Insurance for Hydrofracking

Huhnsik Chung , Gregory Hoffnagle


June 1, 2011

There are a wide range of insurance coverages that may apply to claims brought against companies that engage in hydrofracking. Some are similar to the perils seen in other industries while others are unique to this emerging threat. Here are how some policies may apply.

Certainly all commercial entities involved in hydrofracking operations will have some form of comprehensive general liability (CGL) coverage. Generally, these policies provide liability coverage for bodily injury or property damage to a third party and insure against all liability exposures of a business, unless specifically excluded. CGL policies usually also include coverage for losses associated with products, completed operations, premises, operations and independent contractors.

Hydrofracking claims could also apply to damages caused by products, something that CGL products liability coverage may protect against as these policies normally insure lawsuits brought against the manufacturer or distributor of a product that allegedly causes bodily or property harm. For example, there have been allegations that the well casings used in hydrofracking wells may leak and allow toxic chemicals to leach into the surrounding soil and aquifers. Manufacturers of these well casings may look to this type of CGL insurance to cover associated losses brought by third parties.

Another concern may come from the fact that a hydrofracking site has many contractors and sub-contractors who work daily in the operations of extracting shale gas from a well. And it seems inevitable that some type of accident and injury will occur to these workers as they conduct their business. CGL premises and operations liability coverage insures for bodily injury incurred by third parties on the premises of the insured or as the result of the insured's day-to-day operations necessary to conduct its business. It should be noted, however, this type of coverage almost never extends to the business or its employees.

For these independent contractors who perform services on the wells, CGL independent contractors' liability coverage may also be triggered for losses deemed to have occurred as a result of an independent contractor's "negligent" work. Generally, independent contractors' liability coverage insures bodily injury incurred as the result of negligent acts and omissions of an independent contractor employed by the insured.

There are many environmental exposures related to hydrofracking. If, for example, the chemicals used or the wastewater from the well contaminated the water supply of a local municipality, prohibiting its residents from drinking the water (something that has allegedly occurred in Texas), environmental/pollution liability coverage may cover the resulting losses and pay damages from resulting lawsuits. Generally, environmental/pollution liability coverage insures bodily injury, property damage and remediation costs resulting from a "pollution" incident at a "covered" site. Third party environmental/pollution coverage is designed to defend and/or indemnify (depending on the specific type of policy) the insured from allegations that a release of a pollutant from the insured's facility adversely affected a claimant.

There are multiple ways in which a directors and officers policy could be triggered-as in the case of Cabot Oil & Gas, for instance. First let's look at the coverage generally. Usually, when applied to public companies, D&O contains three clauses:

1) Insuring Clause 1 (Side-A) provides coverage to individual directors and officers when not indemnified by the corporation.

2) Insuring Clause 2 (Side-B) provides coverage for the corporation when it indemnifies the directors and officers (corporate reimbursement).

3) Insuring Clause 3 (Side-C) provides coverage to the corporation itself for securities claims brought against it. Simply put, in relation to potential hydrofracking claims, D&O liability insurance provides financial protection for the directors and officers of a company who will be sued in conjunction with the performance of their duties as they relate to the company.

Cabot Oil and Gas, a $4.2 billion publicly traded corporation heavily involved in Pennsylvania hydrofracking, has been named in several groundwater contamination lawsuits and could possibly face shareholder derivative lawsuits as a result of the growing litigation and associated losses. Cabot would most likely look to D&O coverage to provide a defense and indemnity for directors and officers facing claims relating to Cabot's alleged errors and omissions associated with its "hydrofracking business decisions."

All employees who work in the hydrofracking industry and suffer workplace injuries would most likely be covered. Commercial workers comp liability coverage protects against losses due to injury or death of the insureds' employees. Generally, this type of insurance covers medical, rehabilitation costs and lost wages for inured employees.

Hydrofracking wells have been known to suffer blowouts due to large amounts of highly pressurized water, "proppants" (sand or ceramic beads) and chemicals injected into shale formations. Should a blowout occur, many of the energy and drilling companies would look to operators extra expense coverage. This insurance often covers costs incurred when regaining control of an offshore or onshore well blowout, including re-drilling expenses, seepage and pollution from the blowout, as well as liability coverage for the company and any third party property damaged.

Huhnsik Chung is a partner in the insurance and reinsurance department at Edwards Angell Palmer & Dodge LLP.
Gregory Hoffnagle is an associate in the insurance and reinsurance department at Edwards Angell Palmer & Dodge LLP.