drilling down on hydraulic fracturing · 2019. 10. 22. · drilling down on hydraulic fracturing...

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© 2013 Wilson Elser. All rights reserved.

Drilling Down on Hydraulic Fracturing

The Coverage Implications

Carl Pernicone – Wilson ElserMichael Conley – Offit Kurman

September 10, 2013

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Roadmap of potentially relevant coverages

• Site Pollution Incident (Oil & Gas) Legal Liability Polices• Oil & Gas CGL Protection Form (“Sudden and

accidental” pollution incident coverage)• Traditional CGL Policies• Casualty Policies• London Policy Forms

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Oil & gas pollution legal liability policies

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• Coverages available under Oil & Gas Pollution Legal Liability Policies :– Third party liability - Bodily Injury, Property Damage and

Remediation Expenses– First Party Remediation Expenses– Emergency Response Expenses– Evacuation Expenses– Image Restoration Expenses

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• Coverages available under Oil & Gas Pollution Legal Liability Policies :– Third party liability - Bodily Injury, Property Damage and

Remediation Expenses– First Party Remediation Expenses– Emergency Response Expenses– Evacuation Expenses– Image Restoration Expenses– Written on claims –made/reported basis– Potentially recurring issues:

• What is a covered “Pollution Incident”• Quantifying available limits for the “same, related or continuous”

Pollution Incidents

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Oil & gas pollution legal liability policies (cont’d)

• O & G Third party liability coverage applies to BI, PD and Remediation Expenses when a Claim Arises from a “Pollution Incident” that:– Commences after the Retroactive Dates– Is on, under or migrating from covered property– Is first made and reported during the policy period

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• “Pollution Incident” is defined, relevant part, to mean:– “the discharge, dispersal, release escape, migration or seepage

of Pollutants on, in, into or upon land . . . Structures, the atmosphere, any watercourse or body of water, including surface water or groundwater.”

– Includes abandonment by parties other than insured, without knowledge of an officer, director, manager of insured• “Pollutant” Typically defined to include chemicals used in

hydrofracking

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• “Hydrofracking Scenario:– Energy Co. insured has leasehold that sits atop natural gas

reserve in Marcellus Shale– Energy Co. purchases O&G policy for period January 1, 2013-

2014, with retro date of January 1, 2013– Covered Property definition in O&G policy includes leasehold– Energy Co. constructs and operates multi-pad well site on

leasehold– Energy Co. contracts with local hauler to transport spent fracking

fluid off site for disposal

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• “Fracking Scenario (cont’d):– On June 1, 2013, unbeknownst to Energy Co, hauler off loads

shipment of spent fluid into drums and leaves it on the leasehold property

– On July 1, 2013, a leak develops in drums, releasing fluid into ground, where it thereafter leaches into groundwater

– On Sept 1, 2013, a homeowner living in vicinity where spent fluid drums were left discovers that drinking water well on his property is contaminated by fracking fluid

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• “Fracking Scenario (cont’d):– Homeowner is asymptomatic, but fears contracting disease from

consuming tainted well water– On Dec 1, 2013, homeowner sues Energy Co. and hauler and

seeks establishment of medical monitoring fund for potential future sickness or disease

– On Dec 15, 2013, Energy Co. tenders claim to O&G insurer for coverage

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• “Fracking Scenario Analysis– O&G policy “Pollutant” definition includes fracking fluid so spent

fluid would arguably qualify as a “Pollutant”– Release of Pollutant occurred on Covered Property—Energy

Co’s leasehold—during the period of the policy– Yes, spent fluids were “abandoned “on property, but that was

done without knowledge of any officer, director, or manager of Energy Co.

– “Pollution Incident” definition has therefore been met

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• “Fracking Analysis (cont’d)– Homeowner medical monitoring suit was filed on Dec 1, 2013

and Energy Co. reported suit to O&G Insurer on Dec 15, 2013– Thus claim for a loss arising from a Pollution Incident on

Covered property was first made and reported during policy period

– Absent some other impediment to coverage, on these facts O&G policy would apply.

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• Fracking Scenario 2:– Same facts as above with one change:– Energy Co. discovers drums of abandoned spent frack fluid, after

disposal by hauler, but before any release of fluid into ground and groundwater

• Fracking Scenario 2 Analysis:– Still should be covered– Energy Co had no knowledge of initial illicit abandonment of

drums of spent fluid and discovered drums before there was any Pollution Incident

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• Limits of Liability available under O & G Policy:– one limit per Pollution Incident– “Same, related or continuous” Pollution Incidents are subject to a

single limit– Per incident pollution limit is subject to an overall aggregate for

each coverage type (e.g., Third party remediation, First Party Remediation, Evacuation, etc)

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• Issue: When does fracking-related contamination involves the “same, related or continuous” Pollution Incidents ?

