fracking insurance

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New York Pennsylvania Washington, DC Ohio New Jersey North Carolina Lon

www.nldhlaw.c

The Fuss Over FrackingAn Examination of the Insurance Issues

Associated with Hydro-FrackingA Nelson Levine de Luca & Hamilton White Paper

August 20


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THE FUSS OVER FRACKING:AN EXAMINATION OF THE INSURANCE ISSUES ASSOCIATED WITH HYDRO-FRACKING

INTRODUCTION.................................................................2

I. OVERVIEW......................................................................2A. What is Fracking?........................................................2

1. Process and Evolution..............................................2

a. Drilling Stage.........................................................2

b. Fracking Stage......................................................3

B. Fracking Fluid Components ........................................3

C. Geography and Future Longevity................................4

D. Regulation and Governmental Focus Arising from

Public Concern................................................................5

II. LIABILITY CLAIMS........................................................7

A. Homeowner/Resident Claims.....................................71. Allegations, Causes of Action and Damages........... 7

2. Defenses..................................................................9

a. Causes of Action...................................................9

aa. Strict Liability....................................................9

ab. Trespass.........................................................10

ac. Medical Monitoring.........................................10

b. Causation............................................................11

3. Contractual Issues..................................................13

4. Potential Defendants..............................................13

B. Worker Claims........................................................14

C. Business to Business Claims....................................14D. Government Suits......................................................14

E. First Responders.......................................................15

F. Other Liability Suits....................................................15

III. COVERAGE ISSUES..................................................15

A. First-Party Insurance Coverage Issues.....................16

1. Loss or Damage to Covered Property....................16

2. Trigger of Coverage in First-Party Cases...............17

3. Collapse Coverage.................................................18

4. Earth Movement Exclusions...................................19

5. Pollution and Contamination Exclusions................20

6. Causation/Concurrent Causation...........................22

7. Number of Occurrences.........................................23

B. Third-Party Insurance Coverage Issues....................24

1. Insureds/Additional Insureds..................................24

2. Occurrence Requirement.......................................253. Trigger of Coverage in Third-Party Cases..............25

4. Known or Continuous Injury...................................26

5. Expected or Intended.............................................27

6. Total or Absolute Pollution Exclusion......................27

7. Contractual Liability Exclusion................................28

8. Number of Occurrences/Aggregates......................29

9. Relief Requested By Claimants..............................30

IV. CLASS ACTION ISSUES............................................31

A. Certication under the Federal Rules........................31

1. F.R.C.P. 23(b)(3) Requirements.............................312. F.R.C.P. 23(b)(2) Requirements.............................32

B. Class Action Jurisdiction and Removal.....................32

V. SUBROGATION/RECOVERY OPPORTUNITIES

AND RISKS..................................................................33

A. Opportunities.............................................................33

B. Hurdles/Risks............................................................33

1. Factual Support......................................................33

2. Contractual Limitations...........................................33

C. Evidence Retention and Preservation......................34

D. Perfecting the Contribution/Indemnication Claim:

Releases and Settlements.............................................34

CONCLUSION..................................................................35

TABLE OF CONTENTS

2013 Nelson Levine de Luca & Hamilton LLC


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INTRODUCTION

Hydraulic fracturing, commonly referred toas fracking, is a drilling process used to extractunderground oil or natural gas trapped in hard to reachshale rock formations deep in the earth. The process

involves well construction, acquisition of source water,well stimulation by hydraulic fracturing, and wastedisposal. Recent advancements in drilling technologyhave made signicant shale gas formations newlyaccessible for development. As a result, natural gasproduction in the United States is at its highest level inover 30 years.1

With the monumental increase in frackingactivity in certain geographic regions, and the mediaand governmental attention focused on frackingsactual and perceived risks, it was only a matter of time

before litigation ensued involving those engaged in suchactivity and those impacted by such activity. The currentand anticipated litigation has and will continue to havebearing on the insurance industry, raising numerouscoverage and liability issues.

To assist insurance companies in betterunderstanding the potential risks related to fracking, thispaper discusses the types of claims that the industry canexpect from individuals and businesses, and suggestsactions that insurers should consider when investigating,evaluating and handling these claims. In addition,insurance company recovery options with regard to bothsubrogation and reinsurance are also addressed.

I. OVERVIEW

A. What is Fracking?

Hydraulic fracturing is a part of a process usedto extract gas from underground shale rock formations.The identied shale gas deposits throughout the UnitedStates are viewed by many as a means for relievingor reducing the nations dependence on foreign energysources.2

1 United States Energy Information Administration (EIA), Natural

Gas Monthly (June 2013), Table 1, U.S. Natural Gas Monthly

Supply and Disposition Balance.

2 The most prominent shale gas deposits where fracking operationsare currently taking place include the Bakken Shale in North

Dakota, the Barnett Shale in Texas, Marcellus Shale in

Pennsylvania (discussed further below), Raton Basin in Colorado,and Haynesville Shale in Louisiana.

1. Process and Evolution

Early 19th century gas extraction in the U.Sinvolved accessing shallow deposits via simple weldrilled vertically into natural gas seeps.3 The rst eldscale extraction of shale gas began in the 1920s a

Ohio Shale in Kentucky.4

The energy industry began using hydraulfracturing in the early 20thcentury. Halliburton claims be the rst company to use the process commercially 1947 to access natural gas at Hugoton Field in Kansas.was not until 1992, however, that advances in horizontdrilling, combined with hydraulic fracturing, made largescale shale gas production economically feasible.5

These advances made shale gas formationmore accessible for development. The formationproduce and trap natural gas in deep rocky layersShale is formed from clay particles located in tidal atand deep water basins rich with organic matter sucas algae, plant and animal debris.6 This sedimesolidies into laminate layers resulting in rock witlimited permeability.7 These shale deposits are typicallocated between 1,000 feet and 13,500 feet beneatthe earths surface.8

a. Drilling Stage

Vertical downward drilling, followed by newdeveloped horizontal drilling, allow operators to accesmore shale gas than ever before using a single well. Thhorizontal drilling is visually depicted in Figure 1 below

Operators use drilling uids to clear the borehoand to lubricate and cool the drill bit. Lined retention piare used to store fresh water for drilling and frackingPressurized air is increasingly used as a lower coalternative to such drilling uids when operating olower pressure formations.9

After a well is drilled, operators line the well wilayers of protective steel casing and cement to conta

3 Department of Energy, Modern Shale Gas Development in theUnited States, A Primer (April 2009), p. 13.

4 Id.

5 Id.6 Id. atp.14.

7 Id.

8 Id.9 Id. at p. 55.


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the soon to be applied fracking uids within the welland prevent contamination of underground water. Thiscasing also supports the wellbore and prevents soilcaving. The well is then pressure tested, followed bya perforation process in the region where the frackinguids are to be injected.

b. Fracking Stage

In the fracking stage, pressurized uids made upof water and chemical additives are injected into the rock

formation, opening or enlarging fractures in the rock.10

Operators pump acid into the wellbore area to cleanit. Then, a water based fracturing uid with a frictionreducing agent, also called slickwater, is pumped intothe well. Different companies use different proprietaryuids for this purpose. The involved companies have noexisting legal duty to disclose the contents used in theiruid mixes.

