Source: http://www.jdsupra.com, March 2, 2015
By: Lorelie Masters & Koorosh Talieh, Perkins Coie
Some people believe that “fracking” – the use of horizontal drilling and hydraulic fracturing technology – is a miracle, increasing the extraction of oil and gas from places deep under the ground where hydrocarbons were previously unrecoverable. It has led not only to an economic boom but to a boom in drilling from thousands of fracking wells throughout the United States.
While fracking is making the United States a major oil and gas producer, it is also creating significant environmental exposures, such as soil and groundwater contamination from oil and gas companies, and explosions and earthquakes caused by drillers and others involved in fracking. Some 45 fracking-related tort lawsuits are now pending in courts across the United States against (i) well operators and contractors (oil and gas drillers); (ii) manufacturers of well equipment; (iii) landowners, including municipalities, where fracking activities take place; and (iv) waste handlers and haulers.
A typical fracking case alleges bodily injury or property damage arising out of contaminated groundwater (methane or other pollutants such as fracking fluid). However, cases also seek damages from alleged air pollution, nuisance and trespass, well blowouts, disposal of fracking fluids, earthquakes, and even corporate malfeasance by directors and officers.
Policyholders facing such suits should review their insurance policies to see if they protect them against the significant defense costs, as well as any damages paid in that action. To help you and your company navigate the challenging insurance coverage issues often posed by fracking, we have identified below the types of specific corporate insurance policies that could protect your company.
Comprehensive General Liability (CGL) Policies
CGL coverage protects companies from liability for bodily injury, property damage and, potentially, nuisance and trespass. More significantly, these policies promise to pay for the defense costs that the policyholder incurs while defending against a lawsuit. That defense coverage is an important asset, as it may not be subject to limits, and the costs of defense may exceed potential liability (if any). CGL insurers use certain policy exclusions to try to limit or bar insurance coverage protection for fracking claims. Insurers’ first line of attack is the so-called absolute pollution exclusion, which seeks to bar coverage for claims arising from the use of a “pollutant.” Insurers typically argue that chemicals present in the fracking fluid, such as methanol and boric acid, constitute pollutants, barring coverage even for a key part of the policyholder’s business. Courts have rejected such arguments which make coverage illusory, and policyholders should not take “no” for an answer.
Environmental Impairment Liability (EIL) Policies
EIL policies provide coverage for bodily injury and property damage, as well as governmentally mandated investigation and cleanup costs arising out of pollution claims. EIL insurance is a claims-made coverage, meaning that the claim to the insurer must take place during the policy period. Thus, EIL coverage is notice driven and governed by the timing of notice under the policy.
First-Party Property (Property) Policies
Property insurance policies cover not only physical damage or loss to the policyholder’s own property, but also cover the policyholder’s loss of business income from interruption of its business. A well blowout or an earthquake caused by vibrations and pressures associated with fracking activities may halt the policyholder’s business operations, creating loss of business income. Business interruption (BI) insurance also may cover losses of income from government orders or interruption to a supplier’s business. BI coverage may prove invaluable when a policyholder loses profits due to an interruption in its operations.
Operator’s Extra Expense (OEE) Policies
Well-drilling companies often purchase OEE policies, which provide protection against losses arising from well blowouts (a named peril). CGL and EIL policies typically exclude such coverage. OEE policies cover (i) expenses incurred for controlling the out-of-control well; (ii) re-drilling and restoring the well; and (iii) liability for any above-ground pollution.
Directors & Officers (D&O) Policies
D&O policies protect a company and its senior management against claims by shareholders and certain other third parties that allege corporate negligence or some other malfeasance. Fracking activities could lead to claims alleging that directors and officers failed to exercise due care to prevent underlying fracking-related liabilities. D&O insurance also protects against securities litigation and costs of investigations arising out of their failure to disclose, in public filings, the hazards associated with fracking. In each of these cases, the company and its directors and officers should look to their D&O insurance for both defense and indemnity coverage.
While fracking is still relatively new, it pays for companies to review their current insurance policies and make sure they are structured to address the known risks. Perkins Coie’s Insurance Recovery lawyers are well recognized for their work on behalf of their policyholder clients, counseling them on the types of coverage available and on how to present claims to their insurers.