Hydrofracking and insurance: What the industry needs to know

A look at the different kinds of claims energy and hydrofracking companies can face

Hydrofracking—the practice of extracting natural gas from shale rock deposits using pressurized water and chemicals—has seen more and more media coverage over the past few years. This coincides with the increased use of the technology by energy companies seeking out new sources of natural gas. Much of this media coverage has focused on the alleged negative effects of hydrofracking, including environmental contamination and even manmade earthquakes. Given such alleged risks, it is likely the insurance industry will be called upon more and more to make decisions regarding policy coverage for hydrofracking.

There have already been more than 20 lawsuits alleging that hydrofracking has resulted in the contamination of the environment—specifically to the detriment of aquifers, surface water and air quality. The lawsuits have brought a variety of claims, ranging from illness and injury caused by drinking water from aquifers contaminated by hydrofracking operations, to geologic change, pressure explosions, property devaluation, and loss of crops and livestock.

For the insurance industry, these lawsuits mean the potential for increased exposureand claims by insureds, specifically energy and hydrofracking companies. Areas of potential claims include:

  • Environmental/pollution claims: Any bodily injury or property damage caused as a result of hydrofracking-related pollution or groundwater contamination could trigger coverage under an environmental/pollution liability policy, which typically provides defense and/or indemnity for bodily injury, property damage and remediation costs resulting from a pollution incident at a covered site.
  • Comprehensive general liability claims: Most commercial entities involved in hydrofracking will likely have comprehensive general liability (CGL) insurance, which generally provides coverage for liability resulting from bodily injury or property damage that takes place during the policy period and is caused by an occurrence. Unless specifically excluded, CGL policies usually also provide coverage for losses associated with products, completed operations, premises and operations, and contractors. Moreover, those entities involved in the storage, treatment, transportation and disposal of hydrofracking fluids face potential liability under their CGL policies (as well as other possible sources of coverage).
  • D&O liability claims: One need not look any further than the Deepwater Horizon/BP spill, where derivative actions were brought against the directors and officers (D&O) of the companies involved in that disaster, to see the potential exposure that directors and officers of an entity involved in the hydrofracking process could have if a similar type of catastrophe occurred. Indeed, Cabot Oil and Gas, a $4.2 billion publicly traded corporation that is deeply involved in hydrofracking in Pennsylvania, and has already been named in several groundwater contamination lawsuits, could potentially face shareholder derivative lawsuits as a result of those litigations and related losses. Directors and officers of companies involved in hydrofracking might look to their D&O coverage to provide defense and indemnity with respect to any alleged errors, omissions, or misstatements associated with their business decisions and activities.
  • Operators’ extra expense claims: Hydrofracking wells have occasionally suffered blowouts as a result of the large amounts and highly pressurized water, “proppants” (sand or ceramic beads) and chemicals that are injected into underground shale formations. Should a blowout occur, many of the energy and drilling companies could look to this type of insurance to cover their losses.

Hydrofracking is clearly an area of potential growth for insureds involved in the energy industry, and thus of interest to insurers and reinsurers who underwrite that business. But members of the insurance and reinsurance community should be aware of the variety of potential risks, liabilities and exposures that are associated with hydrofracking.

Contributing Author

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Greg Hoffnagle

Greg Hoffnagle is an attorney in the New York office of Edwards Wildman Palmer, and focuses his practice on international litigation and arbitrations involving energy/environmental, technology, cyber risk and securities insurance...

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