Fracking uids also contain sand or othermaterials (proppants) that enter the fractures to increasepermeability and keep them open as the pressure is

released.11

Some of the applied uids that return to thesurface are contained. As a result, natural gas owsinto the fractures for extraction.12 The waste uidsare removed and stored in tanks, pits or undergroundwells; treated at a wastewater facility; or discharged intonearby surface water.

10 Id.

11 Id.12 Id.

B. Fracking Fluid Components

There are opposing views as to the safeand composition of fracking uid components. 2010, pursuant to the request of the U.S. House Representatives Committee on Energy and Commerc

14 leading oil and gas service companies disclosed thchemical contents of their hydraulic fracturing uids usefrom 2005-2009. A report summarizing the companiedata indicated that while some components, such asalt and citric acid, were harmless, other componencontained toxins such as benzene and lead. The mowidely used chemicals during this period includemethanol (recognized as a hazardous air pollutanisopropyl alcohol 2-butoxyethanol and ethylene glycolBenzene, toluene, xylene and ethylbenzene each which is classied as a regulated contaminant under thSafe Drinking Water Act and as a hazardous polluta

under the Clean Water Act (both of which are analyzefurther in this paper) were contained in 60 of thhydraulic fracturing products identied in the MinorCommittee Report. The Committee further notethat while all of the responding companies suppliesubstantial information regarding the componenof the fracking uids they used, these companies dnot identify certain components because they weproprietary. It was further noted in the report that frackinuid additives vary according to the geographic regiodrilling methodology and conditions.Typically, frackinuid is comprised of the following components:

13 United States House of Representatives Committee on Energy

and Commerce, Minority Staff April 2011, Chemicals UsedHydraulic Fracturing. P.1.

Source: ALL Consultinghttp://fracfocus.org/water-protection/drilling-usage

Source: http://www.epa.gov/safewater/uic/pdfs/hfresearchstudyfs.pdf


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C. Geography and Future Longevity

The Marcellus Shale formation is a unitof black shale that extends through much of the

Appalachian Basin, including portions of New York,

Ohio, Pennsylvania, Maryland and West Virginia. Areport issued by Pennsylvania State University in July2011 estimates that the Marcellus Shale formationwill be the largest single gas eld in the country,producing a quarter of the countrys gas by 2020.The Marcellus Shale, depicted below as a portion ofthe Devonian Black Shale Succession, is only one ofseveral formations being developed throughout thecountry. The economics of the energy sector suggestthat large scale development of drilling operationsusing the hydraulic fracturing techniques is in theimmediate future.

The vast amount of domestic energy as wellas the geographic location and size of these shaleformations underlie much of the simmering controversyrelated to fracking. Drilling for such valuable resourcesis not taking place offshore or in some sparselypopulated desert. It is happening on, around and

under farmlands, rural and wooded communitieand watersheds of some major population centerThe interaction between these industrial endeavoand the residents and property owners in succommunities forms the basis for much of the actu

and potential conict.

In 2012, the United States produced aestimated 24,063 billioncubic feet of natural gas.142011, domestic shale production accounted for 30of all U.S. natural gas production, and it is estimateto account for 56% by 2035.15 The U.S. EnergInformation Administration estimates that the UniteStates, alone, has deposits sufcient to supply thdomestic market for 110 years.16 Simply, it is highlikely that fracking is and will continue to evolve as paof our natural energy program.

Shale gas production growth is also ainternational development. One study estimated ththere are 5,760 trillion cubic feet of recoverable shagas in 32 foreign countries, as depicted in Figure below.17

14 U.S. EIA - www.eia.gov/naturalgas/annual/pdf/table_001.pdf

15 U.S. EIA - www.eia.doe.gov/todayinenergy/detail.cfm?id=811.16 United States House of Representatives Committee on Energy

and Commerce, Minority Staff, April 2011.

17 U.S. EIA - www.eia.doe.gov/todayinenergy/detail.cfm?id=811.

Source: http://www.bizjournals.com/buffalo/stories/2008/02/11/story2.html Source: U.S. Energy Information Administration based on Advanced Reso

International, Inc. data
http://www.bizjournals.com/buffalo/stories/2008/02/11/story2.htmlhttp://www.bizjournals.com/buffalo/stories/2008/02/11/story2.html


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D. Regulation and Governmental FocusArising from Public Concern

Fracking technology has increased shalegas development in geographic areas that werepreviously untouched by oil and gas production efforts.

The expansion has, in turn, led to an increased, andsometimes heated, dialogue on the environmental andhuman health impacts of fracking.

The Safe Water Drinking Act of 1973 (SDWA)established the Underground Injection Control (UIC)program prohibiting subsurface emplacement of fluidsby well injection that endangers underground drinkingwater. Nonetheless, the Environmental Protection

Agency (EPA) concluded in 1996 that the UIC did notapply to fracking. In 1997, the United States Court of

Appeals for the Eleventh Circuit overturned this EPApolicy in response to a petition by Alabama citizensliving near a coal bed methane operation.18 In 2003,the EPA entered into a Memorandum of Agreementwith the three largest providers of hydraulic fracturingfluids, with each provider agreeing to eliminate diesel

18 Legal Environmental Assistance Foundation v. EPA, 118 F.3d

146 (11thCir. 1997) (LEAF I) (holding that hydraulic fracturing

constitutes underground injection under the SDWA) and Legal

Environmental Assistance Foundation v. EPA, 276 F.3d 1253(11thCir. 2001) (LEAF II) (holding that wells used for injection of

fracking uids must be regulated as Class II wells under UIC

program).

