Liability for Fracking – will current insurance policies respond?

The UK is on the verge of an explosion of fracking activity. Shale gas is viewed as an essential part of the energy mix and there is political enthusiasm for its perceived benefits in relation to energy security, emissions and economic stimulation.

A Poyry/Cambridge Economics Study has suggested that shale gas development in Europe could add 1.1 million jobs and increase European GDP by 1% by 2050. Further, it is suggested that it will lead to a reduction in wholesale gas and electricity prices by 2050.

The Environment Agency has indicated that shale gas poses new risks and challenges. There is greater impact on water resources, greater use of fracturing fluid additives and an increased need to manage waste water and fugitive emissions. There is also the added requirement of building an evidence base and managing people’s concerns.

This leads to questions concerning the liability of the industry for damage caused by fracking and the available insurance coverage.

Recent litigation in the United States may help to shed some light on these issues. In Parr v Aruba Petroleum Inc a jury awarded $3 million in damages to the Parrs who owned a 40 acre property in Wise County, Texas.

The Parrs claimed the emissions associated with fracking caused headaches, nausea, vomiting, open sores, dizziness and the death of their pets. The basis of the award was that Defendant’s had “intentionally created a private nuisance” in their operations.

The Parrs alleged exposures to the consequences of the fracking included, emissions from trucks and onsite equipment, particulate matter “stirred up” by drilling and trucking activities, evaporation of fracking fluid in pits releasing chemicals into the air, release of chemicals as a result of processing, flaring, “fugitive emissions” from wells, venting and finally fracking i.e. the subsurface release of chemicals, contamination of ground water, unintended underground migration of gas/chemicals.

Approximately 15 million Americans live within one mile of a fracked well and this recent decision begs the question, will Parr open the litigation floodgates in the US?

How would Parr be treated under English Law?

Trespass?

In the case of Starr Energy v Bocardo it was held that drilling horizontally under adjoining land is trespass. Starr were ordered to pay nominal damages of £1,000. There was however, no injunction ordered.

Greenpeace have indicated they will rely on this case as a “legal block” to impede fracking in the UK and have reported that more than 46,000 people have joined this legal block. A Greenpeace commissioned report of April 2014 also suggests that 75% of the public are opposed to fracking.

Nuisance?

Private nuisance involves use of land in a lawful manner, which unreasonably damages neighbours’ property interests. The remedies for nuisance include injunctions and damages. Damages will not, however, be awarded for personal injury as this is specifically a tort to property.

Public nuisance can be pleaded where the public are affected. Unlike with private nuisance, damages can be recovered for personal injury.

Fracking Liability coverage

Typically 3 types of cover are considered to be relevant; Operators Extra Expense (OEE), Comprehensive General Liability (CGL), and Environmental Impairment Liability (EIL).

The US case of Warren Drilling v Ace American Insurance Co gives an indication as to how liability insurance may respond to injury to those living near fracking sites.

Warren Drilling were engaged to drill and frack wells in West Virginia commencing in 2008. In October 2010, Hagy (a local homeowner) sued Warren Drilling alleging damage to health and the use and enjoyment of his property. Hagy sought damages in negligence, private nuisance and trespass. Warren Drilling settled out of court with Hagy in 2012.

Warren Drilling had CGL cover for 1 year from 1 September 2008. The policy included an Energy Pollution Exclusion if certain conditions were met:

  • The discharge of pollutants was “both unintended and unexpected from the standpoint of the insured”;
  • The discharge occurred “abruptly and instantaneously and can be clearly identified as having commenced entirely at a specific time on a specific date during the policy period”;
  • Discharge was known by the insured within 30 days of commencement of the discharge; and
  • Discharge was reported to insurers within 60 days of commencement.

Coverage was denied and Warren Drilling subsequently sued insurers. Litigation of this matter has raised some interesting coverage issues:

  • Does the pollution exclusion apply in the first place?
    • What is the relevant “pollutant”: fracking fluid, gas, particulate matter, exhaust fumes?
    • Are all of these capable of being pollutants?
  • Is the discharge “unintended” or “unexpected”?
    • Is the discharge sufficiently abrupt/instantaneous?
    • Fracking fluid is deliberately “discharged” into a well and is intended to “exit” the well and enter the formation.
    • At what point does this become unintended or unexpected?
  • Who bears the burden of proof?
    • Insurer as it is an exclusion clause? Or
    • Insurers, as it is an extension of cover?
  • How will the notice requirements be treated? Warren Drilling states that insurers cannot require “slavish compliance” however, the 5th circuit in Starr v SGS petroleum (2013) disagreed.
  • Would an injunction trigger cover?
  • How would malicious/accidental damage to property onsite or in transit due to protestors be treated?

With protest groups growing in number and becoming increasingly more united in opposition to the proposed fracking sites, this is a particularly hot topic. As the government’s Infrastructure Bill, currently awaiting the report stage, looks set to make fracking easier, it will be particularly interesting to see how the market and policies respond to any losses and claims.