Because there are many unknowns and conflicting information surrounding fracking (hydraulic fracturing), there is a general reluctance to provide a comprehensive insurance product for these risks.
Until operating, regulatory and legal liability risks become clearer, and best practices are understood, insurers are unlikely to provide coverage for all the risks associated with shale gas development and hydraulic fracking.
Claims experienced in other jurisdictions associated with fracking include actions for negligence, trespass, nuisance, strict liability, toxic tort, breach of contract, premises liability, violations of environmental statutes, compensatory damages for personal injuries and compensatory damage for damage to real and personal property.
Insurers must consider whether existing liability policies cover risks that they do not wish to cover till more is known about fracking methods and risks.
Commercial general liability policies may provide cover for third party claims against the insured for personal injury and property damage, but the scope is limited through the use of pollution exclusions, including a total exclusion for claims arising from the release of contaminants.
A time-bar provision attached to a pollution exclusion requiring that the pollution condition be discovered and reported within a limited time period can result in some coverage for pollutant releases that can be immediately discovered and reported. The risk of undiscovered contamination requires operators to find additional insurance coverage. A failure to notify the insurer of the release of pollutants within the deadline can result in denial of coverage.
What the policy considers a “pollutant” will determine whether the exclusion applies to contaminants from fracking.
A common and problematical exclusion is whether the insured expected or intended the pollution to occur.
Operators’ extra expense insurance
Operators’ extra expense insurance is a specialised policy available to oil and gas operators which generally contain time-bar restrictions. They include indemnities for damages paid to third parties for harm caused by seepage and pollution and costs for remedial clean-up measures.
Environmental site liability is site specific and covers third-party claims for bodily injury or property damage caused by pollution at or escaping from the specific location covered by the policy. Operators’ extra expense is not usually written on a claims-made basis and perils are not limited to named perils. This can provide some form of gap cover arising from the use of the commercial general liability and operators’ extra expense insurances.
These policies usually treat multiple claims arising from a single pollution incident as one claim subject to one limit of liability and one deductible.
D & O cover
Directors and officers insurance protects a company’s directors and officers from liability claims arising from alleged mismanagement or other negligence in the performance of their duties.
In other jurisdictions oil and gas company shareholders have actively sponsored resolutions relating to hydraulic fracking, seeking more information and disclosures about environmental risks associated with their operation. Those shareholders may file class actions and shareholder derivative loss actions alleging failure to disclose, misrepresentation or mismanagement of the risks associated with hydraulic fracking resulting in lost revenues, loss of market share, stock price declines or damage to the corporation’s reputation. D & O policies may exclude pollution claims and claims for or arising out of bodily injury and property damage, fines, penalties, intentional criminal acts and punitive or exemplary damages.
Insurers need to understand and quantify the risk in order to price a policy’s premium. Factors to consider include the high cost of defending hydraulic fracking class action suits, document discovery issues and complex claims requiring expert testimony.
They also need to consider whether existing liability policies cover risks that they do not wish to cover till more is known about fracking methods and risks.
With acknowledgements and thanks to Barclay Nicholson, Norton Rose Fulbright Houston, USA
