Environmental Coverage Summary: 2013 – Crystal Ball: Insurance Coverage Environmental Issues to Watch For In 2014

Environmental Coverage Summary: 2013 – Crystal Ball: Insurance Coverage Environmental Issues to Watch For In 2014

A. Fracking Claims: Fallacy Or Finally Here?

Hydraulic fracturing - or "fracking" - involves the fracturing (drilling) of pressurized liquid into rock, such as shale rock, to release natural gas and oil. The pressurized liquid is a mix of water, chemicals and sand or gravel. With low costs associated with fracking, as opposed to other means to access natural gas, these operations will continue to increase. For example, in 2012, shale gas (i.e., from fracking) accounted for 39% of all natural gas produced in the United States. Additionally, natural gas production in the United States has increased more than 30% since 2005 and this production is estimated to increase by 44% between 2011 and 2040, primarily due to fracking.

As the fracking industry in the United States expands its operations in 2014, the scope of liabilities arising from this activity is expected to increase. Of course, as these liabilities increase, so too will the scope of insurance coverage challenges arising from fracking. We discuss below the types of fracking liabilities we expect to see in 2014, as well as one insurance dispute that already arose and other coverage issues that may be on the horizon.

1. Expected Liabilities Arising From Fracking

Oil and gas companies are the obvious targets of fracking claims and lawsuits, as they are the companies primarily involved in fracking operations. However, it is not only oil and gas companies that face potential liability related to fracking. In addition to oil and gas companies, other parties that may be the target of legal claims arising from fracking include: (1) contractors and subcontractors of the oil companies, for negligent construction or installation of wells and other equipment used in fracking; (2) property owners, lease holders and site operators, for damage or injury on or to the property and lease disputes (including unfair leasing practices, insufficient rent/royalties and lack of protection from lawsuits against property owners); (3) transporters of materials used in fracking, for injuries sustained in or related to transporting those fracking-related materials; and (4) manufacturers of those materials and tools used in the fracking process, for product liability claims. In addition to these typical tort or contact lawsuits arising from fracking operations, we also expect a series of claims alleging the fracking industry of having a significant detrimental impact on the environment.

Although the claims mentioned above are the most common claims expected to arise from fracking, there may be a very significant new type of claim coming to the table. Within recent months, plaintiffs claim to have established a causal link between fracking operations and earthquakes deep below the earth's surface. Of course, these intermittent earthquakes result in property damage and lawsuits. In 2010 and 2011, the town of Greenbrier, Arkansas experienced over 1,000 minor earthquakes, which scientists from the University of Memphis and the Arkansas Geological Survey concluded may have been caused by the disposal of wastewater from fracking into deep underground wells. This conclusion prompted the Arkansas Oil and Gas Commission to shut down several wells in the area, and the earthquakes ultimately ceased. Armed with a potential causal connection, a number of landowners have filed lawsuits in Arkansas federal court alleging property damage to homes in central Arkansas from these earthquakes caused by the disposal of the leftover toxic water.1 These cases are currently in settlement negotiations, with a trial date scheduled in 2014.

Earthquakes might not be the only new or novel liability associated with fracking in 2014. Other recent fracking-related litigation has seen the oil and gas industry suing local municipalities to challenge those municipalities' constitutional powers to pass ordinances that effectively ban fracking. For example, in the state of New York, anti-fracking resolutions or ordinances have been passed in over 100 municipalities. Elsewhere, large cities such as Pittsburgh and Detroit have banned fracking. Dryden, New York, a town outside of Ithaca, had passed such a zoning ordinance in 2010, which prompted an oil and gas company to file suit challenging the ordinance. To date, the lower courts sided with Dryden [enhanced version available to lexis.com subscribers], ruling that it is within the town's rights to pass such an ordinance. However, New York's highest court - the Court of Appeals - agreed in August to hear the Dryden case, along with another fracking ban passed in Middlefield, New York [enhanced version available to lexis.com subscribers]. Additionally, in Mora, New Mexico a community rights ordinance banning oil and gas drilling was recently passed, resulting in private property owners and the Independent Petroleum Producers of New Mexico filing suit in federal district court in November 2013 challenging this ordinance.