• Discussion:– Unaware of any decisions discussing this in context of fracking

suits– There is considerable body of case law discussing meaning of

the term “related” in context of professional liability policies

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• “Related” Pollution (cont’d):• Cases reflect two views of meaning of “Related”:

– Casually related• Cause and effect relationship• “but for” scenario

– Logically related• Common facts, circumstances or situations• Common ties• Common starting point

– Practice Point: Need to check case law

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• “Related” Pollution Incidents Fact Scenario:– Energy Co. insured leased tract of land sitting atop natural gas

reserves trapped in shale– Energy Co. constructs three-well pad fracking site on property– Unbeknownst to energy company, site sits atop large supply of

trapped methane gas– Fracking causes methane blowout in one of three wells, which

release methane that migrates onto neighboring properties

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• “Related” Pollution Fact (cont’d) :– A day later a methane release occurs at a second well– Two days later methane is released at a third well– Homeowners living in vicinity of well-site have no present injury,

although the fear future injury from methane exposure– They sue to establish a medical monitoring fund for potential

future sickness or disease– Energy Co. tenders suit to its O & G Policy insurer

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• “Related” Pollution Analysis– Causally Related

• No “cause and effect” relationship between Methane blowouts at three wells

• No evidence that one blowout led to the other two — no “but for”scenario

• Sufficiently separated by time—3 days—and place—3 different well sites– to be view as 3 separate Pollution Incidents, each of which is subject to a separate limit

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• “Related” Analysis (cont’d)– Logically Related

• Three separate methane blowouts arise from “common facts and circumstances”—hydrofracking at the same 3-well pad site

• Have a “common tie” and “common starting point”—each of the three wells sits atop a large supply of trapped methane gas that was released by fracking process on the well-pad site sits atop

• All three blowouts are therefore “logically related” Pollution Incidents, subject to a single Pollution Incident limit.

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• Policy covers:– Pollution clean up costs which result from a “sudden and

accidental pollution incident”– “Sudden and accidental pollution incident” must:

• Begin during the policy period• Result from Your Work or Your Completed Work in the

performance of oil and gas operations• Not result from the intentional or willful violation of any

government law, regulation or rule

Oil & Gas CGL Protection FormOil & Gas CGL Protection Form

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• Policy covers:– Pollution clean up costs which result from a “sudden and

accidental pollution incident”

• Subject to strict notice/reporting requirements- Are these requirements enforceable?

Oil & Gas CGL Protection FormOil & Gas CGL Protection Form

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• “Sudden and accidental pollution incident” means the discharge, dispersal, release or escape or a pollutant that:– Is sudden and accidental– Begins on a specified date and time when policy is in effect– Is first known within 30 days of beginning by insured or its

employees– Attempt is made to end leak as soon as possible after it first

becomes known– Is first reported to insurer within 90 days after first becoming known.

Oil & Gas CGL Protection Form (cont.)Oil & Gas CGL Protection Form (cont.)

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• See e.g., Venoco, Inc. v. Gulf Underwriters, Ins Co., 175 Cal. App. 4th 750 (2009)– Notice and reporting requirements are not unusual in the oil &

gas industry

Courts Have Sustained The Notice & Reporting Provisions Of These PoliciesCourts Have Sustained The Notice & Reporting Provisions Of These Policies

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• Where—as here—the policy provides specialized coverage conditioned on express compliance with a notice and reporting requirement, the time limit is enforceable without proof of prejudice.

Courts Have Sustained The Notice & Reporting Provisions Of These Policies (cont.)Courts Have Sustained The Notice & Reporting Provisions Of These Policies (cont.)

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• The notice and reporting requirement in the policy does not violate public policy because compliance with these requirements is an “element of coverage” under these kinds of policies.

Courts Have Sustained The Notice & Reporting Provisions Of These Policies (cont.)Courts Have Sustained The Notice & Reporting Provisions Of These Policies (cont.)

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• Facts– Drilling Company undertakes fracking operations on

property owned by NY dairy farmer– Drilling Company has Oil & Gas CGL coverage in force for

the period June 1, 2011—June 1, 2012– Sept. 1, 2011, “flowback” fracking fluid escapes from a leak

in the well casing of one of Drilling Company’s wells, while being withdrawn from the well

Scenario 1Scenario 1

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• Facts (cont.)– Leaking fracking fluid contaminates well pad area and

seeps into nearby ground– Drilling Company discovers leak on Sept 3, 2011– On Sept 7, 2011, Drilling Company employees take steps to

halt leak– Drilling Company reports the leak to its Oil & Gas insurer on

Nov 3, 2011.

Scenario 1 (cont.)Scenario 1 (cont.)

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• Analysis– Sept 1, 2011 release of “flowback” fracking fluid from leak in

well casing arguably qualifies as a “sudden and accidental pollution incident” within the meaning of Oil & Gas CGL policy

– Leak was discovered on Sept 3—within 30 days of beginning—and reported to Oil & Gas insurer on Nov 3, 2011—within 90 days of Drilling Company’s discovery of leak


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• Analysis (cont.)– In taking action on Sept 7, 2011, Drilling Company

employees “attempted to end the leak as soon as possible”as required by policy

– Absent some other defense to coverage, notice and reporting obligations of Oil & Gas CGL policy have been satisfied and coverage would apply.


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• Facts– Drilling Company undertakes fracking operations on tract of

land in PA– Drilling Company is insured under Oil & Gas CGL policy in

force from June 1, 2011-June 1, 2012– On Nov 1, 2011, a leak develops in casing of a fracking well

passing through a drinking water aquifer—releasing fracking fluid into the water in the well

Scenario 2Scenario 2

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• Facts (cont.)– Drilling Company learns of the leak on Nov 10, 2011, but ,

because of unexpected early snowstorm, it can’t start work on halting well leak until Dec 10, 2011

– Another snowstorm takes place on Jan 25, 2012, again halting operations to stop the leak


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• Facts (cont.)– On Feb 10, 2012. Drilling Company resumes work on

plugging leak in well casing– Two days later, on February 12, 2012, Drilling Company

realizes that, with disruption caused by snow storms, it had forgotten to report the claim to its Oil & Gas CGL insurer

– It does so on Feb. 13. 2012.