Two years later, Congress exemptedhydraulic fracturing from the SDWA under theEnergy Policy Act.19In doing so, gas companies wererelieved from anyobligation to disclose the chemicalsused in the fracking process. Regulatory authority ovefracking operations remained with the states. Initially

regulations specic to fracking were uncommon.

A bill addressing fracking is pending inthe United States Congress (H.R.1921, entitledthe Fracturing Responsibility and Awareness ofChemicals Act of 2013). The proposed act, originallyintroduced in 2008, includes provisions: (1) requiringcompanies to reveal the chemicals in their uids and(2) repealing the exemption to the Safe DrinkingWater Act noted above, while (3) maintaining certainprotections for proprietary information.

In 2010, the EPA began to reassess the effectof hydraulic fracturing on drinking water. A plan wassubmitted to an EPA ad hoc committee, the Science

Advisory Board on February 7, 2011. According tothe EPA, the rst progress report was released inDecember 2012. A nal draft of the report is expectedto be released for public comment and peer review in2014.20

In August 2011, the Securities and ExchangeCommission (SEC) entered into dialogue and began

asking oil and gas companies to provide detailedfracking information, including chemicals used and

19 The language added via the Energy Policy Act of 2005 included The term underground injection:

(A) means the subsurface emplacement of uids by well injection

and (B) excludes: (i) the underground injection of natural gas for purposes of

storage; and (ii) the underground injection of uids or

propping agents (other than diesel fuels) pursuant to

hydraulic fracturing operations related to oil, gas or

geothermal production activities.

While the SDWA specically excludes hydraulic fracturing from

UIC regulation under SDWA 1421(d)(1), the use of diesel fuelduring hydraulic fracturing is still regulated by the UIC program.

Any service company that performs hydraulic fracturing usingdiesel fuel must receive prior authorization from the UIC

program. Injection wells receiving diesel fuel as a hydraulic

fracturing additive will be considered Class II wells bythe UIC program. The UIC regulations can be found in Title

40 of the Code of Federal Regulations, Parts 144-48. State oil

and gas agencies may have additional regulations for hydraulic

fracturing. In addition, states and the EPA have authority underthe Clean Water Act to regulate discharge of produced waters

from hydraulic fracturing operations.

20 http://www2.epa.gov/hfstudy.com

fuel in fracking fluids for coal bed methane wells.19

FRACKING REGULATION TIMELINE

1996 - EPA concluded that the UIC did not apply to fracking.

1997 - The United States Court of Appeals for the Eleventh

Circuit overturned this EPA policy.

2003 - The EPA entered into a Memorandum of Agreementwith the three largest providers of hydraulic fracturing fluids.

2005 - Congress exempted hydraulic fracturing from theSDWA under the Energy Policy Act.

2010 - The EPA began to reassess the effect of hydraulicfracturing on drinking water.

2011 - The SEC entered into dialogue and began asking oiland gas companies to provide detailed fracking information,including chemicals.

2013 - The U.S. Environmental Protection Agency issuedsignicant new use rules under the Toxic Substances Control

Act for 15 chemical substances.


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efforts made to minimize environmental harm.21 TheSECs interest in fracking was presented as ensuringthat investors were being told about risks a companymay face related to its operations, such as potentiallawsuits, compliance costs, environmental liabilities, andother uncertainties, including production estimates. Oil

and gas companies were asked to supply informationcondentially to the SEC. It is uncertain what furthersteps the agency may take.

Much of the environmental and safety concernsarise from the fact that the increased fracking activity isin areas zoned as residential and agricultural.

Some concerns focus on the potentialcontamination of local or individual water supplies by thechemical additives in the uids and potential carcinogensas well as the long term effects of abandoned wells. Otherconcerns involve reports of surface spills of hydraulicfracturing uid; methane contamination from improperlycased wells; pollutant discharges from wastewatertreatment facilities affecting aquatic species in streamsand rivers; and environmental effects of above groundinfrastructure associated with the production.

In May 2013, the U.S. Environmental ProtectionAgency issued signicant new use rules underthe Toxic Substances Control Act for 15 chemicalsubstances. This action requires persons who intend

to manufacture, import, or process any of these15 chemicals for an activity that is designated as asignicant new use by this rule to notify EPA at least90 days before commencing that activity. The requirednotication will provide EPA with the opportunity toevaluate the intended use and, if necessary, to prohibitor limit that activity before it occurs.22

Despite this rising public concern, industryexperts state that fracking technology is safe andeffective in the vast majority of cases. They assertthat it will have an economic benet on states where

the drilling is occurring, and on the country as a wholethrough the promotion of an alternative to foreign fossilfuel. Government ofcials in many states where frackingactivity is expanding have voiced their support of suchexpansion and its underlying safety.

21 SEC Bears Down On Fracking, Wall Street Journal,

August 24, 2011

22 https://www.federalregister.gov/articles/2013/05/09/2013-11061/signicant-new-use-rules-on-certain-chemicalsubstances

The division of public opinion was cleardemonstrated when the New Jersey legislature passea statutory ban on fracking in June 2011 (very little shagas potentially exists in New Jersey); that same weethe Pennsylvania legislature sponsored bills supportinfracking development and the governor of New Yo

advised that he supports lifting the states temporaban on fracking in certain parts of his state. In Ma2012, Vermont became the rst state to ban hydraufracturing within its borders.

Another source of controversy is the mannby which the natural resource companies gain accesto the land. Companies are entering into land leasefrom property owners who typically have enough opeor wooded acreage to install and utilize drilling facilitieFurthermore, the infrastructure required to bring drillinequipment, pumps and millions of gallons of water (fthe fracking uid) to such remote sites and move thgas extracted from the wells is considerable. Treemust be cleared; roads must be built; trucks must bused for the well construction and fracking procesThis activity puts a strain on local roads and highwayPipelines must be built across miles of land in order transport the gas from locations.

As 60 Minutes highlighted in a Novemb2010 piece entitled Shale-ionaires,23 there ainherent conicts between property owners who a

being compensated for allowing industrial activitieon their property, and their neighbors who do nreceive compensation and feel their properties ancommunities are being adversely affected (whether bhealth, environmental or valuation risks). This dispariwithin the local communities has the obvious potentito add fuel to the conict.