2. Coverage Issues Related To Fracking

The interpretation and application of the pollution exclusion is but one example of an insurance coverage dispute that will arise from fracking. The drilling method in fracking injects a mixture of water, chemicals and sand under high pressure to crack shale rock and release the natural gas. To date, the fracking industry has been circumspect regarding the formulation of the chemicals used in the fracking process.

As in other "pollution exclusion"-related cases, parties may soon ask courts to determine whether this fracking mixture is considered a "pollutant" for the pollution exclusion to apply. While the actual chemical component in the drilling mixture is very small, the insurers may be able to convince a court that the pollution exclusion still applies, especially depending on the underlying claim and alleged damage, such as environmental pollution. Additionally, whether the pollution took place suddenly or gradually may determine whether a time-element pollution exclusion applies, as those exclusions bar coverage if an "occurrence" is not reported within a specific time period (i.e., thirty days, ninety days, etc.). See, e.g. Starr Indem. & Liab. Co. v. SGS Petroleum Serv. Corp., 719 F.3d 700, 705 (5th Cir. 2013) [enhanced version available to lexis.com subscribers], (Texas law) (insurer absolved of coverage for clean-up costs from an accidental chemical release because insured failed to comply with the thirty-day notice requirement under pollution exclusion endorsement; insurer did not need to show prejudice under this "specifically negotiated" pollution buy-back endorsement).

To date, one insurance coverage lawsuit has been filed related to fracking and the pollution exclusion. In Warren Drilling Co., Inc. v. Ace American Ins. Co., No. 2:12-cv-425 (S.D. Ohio, filed Apr. 13, 2012), the insured, a drilling company, sued its insurer for refusing to defend or indemnify the company after drilling activities allegedly contaminated a nearby homeowner's water well. The policy at issue was a standard Commercial General Liability (CGL) policy that also included an Energy Pollution Liability Extension (EPLE) endorsement and an Underground Resources and Equipment Coverage (UREC) endorsement. Although the CGL policy in question excluded coverage for bodily injury or property damage caused by "pollutants," the EPLE endorsement reinstated coverage for a pollution incident where certain conditions are met, such as the discharge of pollutants being unexpected and unintended; the discharge commencing abruptly and instantaneously and at or from a site owned/occupied by or where the insured was performing operations; the insured knowing within 30 days of the commencement of the discharge; and the insured reporting to the insurer within 60 days of the commencement of the discharge. Citing to both of these endorsements, the insured argued that the insurer breached its contract and acted in bad faith by denying coverage for the underlying claim. Although the insurer and insured ultimately settled their dispute in early 2013 before the parties litigated any coverage issues, this scenario is ripe for similar litigation.

In addition to the pollution exclusion, other general liability insurance coverage issues that may involve fracking claims include whether the claim constitutes an "occurrence" (including whether the claim was "expected or intended," or an "accident" or "event"), whether an owned-property exclusion applies, and the timing and notice of these fracking claims to insurers. Future coverage issues that will likely arise under general liability long-tail environmental claims related to fracking include the number of occurrences, trigger and allocation. Other than general liability insurance, fracking claims may also implicate workers' compensation insurance, first-party/business interruption insurance, and directors and officers insurance. As fracking claims for coverage develop in 2014 and beyond, there may be a response by underwriters by drafting and issuing endorsements limiting or barring such coverage in the future, as was the industry's response to previous claims such as mold and Chinese drywall.

B. Other Environmental Decisions On The Horizon For 2014

The United States District Court for the Southern District of New York heard arguments in 2013 regarding whether a pollution exclusion for underlying chemical exposure claims applies in Ace American Ins. Co. v. GrafTech International Ltd., No. 1:12-cv-6355 (S.D.N.Y.). The insurers filed a motion for summary judgment, arguing that they have no duty to cover these underlying claims because the damages would never reach the insurance policies at issue, and that the claims are barred under a pollution exclusion. The insured countered that only one policy period is at issue, and the pollution exclusion applies to "traditional environmental pollution," which is not the case here.

