Insurance Coverage for Fracking Claims

Jared Zola

Zola, JaredI presented at the @SeminarGroup conference in Santa Barbara, California on February 8, 2013 about insuring hydraulic fracturing (“fracking”) projects.

The natural gas and oil extraction and production technique known as fracking is a hot-button issue in today’s political landscape and in the media. Estimates suggest that more than a quarter of the United States’ natural gas supply is derived from shale bed fracking. As evidenced by the recent Presidential campaigns, many Americans view fracking as an economic catalyst that may create jobs domestically and help reduce the country’s reliance on foreign energy supplies. While this extraction and production technique has been utilized in the United States since the 1940s, it has recently gained additional attention from environmental groups claiming environmental harm as the extraction moves into the more densely populated areas surrounding the natural-gas rich Marcellus Shale in the northeast and the huge Monterey shale that lies under California’s Central Valley at San Benito and Monterey counties.

As with any oil and gas operation, there are environmental risks associated with oil and gas production sites; however, there are some additional risks associated with fracking operations. Potential risks unique to fracking operations include:

  • The millions of gallons of water used for each production site that must be transported and stored, some of which flows back out of the “fracked” well.
  • The potential for releases from these wells to impact groundwater aquifers with “fracked water” or released methane.
  • Adjacent property damage; perhaps by earthquake.

Companies involved in fracking projects frequently purchase general liability policies, operators extra expense policies (“control of well”), environmental site liability policies, and automobile liability policies. The first known fracking coverage action filed in 2012 highlights a common energy industry time element endorsement that may be the subject of future fracking coverage disputes.

In the fracking coverage action, the insured, Warren Drilling, relies on an Energy Pollution Liability Extension Endorsement, which provides that the general liability policy’s pollution exclusion does not apply to “property damage” caused by a “pollution incident,” meaning a discharge of “pollutants” into the “environment,” provided that the insured meet certain conditions. The endorsement incorporates insurance concepts that are not new to coverage litigation, including what is “unexpected or unintended” and “abrupt or instantaneous.” Additionally, insureds involved in fracking operations must be aware of this endorsement’s short reporting period—within 60 days from the discharge’s commencement. Insureds may consider reporting any circumstances or occurrences for which they may be liable even if insureds do not presently know if they will face potential liability.

Warren Drilling also seeks coverage under the ACE policy’s Underground Resources and Equipment Coverage (UREC) endorsement. The policy excludes coverage for damage to “personal property in the care, custody, or control of the insured,” but the UREC endorsement modifies this exclusion by allowing coverage for property damage included within the definition of “underground resources and equipment hazard.” The endorsement defines “underground resources and equipment hazard” as including “property damage to… oil, gas, water and other mineral substances which have not been reduced to physical possession above the surface of the earth.”  See Underground Resources and Equipment Coverage Endorsement, Form CG 22 62 10 01 (ISO Properties, Inc., 2000).  In the coverage suit, Warren Drilling asserts that because the endorsement includes coverage for property damage to water below the surface, the UREC endorsement applies to the homeowner’s water well. Warren may find coverage based on the UREC endorsement’s plain language.

In light of the high-risk nature of fracking, as I discussed at the seminar, we recommend the following best practices for companies involved in fracking projects facing alleged liabilities:

  1. Consider and locate all possible insurance policies that may be implicated by your loss, including all forms and endorsements; if you cannot find them, then request a copy from your insurance agent or broker.
  2. Check your policy to locate the address to which any written notice is to be sent and provide written notice of your loss to your insurance company.
  3. If your policy contains a time element reporting requirement (see, for example, the Energy Pollution Liability Extension Endorsement), immediately report any circumstances or occurrences for which you may be liable, whether or not you presently face any contamination claims. Otherwise, you may lose the ability to pursue coverage in the future.
  4. Review your policy to determine if there are any additional procedural requirements or deadlines. To the extent possible, comply with all requirements and deadlines.
  5. Follow up with your insurance company regarding your claim.
  6. Seek legal advice as appropriate.