With the inevitable increase in fracking in multipgeographic regions, and the media and governmentattention being drawn to its actual and perceived riskrelated litigation will continue to arise. This will continu

to impact the insurance industry, raising a wide varieof coverage and liability issues.

23 http://www.cbsnews.com/video/watch/?id=7054210n


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II. LIABILITY CLAIMS

Fracking-related litigation has commenced.The issues are somewhat similar to those raised in thetoxic tort litigation of the 1990s. As with any commercialactivity, fracking presents various liability and insurance

coverage issues that could arise under a wide array offactual situations.

A. Homeowner/Resident Claims

1. Allegations, Causes of Action andDamages

Liability suits arising from or related to frackinghave been led in state and federal courts spanningPennsylvania, Texas, Arkansas and elsewhere. Propertyowners who sold mineral rights and residents in production

areas have brought civil claims against operators allegingdamages under several factual scenarios.

Initially, these actions focused upon allegationsof contamination of surrounding land, ground andsurface water caused by faulty well-casings, improperdrilling and/or the improper disposal of fracking uids.These plaintiffs tend to live predominantly in ruralareas with private water wells that they claim are beingcontaminated with fracking chemicals. Other plaintiffshave alleged that there are now high quantities of non-uid substances in their wells, and that the fracking

activity caused such substances, such as methane, tomigrate into their wells.

Plaintiffs and their attorneys have pursueda variety of additional allegations of injury resultingfrom fracking. Plaintiffs have alleged that frackinghas resulted in air pollution and excess noise, bothwith regard to the drilling process itself and to thecompression stations used in fracking. A number ofactions have been led alleging that fracking activity hasgiven rise to earthquakes, resulting in property damage.These cases may have resulted from recent scientic

studies suggesting that fracking activity may causeearthquakes in areas that previously had no seismicactivity. For example, the Oklahoma Geological Surveyissued a study noting that increased fracking activitymay have contributed to a number of small earthquakesin Oklahoma in January 2011.24 This study has led tospeculation that fracking may have been a contributing

24 Austin Holland, Examination of Possibly Induced Seismicity from

Hydraulic Fracturing in the Oela Field, Garvin County,

Oklahoma, Oklahoma Geological Survey, available at

http://www.ogs.ou.edu/pubsscanned/openle/OF1_2011.pdf.

factor in a more signicant, although far from severearthquake affecting Oklahoma in November 2011. addition, researchers from the U.S. Geological Survepresented an abstract of a paper at an April 18, 201meeting of the Seismological Society of America whicsuggests that an increase in earthquakes may b

caused by waste water from oil or gas drilling injecteinto the ground. While no study to date appears to havconclusively determined that hydraulic fracturing wdirectly lead to seismic activity, this has not discourageplaintiffs from seeking to impose liability for earthquakdamage upon entities engaged in fracking.

Other claims related to fracking include grounsubsidence or sinkhole claims. In areas with limestonformation, it is easy to understand how such activitiecould lead to sinkhole allegations. In such areaunderground limestone may naturally dissolve by th

circulation of water. Over time, this results in the formatioof underground caverns and voids. As these spaceincrease, a lack of support for above-ground land maresult in sudden and dramatic collapses. Some believthat the voluminous quantity of fracking uid used hydraulic fracturing can have a similar effect.

Claims may also result from the pipelinerequired to transport gas extracted from the frackewells. Pipeline leaks and other conceivable failuremay affect local air, water and soil, damage propertsicken and/or kill livestock and cause bodily injury. Th

likelihood of such claims will increase as more welare drilled and demand for pipeline and transportatioinfrastructure continues to expand.

These claims are particularly likely to arisgiven a number of recent high-prole incideninvolving defective pipelines that caused properdamage, signicant injury and death. Although nonof these incidents involved pipelines used in frackinoperations, the media have focused attention upothe harm that may arise from their defects. Medreports have not only addressed the potential risk osuch defects, but have also emphasized the lack omeaningful regulations with regard to many pipelineused in fracking activities, including pipelines used the Marcellus Shale. In light of this media coverageany accident involving the failure of pipelines usein fracking is likely to be followed by an onslaught olawsuits led on behalf of allegedly injured parties.


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In fracking litigation, causes of action are oftenasserted under state statutes such as PennsylvaniasHazardous Sites Cleanup Act,25 as well as common-law theories such as strict liability, negligence, privatenuisance, physical trespass (usually based uponallegations that contaminated materials generated by

fracking have inltrated the plaintiffs property), medicalmonitoring, emotional distress, inconvenience anddiscomfort and negligenceper se. Claims of strict liabilityhave often been based on allegations that the drilling isan ultra-hazardous or abnormally dangerous activity.

As discussed below, additional causes of action may beasserted in litigation regarding the allegedly improperextraction of natural gas pursuant to a lease enteredinto with the injured party.

Multiple theories of damage have also beenclaimed, including bodily injury, diminution in propertyvalues, breach of quiet enjoyment, loss of business,increased risk of disease and punitive damages. Inaddition to claims for monetary damages (includingpunitive damages and attorneys fees), plaintiffsfrequently seek injunctions to stop drilling activity andmandate remediation of alleged contamination.

While many of the lawsuits led by purportedlyinjured property owners and residents have beenindividual in nature, a signicant number of these suitshave been presented as putative class actions. At least 10

such actions have been led in recent years, particularlyin the state of Arkansas. One such example of theselawsuits was Tucker v. Southwestern Energy Co.26Theplaintiffs in Tucker claimed that fracking contaminatedtheir water well with alpha methylstyrene, described inthe complaint as a ammable and poisonous componentwhich is a known component of fracking uids. Theplaintiffs also contended that their soil, groundwaterand air were contaminated by the defendants frackingactivities. In the complaint, the plaintiffs asserted causesof action for strict liability, negligence, nuisance andtrespassing. The plaintiffs contended that they sustained

damages that include loss of use and enjoyment of

25 35 P.S. 6020.101 et seq. The Act provides that [a] personwho is responsible for a release or threatened release of a

hazardous substance is strictly liable for certain costs and

damages, including reasonable and necessary or appropriate

costs of response incurred by any person, and [t]he cost of ahealth assessment or health care study. 35 P.S. 6020.702(a)

(3), (5).