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• Analysis– Nov. 1. 2011 leak in well casing causing release of

fracking fluid intro drinking water aquifer occurred during term of June 1, 2011-June 1, 2012 policy

– Drilling Company discovered leak on Nov 10, 2011—within 30 days of the start of the leak as required by the policy


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• Analysis (cont.)– Drilling Company also took steps “as soon as possible” to stop

leak as required by the Oil & Gas CGL policy—even though its efforts were twice halted by snowstorms

– Nevertheless, Drilling Company failed to report the leak to its Oil & Gas CGL insurer until Feb 13, 2012—more than 90 days after it first learned of leak on Nov. 10, 2011

– Upshot: Notice and reported requirements have not been satisfied and Oil & Gas CGL coverage doesn’t apply.


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• Trigger and allocation• Absolute Pollution

Exclusion• Occurrence• Medical Monitoring costs• Damage to Property

Exclusion

• Do Trespass and nuisance claims implicate “personal injury”coverage

• Contractual liability exclusion

• New York Navigation Law

Likely Issues Under Traditional CGL PoliciesLikely Issues Under Traditional CGL Policies

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• Scenario:– Contaminated soil, surface water and ground water allegedly

resulting from the leakage of spent “fracking fluid” from a concrete well casing used in hydrofracking drilling process in the Marcellus Shale

Trigger & AllocationTrigger & Allocation

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• Insurers may argue:– To the extent hydrofracking related contamination spans multiple

policy periods, each triggered policy is responsible for its pro rata share of the alleged contamination

– The policyholder will be responsible for any uninsured, or self-insured periods implicated by the hydrofracking-related contamination

Trigger & Allocation (cont.)Trigger & Allocation (cont.)

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• Policyholder may argue: – To the extent hydrofracking-related contamination spans multiple

periods, each triggered policy would be jointly and severally liable for “all sums” the insured may be obligated to pay as a result of hydrofracking-related contamination

– Where hydrofracking contamination implicates self-insured or uninsured periods, the insured will have no responsibility to contribute to the loss; rather the coverage periods will “collapse around” and absorb any self-insured or uninsured periods

Trigger & Allocation (cont.)Trigger & Allocation (cont.)

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• Policyholder may argue:– Better-reasoned cases interpreting the Absolute Pollution Exclusion

have held it only applies to “traditional environmental claims.”See, e.g., Nav-Its, Inc. v. Selective Ins. Co. of America, 869 A.2d 929 (2005)

– In Ayersman v. West Virginia DEP, 2000 W. Va. LEXIS 131 (W. Va. November 22, 2000), the West Virginia Supreme Court remanded thecase on technical grounds for further fact finding but noted in footnotes that it was “skeptical of any policy language that purports to exclude a primary function of an insured” and that the inclusion of an exclusion for clean up costs incurred at “governmental request” might create an ambiguity in a policy issued to a governmental entity.

– Contamination resulting from release of hydrofracking fluid does not involve a “traditional environmental claim”

The Absolute Pollution Exclusion (cont.)The Absolute Pollution Exclusion (cont.)

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• Policyholder may argue (cont.):– Even if contamination resulting from leakage of hydrofracking

fluid could be viewed as a “traditional environmental claim,”hydrofracking fluid is a “product” used in the course of hydraulic fracturing drilling operations

– Case authority supports proposition that pollution exclusion is inapplicable where contamination results from use of a “product” See, e.g., Great Lakes Chemical Corp. v. International Surplus Lines Ins. Co., 638 N.E. 847 (4th Dist. Ct. App. 1994)

– Here, therefore, hydrofracking fluid is not a “pollutant” and pollution exclusion would be inapplicable.


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• Insurer may argue:– Alleged contamination of land, surface water and ground water

resulting from leakage of hydrofracking fluid has all the earmarks of a “traditional environmental claim”:

• Release of contaminant—frack fluid—into environment• In the course of some industrial operation—drilling• Resulting contamination of soil, surface water and ground water


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• Insurer may argue (cont.):– Cases have found exclusion to be “clear and unambiguous”

(See, Deni Associates of Florida, Inc. v. State Farm Fire & Cas. Ins. Co., 711 So. 2d 1135 (1998)

– Cases have sustained applicability of pollution exclusion in context of drilling claims. See, e.g., Venoco, Inc. v. Gulf Underwriter Insur. Co., 175 Cal. App. 750 4th 2009)


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• Insurer may argue (cont.):• On “products” issue, a product can be a pollutant when

not being used for its intended purpose– Case law support:

• Federated Mut. Ins. Co. v. Absol. Petroleum, 2007 Ala. LEXIS 65 (Ala. 2007) (“We hold that gasoline, although not a pollutant when properly used for the purpose for which it is intended is clearly a pollutant when it leaks into the soil from undergroundtanks or lines or when fumes from such a leak are so dangerous that a business must be closed . . .”)

• MT Petroleum Tank Release Compensation Board v. Cumleys, Inc., et al., 174 P.3d 948 (2008) (“diesel a pollutant when it leaks into ground and contaminates soil and groundwater.”)


