Filed Under:Claims, Investigative & Forensics

Digging Deep: Fracking Litigation Trends

Insurance Coverage and Liability

Hydraulic fracturing, commonly referred to as fracking, is a drilling process used in the extraction of underground oil or natural gas trapped in hard-to-reach shale rock formations deep within the earth. The process involves well construction, acquisition of source water, well stimulation by hydraulic fracturing (using fluids that typically contain a variety of chemicals), and waste disposal.

Advances in horizontal drilling technology make significant shale gas formations newly accessible for development. As a result, natural gas production in the U.S. is at its highest level in more than 30 years.

The rise of fracking offers the potential for a significant economic boom to the areas with major formations containing substantial amounts of natural gas, including states such as North Dakota, Pennsylvania, Texas, Colorado, and Louisiana. However, it is not without controversy. As the fracking industry grows, so too do media reports and governmental investigations regarding its perceived risks. It was only a matter of time before litigation ensued, involving those both engaged in and allegedly impacted by such activity.

This current and anticipated litigation has and will increasingly impact the property and casualty (P&C) insurance industry, raising numerous coverage and liability issues. This article focuses on those coverage and liability issues brought on by fracking lawsuits.

Liability Suits Spreading
Numerous liability suits pertaining to fracking activities have already been filed in the state and federal courts of Pennsylvania, Texas, Arkansas, and elsewhere. Property owners who sold mineral rights and residents in production areas brought civil claims against operators, alleging damages under several factual scenarios.

Initially, these actions focused on allegations of contamination to surrounding land, ground, and surface water. Suspected causes of contamination include faulty well-casings, improper drilling, and/or improper disposal of fracking fluids. These plaintiffs tend to live predominantly in rural areas with private water wells said to be contaminated with fracking chemicals. Meanwhile, other plaintiffs allege high quantities of non-fluid substances in their wells as a result of the fracking activity that caused hazardous substances, such as methane, to migrate into the wells.

Recently, plaintiffs and their attorneys have pursued a variety of additional allegations of injury resulting from fracking. Some plaintiffs charge that fracking results in air pollution and excess noise, both with regard to the drilling process itself and compression stations employed.

Is Fracking Causing Tremors and Sinkholes?
During the end of 2011, a number of actions were filed alleging far more serious consequences: that fracking activity has given rise to earthquakes resulting in property damage. These cases are likely related to recent scientific studies suggesting that fracking may cause earthquakes in areas that previously experienced negligible seismic activity.

Experts expect still more claims to arise, including allegations that by wearing away limestone formations, fracking leads to ground subsidence and sinkholes. In light of recent media investigations, other claims may arise regarding the safety of pipelines required to transport the gas extracted from fracked wells.

Causes of Action
Causes of action in fracking lawsuits have been asserted under common-law theories such as strict liability, negligence, private nuisance, physical trespass–usually based upon allegations that contaminated materials generated by fracking have infiltrated plaintiff’s property–medical monitoring, emotional distress, “inconvenience and discomfort,” and negligence per se. Various theories of damage have been presented, including: bodily injury, diminution in property values, breach of quiet enjoyment, loss of business, increased risk of disease, and punitive damages.

Besides claims for monetary damages–including punitive damages and attorneys’ fees–plaintiffs frequently seek injunctions to stop drilling activity and to mandate remediation of alleged contamination.

Putative Class Action, Mass Torts
While many of the lawsuits filed by purportedly injured property owners and residents have been individual in nature, a significant number of these suits have been presented as putative class actions. At least 10 such actions have been filed in recent years, particularly in the state of Arkansas. Typically plaintiffs and putative class members in these actions are residents of an area adjacent to or near a fracking site. These claimants may thus allege that fracking activities polluted their air, land, and/or water. Putative class actions have also been filed regarding allegations that fracking caused seismic activity.

Several mass torts, as well, are being filed on behalf of multiple plaintiffs who claim to have sustained personal injury from hydraulic fracturing.

A number of fracking lawsuits have been brought by property owners who entered into leases with natural gas companies for drilling rights on their land. Aside from the causes of action set forth above, these property owners may assert claims for the breach of lease provisions stipulating that the drilling company will take steps to mitigate any potential fracking-related environmental damage to the lessor’s property.

These property owners may also raise fraud claims based upon allegations that a natural gas company induced these individuals to enter into the leases by misrepresenting or failing to disclose the potential damage to their property that could arise from fracking.

Residents and/or property owners of allegedly affected areas are typically bringing the lawsuits against the natural gas drilling and exploration company spearheading the fracking operations.

Insureds, such as construction contractors, trade subcontractors, design professionals, chemical suppliers, and transportation companies, are also likely to have claims pursued against them.