26 Tucker v. Southern Energy Co., 2012 WL 52853 (E.D. Ark.2012)

their property, severe diminution in property valuand fear, shock, mental distress and physical harmThe complaint contained demands for $1 million compensatory damages, $5 million in punitive damageestablishment of an environmental monitoring fund ancreation of a medical monitoring fund. The case settle

for an undisclosed sum.

Similar putative class actions have been leregarding allegations that fracking has caused seismactivity27 as well as claims that compression stationused in fracking generate excessive noise and noxiougases.28 A putative class action led in the DistriCourt of Denver County, Colorado29on behalf of 1,00property owners and 5,000 current or former residenof Battlement Mesa, Colorado raised allegations of aand water pollution purportedly resulting from frackinactivity near the community. According to the complainsuch pollution resulted in acute health effects, such anausea, insomnia, and eye and throat irritation.

Several lawsuits alleging mass torts havbeen led on behalf of multiple plaintiffs said to havsustained injury from hydraulic fracturing. An exampof a typical case is Fiorentino v. Cabot Oil & Gas Corp.which was brought by 63 current and former residenof the towns of Dimick and Montrose, Pennsylvanwho executed leases regarding the extraction of naturgas from their properties. These plaintiffs contende

that the lessee improperly conducted fracking another natural gas production activities, resulting in threlease of methane, natural gas and other toxins onthe plaintiffs land and into their groundwater, resultinin res and explosions. In addition to asserting the toclaims typically pled in fracking complaints (such as striliability and negligence), claims of breach of contraand fraudulent misrepresentation were asserted witregard to the leases entered into by the plaintiffs.

Private civil litigation will often intersect witadministrative proceedings of state governme

enforcement actions for fracking-related spills anblowouts. For example, Cabot Oil & Gas entered inta Consent Order and Settlement Agreement with th

27 Lane v. BHP Billiton Petroleum (Arkansas) Inc., No. 1:11-cv-000

(E.D. Ark.).

28 Ginardi v. Frontier Gas Services, LLC, 2012 WL 1377052 (E.Ark. 2012)

29 Evenson v. Antero Resources Corp., No. 2011 CV 05118 (Colo. Dis

Ct.). The court dismissed the claims based on lack of jurisdiction.30 No. 09-cv-2284 (M.D. Pa.).


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Pennsylvania Department of Environmental Protectionfor contamination of local water supplies following oneof the incidents referenced in Fiorentino. The Settlement

Agreement required, among other things, that Cabotestablish and nance escrow funds in the names ofaffected property owners in the area. According to

lings by the Fiorentinoplaintiffs, 22 plaintiffs who wereoffered escrow monies under this agreement rejectedthe money and appealed the Consent Order whilemaintaining the federal litigation.

2. Defenses

a. Causes of Action

Numerous and varied theories of liabilityhave been asserted with regard to fracking lawsuits.Decisions pertaining to motions to dismiss offer someguidance on how courts may view certain causes ofaction typically asserted in fracking litigation.

aa. Strict Liability

Plaintiffs have alleged that fracking is an ultra-hazardous or abnormally dangerous activity, soas to impose strict liability for injuries resulting fromfracking. Courts have held that while the storage andtransmission of fuel has not been deemed an ultra-hazardous activity, this does not compel the same

conclusion with regard to the drilling and operationof gas wells.31 The Fiorentino Court noted that thedetermination of whether an activity may be deemedultra-hazardous for purposes of applying strict liabilityrequires consideration of factors such as the existenceof a high degree of risk of some harm to the person,land or chattels of others; likelihood that the harmthat results from it will be great; inability to eliminatethe risk by the exercise of reasonable care; extent towhich the activity is not a matter of common usage;inappropriateness of the activity to the place whereit is carried on; and extent to which its value to the

community is outweighed by its dangerous attributes.32

Based upon the need to consider these factors, the Courtconcluded that the question of whether fracking was anultra-hazardous activity could not be considered atthe pleading stage, but instead required a developedfactual record.

31 Fiorentino v. Cabot Oil & Gas Corp., 750 F. Supp.2d 506, 512

(M.D. Pa. 2010).32 Id. citing Restatement (Second) of Torts520.

A similar determination was reached by thUnited States District Court for the Middle Distriof Pennsylvania in Berish v. Southwestern EnergProduction Co.33 While concluding that the question whether fracking was an ultra-hazardous activity counot be answered at the outset of litigation, the Beris

court observed that this issue may present the plaintifwith difculty at the Summary Judgment stagegiven the need to consider whether the activity is not matter of common usage, whether it is inappropriato its location, and whether its dangerous attributesoutweigh its value to the community.

While the question of whether hydraulic fracturinis an abnormally dangerous activity does not appeato have been addressed on the merits by any courcourts have addressed the more general question owhether the drilling and operation of natural gas welmay be deemed abnormally dangerous. In Williamv. Amoco Production Co.,34the Kansas Supreme Coureversed a jury verdict that was based in part upon thdetermination that strict liability should be imposefor such activity. In doing so, the Court accepted thdefendants contention that neither the operation of gas well nor natural gas as a substance presents a higdegree of risk of harm.35 The Court also noted that athe drilling and operation of the wells occurred on thlargest known reservoir of natural gas in the world, thdrilling and operation of natural gas wells in this are

is a common, accepted and natural use of the land.

36

Of course, the recognition that the operatioof a natural gas well is not an abnormally dangerousactivity does not resolve the question of whethehydraulic fracturing may be deemed abnormaldangerous or ultra-hazardous. However, as thBerishCourt observed, such a characterization may bdifcult to justify, in light of the fact that fracking habecome a common manner of extracting natural gafrom shale formation and has value to the communiby contributing to the local economy as well as th

nations energy supply. Absent evidence demonstratinsignicant injuries likely to occur as a result of thfracking process, it may be quite difcult for plaintifto establish that strict liability should be imposed fo

33 See, e.g.,Berish v. Southwestern Energy Production Co., 763 Supp. 2d 702, 705 (M.D. Pa. 2011).

34 241 Kan. 102, 734 P.2d 1113 (1987).

