Will Lawsuits Related to Shale Gas Drilling be the 'Next Big Thing?'

Will Lawsuits Related to Shale Gas Drilling be the 'Next Big Thing?'

PHILADELPHIA - Shale drilling for natural gas is big business in several states, but will it be "the next big thing" for litigators? 

It may be too early to tell, but the plaintiff and defense bars are gearing up. About 110 attorneys, insurance professionals and gas industry reps from 22 states and Bermuda attended HB Litigation Conferences' Gas Drilling Operations Conference: Hydraulic Fracturing (Fracking) Sept. 9 at the Hub Cira Centre here, with more than 20  more attending via live Webcast. 

"This is a new tort," said Marc J. Bern of Napoli Bern Ripka Shkolnik LLP in New York, who co-chaired the conference with Joshua Becker of Alston & Bird in Atlanta. "Cases have just recently been filed." 

Lawsuits Filed 

According to Jennifer Quinn-Barabanov of Steptoe & Johnson LLP in Washington, D.C., 38 shale gas drilling-related lawsuits alleging injuries from explosion or contamination had been filed as of Aug. 16, 2011. Thirty of those lawsuits were filed in federal court and eight in state courts. The breakdown by state for those 38 lawsuits is 12 in Pennsylvania, eight in Texas, three in Louisiana, four in West Virginia, one in New York, two in Colorado and eight in Arizona, she said. Quinn-Barabanov said 10 gas drilling-related class action lawsuits had been filed as of Aug. 16.  

"Clearly, fracking litigation is in its infancy," said Hope S. Freiwald of Dechert LLP in Philadelphia. "The question is, is this going to be the next big thing? 

"What makes a perfect storm?" she asked. "You have deep pockets and many of them. You have household industrial names. You have issues that people see as their fundamental rights - their air, their water. You have lawyers who are patient. They can try one legal theory and if it doesn't work, they can try another. . . . 

"The claims will become more creative over time," Freiwald said later. "You have people out there who are holding themselves up as experts in the field who are putting out novel scientific theories." 

Potential Claims 

Although a lot of media attention has been given to the process of hydraulic fracturing, or "fracking" - injecting a large amount of water, chemicals and sand (anywhere from 80,000 to 100,000 gallons per well to 1 million to 5 million gallons per well) at high pressure into underground shale formations to break up the rock and release natural gas - conference panelists said claims related to gas drilling and extraction are not limited to fracking. 

Potential claims conference panelists cited were real estate damage (lost value, lost rents, loss of use and enjoyment), air, groundwater, surface water and well water pollution, soil contamination, destruction of natural habitat, earthquakes, explosions, health issues that could require medical monitoring, trespass, deliberate intent, product liability, toxic spills, truck accidents, breach of lease/royalties, personal injury, consumer fraud, securities fraud and stormwater erosion and runoff from drill pads. 

"If you are concentrating on fracking, you will miss the boat," said Corey Zurbuch of Thomas Genshaft LLP in Aspen, Colo., noting that fracking occurs during only one or two days of the gas extraction process. "It's huge. You really need to be looking across the board." 

"Fracking is not going to be like any other litigation we have seen in the environmental realm," said Debra Pfeifer of Crivella West Inc. in Carnegie, Pa. "Fracking is 21st century litigation." 

"There will be new law created here," agreed Dechert's Freiwald. "There will be appellate issues created here. This is an interesting world we're all facing, with a lot of opportunities to do things right." 

John A. Veil of Veil Environmental Inc. in Annapolis, Md., said natural gas accounts for about 25 percent of U.S. energy consumption, and shale gas accounts for 45 percent of U.S. natural gas, according to the U.S. Department of Energy. 

"I think gas well drilling, and shale gas drilling in particular, will be one of the defining issues of our time," said Thomas Genshaft's Zurbuch. "It will give us energy, it will give us jobs, but we have to do it right. 

"I think we can do it in a positive, safe way, and I think it will take members from both sides of the bar to do it." 

The Future? 

The panelists also speculated on what claims may arise in the future, and zeroed in on the huge amounts of water required for fracking. 

"Municipalities are on the horizon, as they were in MTBE litigation - threats to their water supplies as opposed to just homeowners and their water supplies," said co-chair Bern. MTBE, methyl-tertiary butyl ether, was a gasoline additive. 

Julia LeMense of Weitz & Luxenberg in New York said water theft claims are possible, and Rob Dodson of Adams & Rees LLP in Nashville, Tenn., said downstream water users and downstream states that are not getting the benefits of hydraulic fracking "are not going to be very thrilled when they go to their lake or go to their reservoir and it's eight feet lower." 

Future claims could also be brought by high-volume water users such as public utilities and agriculture, Dodson said. 

Insurance  

With multiple lawsuits pending, it's only a matter of time before liability is assigned in the first claims resulting from fracking, panelist Laura A. Foggan and Kathryn C. Siehndel of Wiley Rein LLP in Washington, D.C., wrote in a paper included in the conference materials. Although general liability insurance coverage may be part of the risk portfolio of oil and gas drilling companies involved in fracking, there should be little exposure for general liability insurers, they said. 

"Depending on individual policy terms, property policies, environmental liability policies, and specialty oil and gas coverages may be more directly at stake," they wrote. "Even for those coverages, however, there will be individual contract terms as well as substantial fortuity issues that could bar coverage for losses arising from fracking." 

 Foggan and  Siehndel wrote that drilling companies and their insurers should anticipate claims arising in at least the following contexts:

  • Individuals alleging bodily injury resulting from exposure to chemicals in soil and water, seeking incurred medical costs and future damages.
  • Individuals who have not suffered bodily injury, but seek medical monitoring costs for any potential health issues as a result of exposure.
  • Property owners claiming environmental contamination, loss in property value and/or damage to crops and livestock.
  • Water suppliers seeking recovery of compensatory damages, costs of removing contaminants from the water supply and injunctive relief to abate harmful practices.
  • State and federal environmental regulatory bodies seeking injunctive relief, contamination cleanup,  mitigation efforts, fines and penalties (contamination from hydrofracking will likely be subject to the Comprehensive Environmental Response, Compensation and Liability Act [CERCLA]).

Foggan and panelist Jared Zola of Dickstein Shapiro LLP in New York said insurance coverage for fracking-related losses would involve third-party liability claims (third-party property damage and third-party bodily injury), first-part property claims (individuals and commercial businesses and energy/drilling companies), environmental liability coverage, specialty drilling policies and directors and officers and errors and omissions coverages. 

Likely insurer defenses, Foggan and Zola said, are pollution exclusions, qualified pollution exclusions, absolute or total pollution exclusions and time element pollution exclusions.

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