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• Insurer may argue (cont.):– Products issue (cont.)– Case law support (cont.):

• Gold Fields American Corp. v. Aetna Cas. And Sur. Co, et al., 744 N.Y.S. 2d 395, 396 (3d Dep’t 2002)(Even if contaminant “[c]an be used as a commercial product, it is nonetheless covered by the absolute pollution exclusion, since indisputably hazardous substances were released in the open environment.”)

• Doe Run Resources Corp. v. Lexington Insur. Co., 719 F.3d 868 (2013) (“ when [product] escapes and reaches a location where it is no longer a useful product it is fairly considered apollutant.”) (citations omitted)


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• Insurer may argue (cont.):– When fracking fluid contaminates soil, surface water or ground

water it is no longer being used for its intended purpose– Rather, it constitutes a “pollutant” within the meaning of the

pollution exclusion– Thus, the pollution exclusion applies


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• What about methane release from shale in the course of hydrofracking?– Recent Duke University study revealed high concentration of

methane gas in homeowners wells and other drinking water supplies in close proximity to natural gas wells

– Possible source: methane released and migrating to surface through fissures in shale resulting from hydrofracking process


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• Methane release (cont’d)– If Duke study proves accurate, methane concentration in

drinking water could be a bigger problem that groundwater contamination resulting from leakage of fracking fluid—either when initially injected or when withdrawn during “flowback process.”


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• Methane release (cont.)– Would pollution exclusion bar coverage for methane released in

course of hydrofracking?– Policyholder argument

• Methane released from shale in course of fracking is a “naturally occurring” substance that wouldn’t constitute a “pollutant” as that term is used in absolute pollution exclusion


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• Methane release (cont.)– pollution exclusion (cont.)– Insurer argument

• Courts have found “naturally occurring” substances can qualify as a “pollutant” or “contaminant” for purposes of the Absolute Pollution Exclusion--under the right circumstances

• , See e.g. Am. Equity Ins. Co. v. Castlemane Farms, Inc., 220 F. Supp. 2d 809, 814 (S.D. Tex. 2002) (concluding that “salt water is a ‘contaminant’ when introduced accidentally onto property that is not meant to receive it.”)


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• Methane release (cont.)– pollution exclusion (cont.)– Insurer argument

• At least two PA decisions have sustained applicability of pollution exclusion to contamination arising from release of methane gas that “forms naturally in landfills.” See e.g., Lower Paxon Township v. United States Fid. And Guar. Co., 557 A.2d 393 (1989) and O’Brien Energy Systems, Inc. v. American Employers Ins. Co., 629 A. 2d 957 (1993)


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• Completed Operations and hydrofracking– Examples of potential hydrofracking-related completed

operations:• Installation of drilling rigs and derricks • Construction of hydrofracking well pads• Construction of well casing for hydrofracking drilling operations• “closed” hydrofracking wells• Operation of waste water plants treating “spent” fracking fluid

collected and shipped from the well site


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• Completed Operations and hydrofracking (cont.)– Potential pollution scenarios involving these hydrofracking-

related completed operations:• air contamination resulting from release or “venting” of methane

from drilling rigs at well site• drinking water contamination resulting from leaks of fracking fluid or

methane gas arising from “Deep Water Horizon”-like poor cementing around vertical section of well-casing

• leaks or releases of contaminants from “closed” fracking wells• release of unscreened drilling contaminants by waste water plants

treating spent fracking fluid shipped from well sites.


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• Completed Operations (cont.)– Would pollution exclusion be applicable here?

• Policyholder argument:– No. If exclusion were applicable it would, in effect, be barring coverage

for entities engaged in hydrofracking related businesses—rig installation, construction of well pads/ well casing-- or municipal services—waste water treatment plants

– These entities purchased insurance with the reasonable expectation they would be covered for liabilities arising from these activities

– Excluding coverage would render the policy meaningless


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• Completed Operations (cont.)– Would pollution exclusion be applicable here?

• Insurer argument:– Yes. Structure of policy shows no tension between exclusion and

completed operations coverage.– No explicit indication that exclusion does not apply to competed ops

hazard– Plain terms of pollution exclusion and structure of policy

demonstrate that if exclusion was not intended to apply to the completed ops hazard, the policy would have so stated.


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• Scenario:– Complaints for hydrofracking-related damage often allege that

the defendants knew or should have known in the exercise of reasonable care that the spills, releases or emissions caused by defendants’ negligent conduct and the resulting harm to plaintiffs and their property “were the foreseeable and inevitable consequences of defendants’ acts and/or omissions in the manner in which it engaged in its gas drilling and production activities”

OccurrenceOccurrence

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• Issue:– Does a hydrofracking complaint with these kinds of

allegations allege an “occurrence” as that term is defined in the policy?

Occurrence (cont.)Occurrence (cont.)

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• Policyholders may argue:– Even if the insured knew or should have known that its drilling or

production activities would result in hydrofracking-related spills, releases or emissions, where the insured can demonstrate that the resulting damage—e.g., soil, surface water and ground water contamination-- was unintended, then the damage would still be deemed to arise from an “occurrence” as that term is used in the policy.


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• Policyholders may argue:– Case law recognizes the principle that unintended damage

resulting from an insured’s intentional conduct would still be covered by insurance. See, e g., Parker v. Hartford Ins. Co.,278 S.E. 2d 803 (1981) and Farber v. United States Fid. & Guar. Co., 809 So. 2d 85, 90 (4th Dist. Ct. of App. 2002) (“the expectation of injury must be more than mere foreseeability.”)


