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Fracking lawsuits and controversy build up

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Energy companies are fighting on a new litigation front as lawsuits mount and controversy swells over the natural gas drilling practice of hydraulic fracturing.

The process, commonly called “fracking” or “hydrofracking,” is a method of extracting natural gas from shale that uses water and chemicals during the drilling process.

It has been in use for decades, but has gained notoriety in recent years as some environmentalists and property owners have alleged that companies involved in fracking are contaminating groundwater or causing other environmental problems.

Others, including drillers and insurance brokers, say such claims are overblown and there is little chance of groundwater pollution from fracking.

So far, litigation has not produced significant awards or settlements, sources say, and insurers have yet to pay claims directly related to fracking. Still, lawsuits are being filed by plaintiffs alleging pollution or attempting to stop fracking activities citing potential environmental damage.

Even without large judgments, defendants are racking up huge defense costs, sources say, which has prompted development of at least one specialty insurance product to ensure that such expenses are covered.

There also are concerns that fracking exposures will expand to include directors and officers and others connected to the projects.

Fracking has become popular as large reserves of natural gas in the United States are increasingly tapped to provide fuel. Drilling has increased as technology has improved, sources say, and rising prices for crude oil and imported natural gas make the domestic source even more attractive.

As fracking activity has picked up, so has litigation.

“Litigation is heating up,” said plaintiff attorney Marc J. Bern, a senior partner at Napoli Bern Ripka Shkolnik L.L.P. in New York. “Clearly a component of that is the fracking, but that is not the only risk to the environment.”

There also is a risk of failed well casings, chemical spills above ground, negligent use of drilling equipment and other actions that can harm individuals and the environment during drilling, Mr. Bern said.

“The fact that the risk is real can be seen in efforts that plaintiffs attorneys have put in to forming groups and websites seeking regulatory relief,” said Laura Foggan, a partner with law firm Wiley Rein L.L.P. in Washington. “There is so much activity that we know the landscape is primed for litigation.”

Gregory S. Hoffnagle, an associate with Edwards Angell Palmer & Dodge L.L.P. in New York, said fracking is spawning exposures beyond pollution.

“We are now seeing different types of risks starting to develop,” he said. Directors and officers, for example, could become targets of claims if things go bad on a drilling site and shareholders or investors feel proper due diligence was ignored or too much risk was undertaken, he said.

Mr. Hoffnagle said in a report he recently completed on hydrofracking that Houston-based Cabot Oil & Gas Corp. has been named in several groundwater contamination suits related to its fracking operations in Pennsylvania and could face shareholder derivative suits as a result.

The likelihood of a D&O claim related to a fracking incident probably would boil down to the size of the loss, said John Keely, managing director and global upstream sector leader in the Houston office of Aon Risk Solutions' energy practice. Problems at a single well might not cause damage that is significant enough to trigger an action against directors and officers, he said, although such a sizeable loss cannot be completely ruled out.

He said that even though there have been no significant claims paid in fracking cases, defendants are spending millions of dollars to defend themselves in court against pollution allegations.

Aon has worked with an insurer to develop coverage that specifically covers a well operator's defense costs in a case that alleges damage from fracking activities, Mr. Keely said.

And, if a case proves that pollution occurred because of fracking, the policy will respond whether the contamination is sudden and accidental or gradual, and includes the fluids used in fracking as covered contaminants, he said.

Contractors, suppliers, site operators and others taking part in a fracking operation should make sure they have coverage that would respond to pollution claims, Ms. Foggan said.

Some sources say the risk is well-managed—as evidenced by the lack of claims—and drilling operators are being unfairly maligned.

“Fracking has been going on for 50 years,” said Brian T. Petty, executive vp of government affairs at the International Assn. of Drilling Contractors in Washington.

“Fracking takes place thousands of feet below the water table,” Mr. Petty said. “The wastewater that comes up is contained and reprocessed; it doesn't go into the streams or rivers and kill fish. People are making these claims without substantiation.”

“A whole lot of noise from different environmental groups” claiming fracking has polluted drinking water “just hasn't been proven,” Mr. Keely said.

It's a good idea for policyholders to sort out what coverage they have that might respond to contamination or other damage from fracking, sources said.

“Most oil and gas companies have pollution coverage, usually for sudden and accidental pollution,” said Bertil Olsson, U.S. energy, mining and power practice leader with Marsh Inc. in Houston. “If there is groundwater contamination, that is probably not sudden and accidental, so they may not have coverage. They can buy environmental coverage for it, and some do.”

Ms. Foggan said drilling contractors and well operators may find they have commercial general liability insurance that excludes pollution claims that could arise from conditions caused by fracking.

“I think we are talking about the need for specialty policies” in such cases, Ms. Foggan said.

In the case of a well blowout during a fracking operation, operators extra expense insurance would pay the cost of bringing the well under control, along with costs related to any pollution cleanup, Mr. Olsson said. While a CGL policy would not cover the cleanup, it would pay for third-party damages, he said.

“Property is usually less of an issue” because, apart from the well equipment, there “usually is not a lot of property at the site,” he said.

Property exposures are well-defined, said Craig Sutton, senior vp, marine, energy and engineering at Liberty International Underwriters in Dallas.

“Fracking is an integral part of onshore drilling” and has been for decades, he said. As with other drilling operations, equipment and structures used in the process are covered for damage that results from an accident at the site, he said.