Hydraulic Fracturing and Emerging Insurance Issues

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.