against operating companies may be viable, the Parr verdict appears to be an anomaly rather than a reflection of the current legal environment for companies engaging in drilling activities.
Today, May 15, 2014, in Towanda, Bradford County, Pennsylvania, Panda Power Funds broke ground for the first new power plant in Pennsylvania that was specifically developed to take advantage of its proximity to the Marcellus Shale gas formation. Governor Tom Corbett and other Pennsylvania officials joined the company in its groundbreaking ceremony.
This plant is expected to contribute an estimated $5.97 billion to the area’s economy during construction and the facility’s first 10 years of operation. The company also reports that approximately 500 jobs will be created during peak construction. Upon completion in 2016, the generating station will create an estimated 27 skilled jobs to operate the facility, as well as creating 45 indirect jobs within the community to support the plant.
Yesterday, May 14, 2014, the Pennsylvania Commonwealth Court heard oral argument regarding select matters that remain unsettled in the wake of the Pennsylvania Supreme Court’s ruling in the Robinson Township v. Commonwealth decision, including: (1) whether Act 13 can prohibit medical professionals from disclosing chemicals associated with gas drilling; (2) whether the Public Utility Commission retains the authority to review local zoning ordinances and withhold impact fee money to municipalities; (3) whether limiting notice by the DEP of spills to public well owners only is constitutional; and (4) whether eminent domain powers are available to those storing, selling, or transporting gas.
In anticipation of Pennsylvania’s gubernatorial primary on May 20, 2014, StateImpact Pennsylvania has provided a guide regarding where the candidates and the governor stand on energy and environmental issues: http://stateimpact.npr.org/pennsylvania/tag/election-2014/.
StateImpact Pennsylvania is a reporting project of NPR member stations that covers the fiscal and environmental impact of Pennsylvania’s energy economy, with a focus on Marcellus Shale drilling.
The Council of Canadian Academies has released an interesting panel report: Environmental Impacts of Shale Gas Extraction in Canada.
As the hydraulic fracturing or “fracking” industry has expanded, the companies involved in this drilling process have become the targets of an increasing number of claims and lawsuits. With the rising number of fracking claims, insurance coverage becomes vitally important. For example, if a plaintiff or a class of plaintiffs alleges that a water or air supply has been contaminated as the result of drilling-related activity, the defendant will request that its insurer defend and indemnify the company. Questions may arise, however, such as whether the policy indemnifies the insured for unintended consequence resulting from the intended act of fracking or whether the insurer may refuse to indemnify the insured based, for example, on the pollution exclusion contained in most Commercial General Liability (“CGL”) policies.
These types of insurance coverage issues have yet to be fully litigated. To date, only one publicized insurance coverage lawsuit has been filed related to fracking and the pollution exclusion. In Warren Drilling Co., Inc. v. Ace American Ins. Co., No. 2:12-cv-425 (S.D. Ohio, filed Apr. 13, 2012), a drilling company sued its insurer for refusing to defend or indemnify the company after drilling activities allegedly contaminated a nearby homeowner’s water well. The at-issue policy was a standard CGL policy, which excluded coverage for bodily injury or property damage caused by “pollutants,” but it included an Energy Pollution Liability Extension (EPLE) endorsement that reinstated coverage for a pollution incident where certain conditions are met. Specifically, the EPLE endorsement required the following: the discharge of pollutants being unexpected and unintended; the discharge commencing abruptly and instantaneously and at or from a site owned/occupied by or where the insured was performing operations; the insured knowing within 30 days of the commencement of the discharge; and the insured reporting to the insurer within 60 days of the commencement of the discharge. Citing to this endorsement as well as to an Underground Resources and Equipment Coverage endorsement, the insured argued that the insurer breached its contract and acted in bad faith by denying coverage for the underlying claim.
Although the insurer and insured in Warren ultimately settled their dispute in early 2013, before the parties litigated any coverage issues, this scenario is ripe for similar litigation. It is likely that courts soon will be interpreting these types of policy provisions in connection with fracking claims. Another area of interest may be D&O insurance coverage. For example, lawsuits may be filed alleging that directors and officers failed to disclose known environmental effects caused by the fracking process.
Thus, as energy companies continue to increase their fracking activities, the insurance industry may play an important role in establishing the scope of risk for these companies. But environmental risk management is not new to the insurance industry, and the growing fracking industry may require tailored insurance policies. Ultimately, companies involved in fracking should make sure that their insurance brokers understand the specific risks facing these companies, allowing confidence that the companies’ insurance policies will respond appropriately to fracking-related claims.