35 Williams, 241 Kan. at 115, 734 P.2d at 1123.36 Id.


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fracking-related damage. In such a case, plaintiffs maybe forced to focus upon the more challenging processof establishing that the particular fracking activity atissue was performed in a negligent or reckless manner.

ab. Trespass

Fracking cases frequently incorporate a causeof action for trespass, usually based upon allegationsthat hazardous materials generated during the frackingprocess migrated onto the plaintiffs property. The viabilityof such a claim was examined by the Texas SupremeCourt in FPL Farming Ltd. v. Environmental ProcessingSystems, L.C.,37 which concerned allegations that adefendants fracking activities constituted trespass whenwastewater injected into the defendants land purportedlymigrated into an adjacent property, contaminating thepropertys water supply. The defendant contendedthat the trespass claim was without merit, because thefracking was conducted pursuant to a permit issued bya Texas governmental agency under the authority of thestates Injection Well Act.38

In assessing the defendants argument, theCourt emphasized that the Act expressly stipulatedthat [t]he fact that a person has a permit issued under[the Injection Well Act] does not relieve him from anycivil liability.39 The Court further noted that regulationsenacted in support of the Act stipulate that [t]he

issuance of a permit does not authorize any injury topersons, or property or an invasion of other propertyrights, or any infringement of state or local laws orregulations.40 As the tort of trespass falls withininvasion of property rights, the Court concludedthat while the defendant may have permission from[the agency] to inject authorized wastewater, but theconsequences of acting under the permit have notbeen immunized.41 The Court therefore reversedthe Court of Appeals determination that the agencysissuance of a fracking permit precluded a cause ofaction for trespass, although it did not reach the merits

of the trespass claim.42

Whether fracking activity may support a causeof action for trespass depends upon the jurisdiction.

37 351 S.W.3d 306 (Tex. Aug. 26, 2011).38 Tex. Water Code 27.001 et seq.39 FPL Farming, 351 S.W. 3d at 312, citing Tex.

Water Code 27.104.40 Id.41 Id. et. 313.

42 Id.at 314-315.

In Texas, a trespass claim may be supported byany unauthorized entry on to property, regardless owhether the entry was intentional or merely negligent.43

However, in observing that actionable trespass requiresinjury, the Texas Supreme Court held that damagesfor drainage by hydraulic fracturing are precluded by

the rule of capture a rule that gives a mineral rightsowner title to the oil and gas produced from a lawfuwell bottomed on the property, even if the oil and gasowed to the well from beneath another owners tract.44

A federal district court in West Virginia, on the othehand, opined that fracking activity under the land of aneighboring property without that partys consent is noprotected by the rule of capture but, rather, constitutesan actionable trespass.45 Pennsylvania courts haveheld that only intentional conduct may constitute anactionable trespass,46while rejecting an anticipatorytrespass claim that was based on fracking activities.45However, Pennsylvania has recognized a relatedcause of action for inconvenience and discomfortthat is caused by interference with anothers peacefupossession of his or her real estate.47 Courts havepermitted such claims to proceed in cases challengingfracking activities.48

ac. Medical Monitoring

Fracking cases may involve plaintiffs who allegethat the activity at issue has placed them at signicant

risk of physical injury, but have not manifested such aninjury at the time of ling the complaint. This is particularlytrue with regard to putative class actions and mass tortclaims involving numerous named or potential plaintiffsWhile the absence of apparent bodily injury has certainlynot discouraged litigants from pursuing claims basedupon the mere risk of harm, courts have been reluctantto recognize the viability of such claims under traditionacommon law causes of action.49

43 Watson v. Brazos Elec. Power Co-op, Inc., 918 S.W.2d 639, 645

(Tex. App.-Waco 1996).44 Coastal Oil & Gas Corp. v. Garza Energy Trust, 268 S.W.3d 1

(Tex. 2008) ]45 Stone v. Chesapeake Appalachia, 2013 WL 2097397

(N.D.W.Va. 2013).

46 Valley Forge Gardens, Inc. v. James D. Morrissey, Inc., 385 Pa. 477, 483-84, 123 A.2d 888, 891 (1956).

47 Houston v. Texaco, Inc., 371 Pa. Super. 399, 408, 538 A.2d 502

506 (1988).

48 Berish, supra, 763 F. Supp. 2d at 706.49 See id.(dismissing cause of action for emotional distress

asserting by plaintiff who did not raise allegations of

current bodily injury).


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The cause of action for medical monitoringhas developed to address these concerns. Such aclaim seeks to have the defendant pay for a programto periodically monitor plaintiffs for the purpose ofdiagnosing and treating the illness or illnesses thatthe plaintiffs are at risk of developing as a result of the

fracking activities.

While medical monitoring has proven to be acontroversial cause of action, a growing number ofstates have permitted such claims to move forwardwhen supported by factual allegations similar to thoseraised in fracking cases. In Fiorentino, the court heldthat allegations that fracking exposed the plaintiffsto hazardous chemicals properly stated a claim formedical monitoring under the standards for such a claimunder Pennsylvania law. The court held that the plaintiffcould proceed upon proof of (1) exposure greater than

normal background levels; (2) to a proven hazardoussubstance; (3) caused by defendants negligence;(4) as a proximate result of the exposure, plaintiff hasa signicantly increased risk of contracting a seriouslatent disease; (5) a monitoring procedure exists thatmakes the early detection of the disease possible;(6) the prescribed monitoring regime is different fromthat normally recommended in the absence of theexposure; and (7) the prescribed monitoring regimeis reasonably necessary according to contemporaryscientic principles.50

A 2011 decision by the United States SupremeCourt may make it more difcult to obtain classcertication for medical monitoring claims in federalcourts. Plaintiffs have typically sought to certify aninjunctive class under Federal Rule of Civil Procedure23(b)(2) with regard to such claims, in order to avoidthe need to satisfy the requirement for certication of amonetary class under Rule 23(b)(3) that common issuesof fact or law predominate over issues individual to theclass members. In Wal-Mart Stores, Inc. v. Dukes,51the Supreme Court emphasized that certication

under Rule 23(b)(2) is only appropriate when a singleinjunction or declaratory judgment would provide reliefto each member of the class.52 Based in part uponthis holding, courts such as the United States Courtof Appeals for the Third Circuit have recognized thatcertication of a medical monitoring class under Rule

50 Fiorentino, 750 F. Supp.2d at 513.

51 131 S. Ct. 2441 (2011),52 Id.at 2557.

