By: Andrew W. Erlandson aerlandson@hbslawfirm.com Office: 608-257-0945 Direct: 608-310-5546
John C. Mitby jmitby@hbslawfirm.com Office: 608-257-0945 Direct: 608-310-5556

Recent seismic activity in Texas and a steady uptick in gas prices during 2Q 2015 have returned hydraulic fracking to the nation’s front pages. Fracking activities – and fracking-related litigation – have proliferated during the last decade, but there remains considerable uncertainty over insurance coverage for fracking-related claims. Somewhat surprisingly, the law has only begun to address these issues.

Hydraulic fracking involves the injection of a “fracking fluid” into the ground to create access to oil or natural gas trapped in shale reserves. A well is first drilled vertically into the rock suspected to contain oil or natural gas, which then can be continued horizontally for up to thousands of feet. Then a fracking fluid, usually a mixture of water, sand and chemicals, gets pumped into the well at very high pressure in order to fracture the rock and release the oil or natural gas that lies within.

Although hydraulic fracking has been around for decades, new and improved technologies, along with steadily increasing energy costs after the turn of the Millennium, combined to fuel a fracking “boom.” According to the Insurance Coverage Law Report, in Texas alone horizontal fracking, which only began in 2004, increased 25 times in ten years. The United States and Canada are global leaders in developing shale gas. See Lewin, Robert, et al., “Emerging Insurance Issues in the Date over ‘Fracking,’” Insurance Coverage Law Report, at 5-6 (Dec./Jan. 2013).

Few insurers actually offer coverage for fracking activities. Most companies involved in such activity purchase general liability coverage. Id., at 23. The majority of fracking-related tort litigation has involved personal injury and property damages claims arising from alleged ground water contamination or other property damage linked to fracking.

Cases addressing fracking-related coverage issues remain few and far between. The central question in fracking related coverage disputes involves the CGL policy pollution exclusion. The three most common pollution exclusions apply to:

• Bodily injury or property damages arising out of the actual, alleged or threatened discharge, dispersal, seepage, migration, release or escape of pollutants, regardless of whether the event is sudden or accidental;
• All pollution events other than named perils (e.g., fire); and
• Pollution incidents, except those that are accidental, provided the insured discovers and reports the incident within a specified time.

Pollution exclusion analysis first turns on whether fracking fluid – or any of its constituents – qualifies as a “pollutant.” Fracking is a legal – albeit heavily regulated – activity. So despite fracking fluid’s often complex chemistry, courts may be reluctant to label it a “pollutant.” The EPA is currently studying fracking’s potential environmental impacts, and an interim report released in 2012 identified over 1,000 chemicals used in fracking fluid between 2005 and 2011. The EPA’s final report was expected in 2014 but has yet to be released. The report’s eventual release merits close attention, as the EPA’s findings may significantly impact courts’ analysis of fracking fluid’s treatment as a “pollutant.”

Other coverage disputes may focus on the accidental or unexpected nature of the incident that leads to a fracking related claim. Some CGL policies contain an “energy pollution liability extension” (“EPLE”). EPLE provisions typically extend coverage to pollution incidents that were:

• Unexpected and unintended
• Abrupt and instantaneous
• Commenced from site that is owned or operated by the insured
• Known by the insured within 30 days after the discharge of the pollutant commenced; and
• Reported by the insured within 60 days after the discharge of the pollutant commenced.

One of the only fracking-related coverage cases on record involved an EPLE provision. In Warren Drilling v. ACE American, the insured sought coverage for a contaminated well water claim. The insurer denied coverage, arguing that the insured had failed each of the five requirements outlined above. The Warren Drilling case settled before any published court decisions issued, so the case served primarily to frame questions rather than provide answers. Warren Drilling also demonstrated that each of the EPLE elements is fact-driven, and that a pollution claim may trigger an insurer’s duty to defend until the relevant facts can be developed. Insureds with an EPLE endorsement should expect their insurers to question whether fracking-related pollution is unexpected and unintended, when the process necessarily involves the intentional pumping of fluids into the ground. Insureds should also be keenly aware of any deadlines that their EPLE endorsement may impose for discovering and reporting pollution incidents.

Insurers and their insureds also should consider whether the subject policy contains an Underground Resource and Equipment (“URE”) endorsement, and if so, how it might impact coverage of a fracking-related claim. URE endorsements typically apply if a well leaks and damages nearby resources or property outside the insured’s control. URE endorsements usually cover property damage to untapped underground natural resources (oil, natural gas, or water), as well as any underground wells or other equipment belonging to third parties.

Given the nation’s seemingly insatiable energy appetite, fracking isn’t going away anytime soon. Regulators and energy companies alike view fracking as the bridge to America’s low-carbon energy future. As fracking activities continue their proliferation, additional insurance claims are sure to follow. How courts resolve the questions outlined above will have enormous financial implications for industry stakeholders and their insurers. Stay tuned, and please contact us if you have questions concerning a fracking-related coverage issue.