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.
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.
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.
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.
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.