23(b)(2) (as well as Rule 23(b)(3)) is improper dueto the prevalence of individualized issues pertainingto individual claimants, particularly with regard toexposure to the substance or substances at issue.53

The difculty of obtaining class certication may

remove much of the incentive for pursuing medicamonitoring claims. However, in the jurisdictions thathave recognized such claims, it remains relativelysimple to craft a complaint (at least on an individuabasis) regarding fracking activities that satises theseelements. The task of actually demonstrating a linkbetween fracking activities and exposure to a provenhazardous substance may prove far more difcult.

b. Causation

At the present time, relatively few fracking

cases have proceeded to the summary judgment stageor to trial. As a result, there is little caselaw offeringguidance with regard to issues such as causation andchallenges to expert opinions. As fracking litigationprogresses, these are likely to be hotly contested issuesMost fracking complaints name several defendantspresumably operating in the same region. Courts arelikely to require plaintiffs to establish (to a reasonabledegree of certainty) that any particular injury was theresult of a specic defendants fracking operationsThus, a plaintiff may be required to demonstrate a linkbetween the presence of a particular chemical or otherforeign substance in the atmosphere, water and/or landand a particular defendants fracking activities.

This may prove difcult in three ways. First, ifplaintiffs have no pre-existing water, air or land testsreecting environmental conditions before the drillingactivity took place, they may be limited in their ability todemonstrate a causal connection between the allegedcontamination and the fracking operations at issue.

Establishing causation may be further

complicated by the absence of available informationregarding the components of fracking uids. Federalaw does not currently mandate disclosure of suchinformation. A growing number of states do mandatesuch disclosures, and companies have becomeincreasingly willing to voluntarily make such disclosures

53 Gates v. Rohm and Haas Co., 655 F.3d 255, 262-71

(3d Cir. 2011).


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(whether legally required or not) in the interest ofpublic relations. However, companies have beenreluctant to disclose information regarding frackinguid components deemed to be proprietary and thesestate laws and regulations typically do not require thedisclosure of such information.

In many cases, such information may not beavailable to the gas exploration company itself. Whilethe Occupational Health and Safety Administrationrequires chemical manufacturers to provide a MaterialSafety Data Sheet (MSDS) for every product they sellidentifying hazardous materials that are contained in theproduct,54this regulation does not require manufacturersto disclose the specic chemical identity, including thechemical name and other specic identication of ahazardous chemical, with regard to chemicals deemedto be trade secrets.55 Contentious discovery battlesare certain to take place as plaintiffs seek to procureevidence regarding fracking uid components that mayoften prove vital to establishing liability.

Second, with energy companies operating inclose proximity on neighboring lands, it may prove achallenge to establish whether any defendants frackingactivities resulted in the contamination at issue. Thiscausation issue may also be presented in cases wherea plaintiff is required to establish that a particulardefendants fracking activities gave rise to seismic

events, subsidence or collapse.

The market share theory may be relevant tothis causation issue in some jurisdictions. New York hasrecognized this theory in certain product liability casesin which numerous entities manufactured a fungibleproduct and identication of the actual manufacturerthat caused the injury to a particular plaintiff wasimpossible.56 In these cases, liability is apportionedamong the various manufacturers based upon theirmarket share for the period in question. It remains tobe seen whether and to what extent this theory will

be applied to fracking litigation in which it is difcult orimpossible to determine which of the many companiesinvolved in fracking activities in the area was responsiblefor the injuries at issue.

54 29 C.F.R. 1910.1200(g)(1).

55 29 C.F.R. 1910.1200(i)(1).

56 Hamilton v. Beretta USA Corp., 96 N.Y.2d 222, 240, 750N.E.2d 1055, 1067 (2001).

It may also prove difcult to establish a causlink between the use of certain fracking uids and thalleged contamination. Fracking uids are not uniforin character. Rather, a wide range of formulations arproduced by various manufacturers for use in differegeological contexts. Contaminating substances ma

not even be present in the uids used at particular wellCausative proof may need to be based on multipcoordinated areas of scientic and expert evidencincluding chemistry, geology, hydrogeology, toxicologindustrial hygiene, epidemiology, engineering (materiasafety, mining and chemical) and architecture.

In Colorado, at least, toxic tort plaintiffs do nohave to establish their injuries or evidence of causatioprior to discovery. In Strudley v. Antero ResourceCorp.,57 the plaintiffs asserted that exposure chemicals related to gas production activities causethem to suffer various health problems. In May 2012, thtrial court dismissed the case, holding that the plaintiffailed to adequately link their claimed injuries to thalleged contamination. The plaintiffs were operatinunder what is known as a Lone Pine order, whicrequired plaintiffs to detail their alleged injuries anshow some evidence of causation prior to discovery. July 2013, the Colorado Court of Appeals reversed thdecision, ruling the Lone Pine orders are barred undestate law.

In the future, state statutes and regulationmay make it easier to establish a causal link betweehydraulic fracturing and injuries. States, includinMichigan, are considering legislation that would creata presumption of liability for groundwater contaminationear a hydraulic fracturing well. Such legislation wouestablish that if chemicals used in fracking operations a particular well are subsequently found in groundwatewithin the vicinity of the well, there is a rebuttabpresumption that the contamination was causeby the fracking operations. As public concern ovefracking continues to grow, the enactment of statute

and regulations imposing a rebuttable presumption oliability for fracking may become more likely, which malead to a dramatic increase in the potential exposure aa result of fracking operations.

57 __P.3d __, 2013 WL 3427901 (Colo.App. July 3, 2013).


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3. Contractual Issues

Many property owners entered into contractsfor the use of their land and the removal of resourcesburied deep under the property. The wide variety

of natural resource companies entering into suchcontracts (usually referred to as leases for gas andoil), and an equally wide variety of contracts used byeach over the years prevents detailed discussion ofthe specic contractual provisions. At the same time,whenever a loss occurs in which an insured hasentered into such a contract (whether the insured isa property owner, a natural resource company or aninvolved subcontractor), the contractual provisionsshould be reviewed to best understand how they mayact to buttress a claim between the parties, or to limitsuch a claim.

Some contractual leases may contain provisions,which limit the liability and/or protect or indemnify thelessee (the natural resource company) for damages thatarise from the drilling operations. Others may containwaivers of subrogation, whereby the lessee would beprotected from claims from the property owners carriers to the extent covered losses occurred. These shouldbe considered when evaluating any such liability claims.

