Source: http://www.insurancejournal.com, January 27, 2014
By: Stephanie K. Jones
The oil drilling technique known as hydraulic fracturing, or fracking, has been blamed – rightly or wrongly – for various hazards ranging from earthquakes to water pollution.
While the technique has generated a lot of media attention, so far there has not been much in the way of resolution of insurance litigation resulting from claims stemming from fracking practices.
One case being closely watched by insurance companies was filed in the U.S. Court for the Southern District of Ohio in 2012. Many believe the decisions made in Warren Drilling Co., Inc. v. ACE American Ins. Co. have the potential for guiding the outcomes of future litigation generated by the use of hydraulic fracturing in the oil and gas production industry.
The court’s language and the elements it focuses on will be important for future cases, said Michael Salem an attorney with the California-based firm of Nelson, Thompson, Pegue & Thornton, A.P.C.
“Once a well has been drilled, a mix of water and chemicals called proponents, or fracking fluid, is injected under high pressure, fracturing the reservoir rock. … When the fracking fluids are removed, the proponents keep the cracks open left by the fracturing, letting oil and natural gas flow back to the surface,” Salem said during an A.M. Best law podcast on fracking insurance issues.
He said the problem with fracking is that it “can sometimes involve unsafe chemicals and … wells can extend thousands of feet horizontally, travelling under homes and even farms.”
In the Warren Drilling case, “in 2008 a homeowner living close to drilling operations became aware that his water well had been contaminated by the hazardous fracking fluid,” Salem said.
The homeowner sued Warren Drilling and the driller eventually settled with the homeowner. Warren Drilling then sued ACE for coverage under the insured’s energy pollution liability extension endorsement (EPLE) after the insurer refused to defend the case brought by the homeowner and indemnify the driller for its losses.
“One of the major issues the court will have to decide is whether the incident was unexpected and unintended, and commenced abruptly and instantaneously,” Salem said.
The court will also need to decide which party has the burden of proof on the issue – ACE or Warren Drilling.
“If ACE has the duty to prove the discharge was intended and not abrupt, this could have a significant impact on the outcome of the case and whether ACE has a duty to defend,” Salem said.
Additionally, the case involves issues related to the timing of Warren Drilling’s notice to the insurer about the claim.
If the Warren Drilling case doesn’t settle, the court’s interpretation of many of the provisions in the endorsement may have a long-term impact on issues of fracking liability in insurance coverage.
“Because of all these potential issues you can see that other insurers are watching this case quite closely,” Salem said.