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• Policyholders may argue:– Case law Cont.:– See also, Dallas National Insur. Co. v. Sabic Americas, Inc.,

2011 Tex. App. LEXIS 1741 at * 19-20. (Mar., 10, 2011), citing Texas Supreme Court opinion in Trinity Universal Insur. Co. v. Cowan, 945 S.W. 2d 819 (1997) and noting “Although the Cowan court found no ‘accident,’ it declined to rule that deliberate acts may never constitute an accident, citing the example of the hunter who deliberately fires gun at what he believes is a deer, but is actually a person.”


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• Insurers may argue:– The most recent decision to address this issue is the VA

Supreme Court’s opinion in AES Corp v. Steadfast Insur. Co., 2012 VA Lexis 81 (Apr. 20, 2012)

– The coverage dispute there arose from the Native Village of Kivalina climate change suit against AES and a number of other power companies


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• Insurers may argue:– VA Supreme Court held that, even if AES acted negligently and

didn’t intend the damages arising from its greenhouse gas emissions, the Kivalina complaint alleged that the “damages sustained were the natural and probable consequence of AES’s emissions.”

– The Kivalina allegations are substantially similar to allegation in fracking complaints that the damages “were the foreseeable and inevitable consequences of defendants’ acts and/or omission”


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• Insurers may argue :– Relying on Steadfast, insurers could argue that, where the only

allegations in the complaint are that the fracking-related damages---e.g., soil, surface water and ground water contamination-- “were the foreseeable and inevitable consequences of defendants’ acts and/or omissions in the manner in which it engaged in its gas drilling and production activities,” there is no “occurrence” as that term is used in the policy.


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• Background:– Marcellus Shale-related complaints typically include a count to

recover the costs of establishing a program for the medical monitoring of claimants who:

• May have had contact with soil, surface water or ground water contaminated with fracking fluid or air emissions resulting fromdrilling operations

• Allege no present injury as a result of that contact• But have an increased risk they may become ill in the future

Fear of Future Injury & Medical Monitoring (cont.)Fear of Future Injury & Medical Monitoring (cont.)

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• Issue 1:– Do Medical Monitoring Claims allege policy-defined “bodily

injury”?

• Insurers may argue:– Complaint seeking medical monitoring must allege actual

present bodily injury in order to satisfy the policy definition of bodily injury. See e.g., HPF, LLC v. General Star Indem. Co., 788 N.E. 753 (Ill. App. Ct. 2003)


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• Issue 1:– Do Medical Monitoring Claims allege policy-defined “bodily

injury”?

• Insurers may argue:– See also Norwood v. Raytheon Company, et al, 414 F. Supp. 2d

659, 665 (W.D.Tex. 2006)(“ . . . The Texas Supreme Court appears disposed to rely on the same policy considerations in rejecting medical monitoring claims that it relied on in rejecting mental anguish claims in the absence of present physical injury.”)


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Fear of Future Injury & Medical Monitoring (cont.)

• Issue 1 (cont.):– Do Medical Monitoring Claims allege policy-defined “bodily

injury”?

• Insurers may argue (cont.):– Applying this rule here, where a Marcellus Shale-related

complaint seeking medical monitoring contains no allegation of actual present bodily injury, the “bodily injury” definition of the policy is not satisfied and coverage does not arise.

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• Issue 1(cont.):– Do Medical Monitoring Claims allege policy-defined “bodily

injury”?

• Policyholder may argue:– Allegations of an increased risk of illness, standing alone, are

sufficient to satisfy the “bodily injury” required by CGL form definition. See, e.g., Baughman v. United States Liability Ins. Co., 662 F. Supp. 2d 386 (D.N.J. 2009)


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injury”?

• Policyholder may argue (cont.):– In addition, courts have ruled that mental injury or emotional

distress —even without some corresponding physical condition or impairment— is sufficient to satisfy CGL “bodily injury”requirement. See. e.g., Lavanat, et al. v. General Accident Ins. Co., 584 N.Y.S ed 744 (1992)


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injury”?

• Policyholder may argue (cont.):– See also Petito, et al. v. A. H. Robins Co., Inc., 750 So. 2d 103,

108 (3rd Dist. Ct. of App. 1999) (Florida appeals court overturning trial court ruling and holding, “We find nothing in Florida law barring a [medical monitoring] claim and caselaw and equity . . . Persuade us that. . . such a claim is viable and necessary to do justice.”


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• Issue 2:– Do the costs of medical monitoring constitute “damages” the

insured is legally obligated to pay?

• Policy wording:– “We will pay those sums that the insured becomes legally

obligated to pay as ‘damages’ because of ‘bodily injury’ or ‘property damage.’”


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• Issue 2:– Do the costs of medical monitoring constitute “damages” the


• Insurer may argue:– Case law supports view that damages includes only legal

damages. See e.g., Johnson Controls, Inc. v. Employers Ins. of Wausau, 665 N.W. 2d 257 Wisc. 2003)

Fear Of Future Injury & Medical Monitoring (cont.)Fear Of Future Injury & Medical Monitoring (cont.)