The insured, GrafTech International Ltd. (GrafTech), sought coverage from its insurers for costs in defending numerous cases alleging hazardous toxic and chemical exposure from GrafTech's products at various smelting facilities between 1942 and 2012. The insurers first argued that, under either New York or Connecticut law, pro rata allocation would spread GrafTech's damages over a 70-year period, and that GrafTech has not proven that it has exhausted its deductibles or underlying insurance to trigger the insurers' policies, which were issued between 1991 and 2007. Alternatively, the insurers argued that each of the policies issued between 1997 and 2007 contain an "absolute" pollution exclusion that would preclude coverage for the underlying claims. The exclusion bars coverage for claims arising out of the "actual, alleged or potential presence in or introduction into the environment of any substance if such substance has, or is alleged to have, the effect of making the environment impure, harmful or dangerous." The policies further define "environment" as "any air, land, structure or the air therein, watercourse or water, including underground water."

Another highly anticipated ruling in 2014 with possible nationwide significance to environmental law and subsequent insurance coverage litigation is in the matter, Chubb Custom Insurance Co. v. Space Systems/Loral Inc. Chubb Custom Insurance Company (Chubb) filed a Writ of Certiorari to the United States Supreme Court in September, requesting the Court to hear arguments related to an insurer's right to seek recovery via subrogation lawsuits under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA). Chubb seeks reversal of a Ninth Circuit dismissal [enhanced version available to lexis.com subscribers], of Chubb's claims for damages against Ford Motor Company, Chevron Corp. and other former owners of a contaminated parcel of land that Chubb paid to remediate on behalf of its policyholder, Taube-Koret Campus for Jewish Life.

In its writ, Chubb contends that the Ninth Circuit erred in dismissing its subrogation claims under CERCLA, arguing that its insured would have been entitled to sue the other parties had it not received payment from Chubb. The Ninth Circuit affirmed the district court's dismissal of Chubb's lawsuit, claiming that Chubb did not directly incur environmental response costs and that subrogation law does not apply to the section of CERCLA Chubb sued. Chubb argues in its Writ that the courts failing to recognize insurer's subrogee rights will force environmental remediation litigation to take longer and become more complicated.

V. Conclusion

The year 2013 has been another busy year with significant decisions affecting both policyholders and insurers alike. States continue to diverge on issues such as what constitutes a "pollutant," and whether a "pro rata" or "all sums" allocation method is appropriate in spreading a risk in long-tail environmental claims. These issues are not disappearing in the near future, and courts may soon be interpreting these same policy terms in different arenas, such as fracking. Once again, the area of environmental coverage allows claims personnel and coverage counsel alike to learn from the past lessons of case law, which continue to be applied to form and shape the future.

Endnotes

1. See, e.g., Miller, et al. v. Chesapeake Operating Inc., et al., Case No. 4:13-cv-131 (E.D. Ark); Thomas, et al. v. Chesapeake Operating Inc., et al., Case NO. 4:13-cv-182 (E.D. Ark.); Sutterfield, et al. v. Chesapeake Operating Inc., et al., Case No. 4:13-cv-183 (E.D. Ark.); and Mahan, et al. v. Chesapeake Operating Inc., et al., Case No. 4:13-cv-184 (E.D. Ark.).

Ellen J. Zabinski is a partner of Bates Carey Nicolaides LLP who focuses her practice on insurance coverage matters. She has defended numerous insurers involved in complex insurance coverage litigation pending throughout the country in both state and federal courts. Adam H. Fleischer is a partner of Bates Carey Nicolaides LLP with a national reputation for innovative advocacy in complex insurance and reinsurance coverage issues with respect to the pre-litigation, litigation and appellate stages. Copyright (c) 2013 by Ellen J. Zabinski and Adam H. Fleischer. Responses are welcome.

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