Beyond Residents and Landowners   
Fracking lawsuits may also be asserted by laborers who contend that they have sustained injury. While workers’ compensation law in most states will limit the ability to pursue such claims against one’s employer, laborers will likely pursue actions against other entities involved, or may raise allegations that will invoke exceptions to the general prohibition on lawsuits against an employer. On example of such a claim would be that an employer engaged in willful, wanton, or reckless conduct.

The Court’s View
As most fracking lawsuits are yet to be filed or are still in the early stages of litigation, there is comparatively little guidance as to the chances that this type of claims will succeed. However, decisions pertaining to motions to dismiss offer some guidance on how courts may view certain causes of action typically asserted in fracking litigation.

Claims of strict liability, for example, have often been based on allegations that hydraulic fracturing is an “ultra-hazardous” or “abnormally dangerous” activity. Courts have typically rejected defense arguments that such claims should be dismissed because fracking is not “ultra-hazardous” as a matter of law. Courts have instead held that this question is fact-specific, although they have expressed some skepticism as to the ability of plaintiffs to establish these claims at trial.

Courts also recognize the ability to assert claims for medical monitoring on behalf of plaintiffs and/or putative class members who allege that the activity at issue has placed them at significant risk for physical injury. However, such an injury may not be visible at the time of filing.

A claim like this seeks to have the defendant pay for a program that periodically monitors plaintiffs for the purpose of diagnosing and treating the illness or illnesses that they are at risk of developing as a result of fracking activities.

Presenting Proof
Liability in fracking lawsuits will ultimately bring on causation issues. Courts are likely to require plaintiffs to establish, to a reasonable degree of certainty, that any particular injury was the result of the defendant’s fracking operations. A plaintiff will be required to demonstrate a link between the presence of a particular chemical or other foreign substance in the atmosphere, water, and/or land and defendant’s fracking activities.

The absence of environmental studies prior to the onset of fracking operations will make it quite challenging to establish a general link between fracking and potential contamination. Even if such a general link can be shown, a plaintiff still must establish a connection between the contamination and the fracking operations of a particular defendant. In regions with abundant natural gas deposits in shale formations, many operators are likely to be carrying out fracking activities within close proximity of each other. This may make it difficult to establish that a particular environmental contamination was the result of a specific entity’s operations. When questions like these reach juries, the answers can be unpredictable and expensive.

Regarding both general and specific causation issues, expert opinions will play a pivotal role. State legislation is evolving, which may result in presumptive causation based upon the claimant’s proximity to the fracking operations.

Issues for CGL Insurers
The expected onslaught of fracking lawsuits is likely to present a number of unique coverage issues for commercial general liability (CGL) insurers. These issues include when coverage was “triggered” under a CGL policy. Depending upon the jurisdiction, coverage may be triggered when an event that allegedly caused a subsequent injury actually occurred, or when the injury itself became manifest.

As seen with regard to asbestos litigation, particular challenges are presented by allegations of injury pertaining to a period of continuous exposure to hazardous substances. Approaches developed in response to the determination of CGL coverage for asbestos, such as applying a “continuous trigger,” may be applied in appropriate cases to hydraulic fracturing claims.

CGL claims arising from fracking litigation are also likely to present issues regarding the application of standard pollution exclusions. Specifically, it may be necessary to decide whether certain elements of materials used in fracking fluids may be deemed pollutants for purposes of such exclusions, and if so, then whether these materials render the fracking fluids themselves pollutants. These issues may present matters of first impressions for trial and appellate courts.

An Insurer’s Duty
The scope of coverage for liability insurance policies will also be relevant to demands for the defense and indemnification of fracking lawsuits. As noted above, such lawsuits may raise allegations, such as breach of contract, that go beyond the allegations of “bodily injury” and “property damage” for which CGL policies typically provide coverage. As many states require insurers to provide a full defense for lawsuits even if only some of the claims fall within the scope of coverage, this issue may have little relevance to a liability insurer’s defense obligations. This issue, however, will obviously be significant in many cases regarding an insurer’s duty to indemnify.

Additionally, scrutiny by the Securities and Exchange Commission (SEC) regarding representations as to both production and environmental risk may trigger both directors and officers (D&O) and errors and omissions (E&O) policies written for shale gas and other involved companies.

Fracking lawsuits and other claims will present a vast array of additional issues that are beyond the scope of this discussion, including coverage obligations for fracking damage under first-party property insurance policies, and the potential duty to defend and indemnify fracking lawsuits under E&O coverage. Insurers should take steps at the present time to identify, examine, and analyze insurance coverage and liability issues presented by this type of litigation. Such an approach will help ensure that carriers are prepared to effectively address fracking issues.

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