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• Issue 2 (cont.):– Do the costs of medical monitoring constitute “damages” the

insured is legally obligated to pay?• Policyholder may argue:

– Other cases support view that equitable remedies —like medical monitoring- qualify as “damages” within the meaning of the CGL wording See, e.g., Farmland Indus., Inc. v. Republic Ins. Co., 941 S.W.2d 505 (Mo. 1997) or that the CGL “damages”wording includes both legal and equitable relief. See e.g., Bausch & Lomb, Inc. v. Utica Mut. Ins. Co., 625 A. 2d 1021 (Md. 1993)


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• Policyholder may argue (cont.):– Under this view, an insured would have coverage for the costs of

a court-administered fund for medical monitoring for potential future hydrofracking-related bodily injury.


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• Middle View (cont.):– Still other cases have rejected a bright line test and classified

medical monitoring as having both legal and equitable elements, depending on the scope of the relief sought


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• Middle View (cont.):– These cases recognize the need for a “case-by-case” analysis to

determine the specific nature of the medical monitoring relief sought. See, e.g., Donovan v. Phillip Morris USA, Inc., No. 06-cv-12234-NG (D. Mass. June 24, 2010)


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• Middle View (cont.):– Applying this here, if investigation reveals that request for

medical monitoring for future hydro fracking-related injury is primarily compensatory, then the damages requirement would be satisfied.


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• Middle View (cont.):– On the other hand, if the investigation reveals that the request for

medical monitoring for future hydrofracking-related injury is more equitable in nature, the “damages” element would likely not be satisfied.


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• Scenario:– Insured is a drilling company engaged in hydrofracking

operations in the Marcellus Shale– One of the insured’s workers on hydrofracking well site ruptures

a surface container storing spent fracking fluid– Rupture of storage results in immediate release of fracking fluid

into soil, surface water and subsequent seepage into ground water

Damage to Property ExclusionDamage to Property Exclusion

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• Issue:– Does damage to property exclusion bar coverage for any

hydrofracking-related contamination claim stemming from rupture of fracking fluid surface storage container?

Damage to Property Exclusion (cont.)Damage to Property Exclusion (cont.)

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• Insurer may argue:– The contamination resulting from the release into the

environmental of fracking fluid on property where insurer drilling companies workers were operating constitutes property damage to property owned, rented or occupied within the meaning of the damage to property exclusion


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• Policyholder may argue:– Damage to property exclusion may bar coverage for soil and

surface contamination arising from drilling company workers rupture of fracking fluid storage container on property occupiedby insured drilling company

– However, well settled that this exclusion does not apply to ground water contamination


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• Policyholder may argue (cont.):– Rationale: Ground water is not property an insured can own,

rent or occupy; it is a resource of the state, property of the people. See, e.g. State of New York v. New York Central Mut. Fire Ins. Co., 542 N.Y.S. 2d 402 (3d Dep’t 1989)

– Thus, in event fracking fluid, released into soil and surface water, leaches into ground water, damage to property exclusion would be inapplicable to ground water contamination


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• Scenario:– Complaints for damages arising from hydrofracking in Marcellus

Shale typically include counts for “nuisance and trespass”– Claimants allege that hydrofracking-related activity results in

release of contaminants into environment, including air emissions from drilling process at hydrofracking well pads

– Marcellus Shale-related complaints allege that these releases and emissions represent actionable “trespass and nuisance”

Coverage For Trespass & Nuisance ClaimsCoverage For Trespass & Nuisance Claims

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• Issue:– Does the “Personal injury” coverage in the CGL form apply to

any Marcellus Shale-related claims for trespass and nuisance?

Coverage For Trespass & Nuisance Claims (cont.)Coverage For Trespass & Nuisance Claims (cont.)

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• Insured may argue:– “Personal injury” is defined in CGL form to include “wrongful

entry into or invasion of the right of private occupancy”– Courts in environmental context found that i) pollution claims

involve an “invasion of the right of private occupancy,” triggering personal injury coverage and; ii) the pollution exclusion only limits the CGL bodily injury and property damage coverage.See., e.g., Titan Holding Syndicate, Inc. v. City of Keene, N.H., 898 F.2d 265 (1st Cir.1990)


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• Insured may argue (cont.):– Applying this principle here, the insured could argue that any

Marcellus Shale-related complaint for trespass and nuisance arising from hydrofracking- related activities alleges an “invasion of the right of private occupancy,” triggering personal injury coverage, which is unrestricted by the pollution exclusion


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• Insurer may argue:– Check to see if personal injury coverage is subject to its own

pollution exclusion– In some forms, it is– If so, that ends, the inquiry– Even if it is not, courts that found personal injury coverage

applicable to environmental claims were wrong.


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• Insurer may argue (cont.):– Here’s why: Personal injury coverage provides coverage for

certain enumerated purposeful offenses which can be lumped under the descriptive term “personal injury.” The coverage does not apply to the kind of “incremental harm that results to property interests from pollution.” County of Columbia v. Continental Ins. Co., et al., 612 N.Y.S. 2d 345 (1994)

– No Florida decisions, but See., e.g., Legarra, et al. v. Federated Mut. Ins. Co., 42 Cal. Rptr. 101 (Third App. Dist. 1995) and Titan Corp., et al. v. Aetna Cas. And Sur. Co., 27 Cal. Rptr. 2d 476 (Fourth App. Dist. 1994)


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• Insurer may argue (cont.):– Courts that adopted this theory in the environmental context also

erred when they found the pollution exclusion only restricted bodily injury and property damage coverage See, e.g., O’Brien Energy Systems, Inc. v. American Employer Insur. Co., et al. 629 A. 2d 957, 964 (Super Ct. 1993)(“ The [personal injury] coverage does not provide indemnification for environmental damage claims . . . Coverage for such claims is specifically excluded by the pollution exclusion. To hold otherwise would emasculate the clear and unambiguous provisions of the pollution exclusion and could not be justified. . . .”)


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• Insurer may argue (cont.):– Insurance policies must be interpreted as a single integrated

document, with all the provisions – including the pollution exclusion – applying to the entire policy

– Applying these principles here, Marcellus Shale-related claims for nuisance and trespass arising from hydrofracking operations would not be covered by “personal injury” coverage


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Contractual Liability Exclusion

• Policy Wording:– Standard form CGL excludes coverage for bodily injury and

property damage that the insured has assumed under contract or agreement

– This exclusion, however, does not apply to liability:• Assumed under an “insured contract” ; or• That the insured would have been subject to even in the absence of

contract or agreement

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Contractual Liability Exclusion (cont.)

• Policy Wording (cont.):– The CGL form definition of “Insured contract” includes contracts

for leasing premises and contracts or agreements pertaining to the insured’s business under which the insured assumes the tort liability of another party. (emphasis supplied)

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• Insureds potentially facing contractual liability exposures in connection with hydrofracking activities:– Property owners (individuals or municipalities)– Gas companies– Companies engaged in constructing and installing hydrofracking

drillings rigs– Companies engaged in constructing hydrofracking well pads and

well casing

Contractual Liability Exclusion (cont.)Contractual Liability Exclusion (cont.)

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• Insureds facing contractual liability (cont.) :– Consulting engineers retained relative to hydrofracking related

activities (e.g., well pad placement, well casing construction).Transportation companies retained to ship spent fracking fluid from the site


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• Scenario 1– Facts

• Gas company enters lease agreement with property owner pursuant to which it is authorized to enter property and perform hydrofracking to recover shale gas.

• Gas company enters into subcontract with insured drilling company to perform actual hydrofracking operations.

• Pursuant to subcontract, insured drilling company agrees to indemnify gas company and hold it harmless for any liability arising from hydrofracking operations on property.


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• Scenario 1– Analysis

• Insured drilling company’s agreement to indemnify gas company was made “in the course of its business.”

• Thus it would satisfy the “insured contract” definition and fall within the exception to the contractual liability exclusion.


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• Insured commercial dairy farmer owns a tract of land in upstate NY.

• Insured enters into contract with gas exploration company authorizing it to enter its property and use hydrofracking to extract gas trapped in shale

• Drilling does not relate to insured’s dairy farm business; however, business has been slow and gas exploration project could supplement insured’s income.


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• Contract obligates drilling company to defend and indemnify insured commercial dairy farmer from any liability arising from hydrofracking activities on its property

• Nevertheless, the local municipality which owns a tract of land contiguous to insured dairy farmer and which has final sign off on any drilling activity in the community, is concerned about its potential exposure

• It fears it might face potential liability for any hydrofrackingcontaminants that might migrate onto its property, and from there, onto neighboring properties


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• As a pre-condition to approving the project it demands that insured dairy farmer provide a separate indemnity and hold harmless protecting municipality from any potential hydrofracking-related liability

– Analysis• Indemnity protection insured commercial dairy farmer gave

municipality would arguably not fall under “insured contract”exception to the exclusion

• Indemnity agreement arose from an activity—gas drilling on insured’s property– which did not “pertain to insured’s business”—dairy farming


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• Scenario 2– Analysis

• Nevertheless, insured commercial dairy farmer is the owner of the property on which damage causing conduct—hydrofracking—may occur

• As such, it would be liable to the municipality even if it had not entered indemnity agreement

• Thus, it could be argued that the other exception to the contractual liability exclusion—concerning liabilities that would have existed in absence of indemnity agreement—would be applicable and the exclusion would not apply.


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• We previously noted, hydrofracking-related discharges may be subject to Article 12 of the New York Navigation Law—if the discharge or release contains any petroleum-based products

• Specifically, the chemical gel used in the fracking fluid may include petroleum based ingredients—such as solvents or diesel

New York Navigation LawNew York Navigation Law

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• To date, drilling companies have not been required to disclose the formulae for these chemical gels.

• Requests for disclosure have been rejected on trade secret grounds and because the fracking fluid is exempt from regulation under the Safe Drinking Water Act

• Future regulations are under consideration which would compel drilling companies to disclose the content of their fracking fluid

Navigation Law (cont.)Navigation Law (cont.)

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• Significance of this for insurers?– Navigation Law subjects a responsible party’s insurer to a direct

action for the same level of liability as the responsible party.– An insurer facing such liability is prohibited from challenging the

reasonableness of New York State’s cost recovery demands.– Timely assertion of a coverage defense—such as an Absolute

Pollution Exclusion—may be an insurer’s only way of avoiding liability under the Navigation Law.

Navigation Law (cont.)Navigation Law (cont.)

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Casualty Insurance Coverages

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Who are likely fracking-related defendants in casualty insured context?

• Property Owners• Homeowners• Farmers

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Under What Circumstances Could Casualty Insureds Face Hydrofracking-Related Liability?

• Unaware of any pending fracking-related suits property owners, homeowners and farmers

• Still there are several scenarios in which they could be sued:– Exhaustion of energy company lessee’s available insurance– Bankruptcy filing by energy company lessee– Inadequate hold harmless agreements – Forced “pooling statutes,” unitization statutes– New York Navigation Law

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Casualty Insurance

• Coverage Types:– Property Owners– Homeowners– Farmers

• Coverage Issues:– Business Pursuits Exclusion– Number of occurrences—quantifying per occurrence indemnity

limits at risk– Pollution Exclusion

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What Types of Casualty Insurance Policies Could be Implicated in Hydrofracking-Related Claims?

• Homeowners policies• Personal umbrella Liability Policies• Farm Owners Policies

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What Types of Casualty Insurance Coverage Issues Could Arise in Fracking-Related Claims?

• Business Pursuits Exclusion• Number of occurrences—quantifying indemnity limits at

risk• Pollution Exclusion

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Business Pursuits Exclusion

• Business pursuits exclusion states, in relevant part, that policy does not apply to– 2 “Business”– a. “Bodily injury” or “property damage’ arising out of or in

connection with a “business” conducted from an “insured location” or engaged in by an “insured,” whether or not the “business” is owned or operated by an insured” or employs an “insured”

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Business Pursuits Exclusion (cont.)

• Homeowners and Umbrella policies defined the term “Business” to mean:a. A trade, profession or occupation engaged in on a full-time,

part-time or occasional basis; orb. Any other activity engaged in for money or other compensation,

except, the following: . . . – (1) One or more activities . . . for which no insured receives no

more than $2000 in total compensation for the 12 months before the beginning of the policy period

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• Farm Liability policy form defines the term “Business”as follows:– 4. “Business” means a trade, profession, occupation or

activity, other than “farming” . . . which is engaged in for the purpose of monetary or other compensation”

• Comment: Doesn’t include $2000 total compensation allowance found in “Business” definition in homeowners and umbrella policies

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• Factors in determining applicability of Business Pursuits Exclusion:– Continuity or regularity of activity– Expectation or anticipation of profit—even if not realized

• Practice Pointer:– Varies from state to state– Need to check applicable law

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Limits Available Under Casualty Policies to Respond to Fracking Claims

• Occurrence-based homeowners, umbrella liability and farm owner forms define term “occurrence,” in relevant part as follows:

• “Occurrence” means an accident, including continuous or repeated exposure to substantially the same general harmful conditions.”

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Casualty Limits available (cont.):

• Homeowners and Umbrella forms: – per occurrence limit– No aggregate– Farm liability form:

• General Aggregate: “The General Aggregate Limit is the most we will pay . . . . Because of all “bodily injury” and “property damagearising out of any one “occurrence.”

• “All “bodily injury” and “property damage” resulting from . . . Continuous or repeated exposure to substantially the same general harmful conditions shall be considered the result of one occurrence

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Casualty Limits available (cont.):

• Legal Test for quantifying number of occurrences:– Cause Test– Effects Test– Unfortunate event test (New York)—”time and space”

considerations

• Practice pointer:– Approach varies from states to state– Need to check applicable state law

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Pollution Exclusion

• Neither homeowners nor personal umbrella policy forms contain the exclusion

• Farm Owners form contains the standard Absolute Pollution Exclusion (APE)

• Legal Analysis in applying in context of fracking claim:– Traditional environmental claim vs. non-traditional environmental

claim– Pollutant vs. Product: Is fracking fluid a Pollutant or a Product?– Does the term “Pollutant” as used in APE include contamination

arising from release of naturally occurring minerals, such as methane?

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London Policy Wording

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London Policy Wording

• 2012 Excess Claims Made Policy—LSW 244• 2012 Claims Made Policy Form• 2012 Umbrella Policy Form• Bermuda Policy Form

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Potential Fracking-related issues under London Policy wording

• Notice and reporting requirements• Fracking-related losses and the “Integrated” occurrence

concept• Quantifying the number of fracking-related accidents or

occurrences for purposes of determining the number of applicable policy retentions

• Coverage for fracking-related claims seeking so-called “Medical Monitoring” costs

• The applicability of the seepage, pollution and contamination exclusion and Bermuda form Pollution Exclusion to fracking-related losses

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Fracking issues (cont.)

• Notice and reporting requirements– Have the requirements under the forms been satisfied?– If not, are they enforceable?

• Quantifying the number of applicable retentions– How many fracking-related accidents?– How may fracking-related occurrences?

• Notice of an “integrated occurrence” under Bermuda form– Potential fracking-related scenarios

• Coverage for claims for medical monitoring costs– Do the fracking-related claims seek “damages” for policy-

defined “bodily injury”?

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Fracking issues (cont.)

• Seepage, pollution and contamination exclusion– Do we have a pollutant within the meaning of the exclusion?

• Product vs. Pollutant (e.g., fracking fluid)• Naturally- occurring substances (e.g., methane)

– Notice and reporting requirements in exception restoring limitedcoverage for seepage, pollution and contamination

• Have requirements been satisfied?• Are they enforceable?

• Pollution Exclusion under Bermuda Form– Potential applicability of “Product Pollution Liability” carve out to

fracking-related losses

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Contact

Carl PerniconePartner, Wilson ElserNew [email protected]

Michael ConleyPartner, Offit [email protected]

drilling down on hydraulic fracturing · 2019. 10. 22. · drilling down on hydraulic fracturing...

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