Other contractual provisions may explicitly limitthe liability, protect or indemnify a property owner from

all damages arising from the drilling operations. Therecould be great disagreement about the legal ramicationsof such a minimalistic clause in the face of a variety oflosses. Some contracts provide more express promisesof protection to lessors and more opportunity forlitigation. For example, Fiorentino includes a breachof contract action based upon allegations that thedefendant breached a contractual provision in itsgas leases stipulating that if its operations adverselyaffected the lessors water supply, the defendant wouldtake corrective action to return the water supply to pre-fracking conditions.

In addition, lessees who allege property damagefrom fracking activities are likely to assert claims offraud, based upon the contention that they were notwarned of the potential that such damage could resultfrom fracking. The Fiorentinocomplaint incorporates a

claim for fraudulent misrepresentation, based in paupon the contention that the lessor failed to disclosrisks to Plaintiffs person and property as a result othe well drilling process, including the fact that uidcontaining pollutants and hazardous substances use

in the hydraulic fracturing process, as well as gas ogas components, could escape into their groundwatewells to their harm and detriment.

Therefore, the specic contractual languagused in a lease with regard to fracking operations manot be fully dispositive of the claims ultimately asserteby a lessee against a lessor. Nevertheless, it is importato review any such lease documents when considerinthe strength or weakness of any liability claim.

4. Potential Defendants

Fracking lawsuits asserted by residents and/oproperty owners of affected areas have typically beebrought against the natural gas drilling and exploratiocompany that is spearheading the particular frackinoperations. However, as the number of such lawsuiincrease, claims are likely to be pursued against anand all entities involved in the fracking process. In number of actions, contractors and subcontractors whparticipated in fracking operations have been nameas defendants. Design professionals who assisted the development of the fracking process at issue ma

likewise be named as parties. Litigation is also liketo be brought against the chemical companies whprepared components used in fracking uids. It is alspossible that property owners who leased land fohydraulic fracturing could be named as defendantparticularly if these owners have deep pockets ancertain facts (such as the property owners status aan absentee landlord) may support allegations that thlessor knew or should have known of the risks involvein the fracking activities.

As the issues unfold, it is evident that there potential for a signicant number of fracking lawsuiwith regard to allegedly defective pipelines. Theslawsuits are almost certain to name the manufactureand installers of the defective pipelines as defendantOther entities likely to be named as defendaninclude contractors who performed work related t


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the installation of the pipelines (such as excavation);parties that performed maintenance and/or repair workon the pipelines; and energy companies that utilizedthese pipelines.

Lawsuits asserted by residents or property

owners of allegedly affected areas have comprisedthe majority of the current fracking-related litigation.

As fracking activities continue to accelerate, however,lawsuits are unlikely to be limited to claims by theseparties. The sections below provide a brief analysisof additional types of lawsuits that have been ledwith regard to hydraulic fracturing, and are likely tobecome more common as the hydraulic fracturingindustry matures.

B. Worker Claims

Laborers hired to work at or near drilling siteshave begun to le civil actions alleging injuries resultingfrom harmful chemical exposures. Such lawsuits aresubject to the strict limits most states have imposed uponlawsuits against ones employer, pursuant to workerscompensation laws. To get around these limits, plaintiffshave alleged that operators knowingly used and hidharmful chemicals in proprietary mixtures and willfullysubjected the workers to the exposure. Allegations ofintentional or reckless conduct are not precluded byworkers compensation laws in many states.

Injured workers have also looked for opportunitiesto sue parties involved in fracking projects other thantheir employers. This is relatively simple if the injuredworker was employed by a contractor or subcontractorretained by the energy company to assist in the project,thereby enabling the worker to sue the energy company.Even if the injured worker was employed directly by theenergy company, other potential targets of litigation mayexist, including the manufacturer of the fracking uidsas well as any other companies involved in the project.

In 2012, the Centers for Disease Control andPrevention (CDC) indicated that its research, conductedat various oil and gas sites in 2010 and 2011, revealedthat some workers may be exposed to high amounts ofsilica and other chemicals during the hydraulic fracturingprocess. This potential risk may lead to an increase inworkers claims.

C. Business to Business Claims

Given the large number of businesses that mabe involved in a fracking operation, it is foreseeable ththere will be lawsuits between these entities. A powecompany recently led suit against an engineering r

contracted to construct a fracking uid treatment planAfter coming on-line, the metal piping and containers the plant began to corrode and come apart, allegedforcing the plants closure for six months. The suclaimed that the engineering rm suggested treatmetechnologies that did not work, and asserted causes action for breach of contract, negligence and negligemisrepresentation.

The consequences of negligent hydraufracturing work performed by a contractor or othprofessional on behalf of a natural gas drilling an

exploration company are unlikely to be limited business interruption or damage to the energcompanys property. Such negligence is likely to resuin signicant liability exposure to the drilling companOften, the plaintiffs allegedly injured by a frackinproject may focus their attention upon the compansupervising the project, rather than other entities thmay have performed the allegedly sub-par work. Thmay prompt the drilling and exploration company commence litigation against a purportedly negligecontractor, subcontractor, or other service provider f

the purpose of seeking defense and indemnication flawsuits resulting from the alleged negligence.

D. Government Suits

In addition to administrative enforcemeactions, government entities are ling civil suits. NeYork Attorney General Eric Schneiderman led subefore the Delaware River Basin Commission in Marc2011 against the EPA for allegedly failing to conductscientic study as to the Marcellus Shale.

Maryland Attorney General Douglas Ganslissued a formal notice of intent to le suit againChesapeake Energy Corp. (Chesapeake) for a spalleging that a well owned by Chesapeake releasefracking uids into Towanda Creek, a tributary of thSusquehanna River that supplies 45% of the water the Chesapeake Bay. The May 2011 notice indicated th


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the Attorney General would le a citizen suit seekinginjunctive relief and civil penalties for contamination ofthe surface waters of Towanda Creek within 90 days.In June 2012, Chesapeake agreed to pay $500,000for water quality monitoring.58 The Maryland AttorneyGenerals response reects a renewed intent by state

governments to recognize and challenge perceivedimproprieties during the fracking process.

Although the EPA previously concluded thatthe Safe Water Drinking Act did not apply to fracking,it has yet to nalize its fracking study, as it does notdirectly regulate fracking. Yet the EPA is still attemptingto regulate fracking operators in the courts. The EPAled a complaint in the United States District Court forthe Northern District of Texas in early 2011 againstan operator of two wells, seeking injunctive relief andcivil penalties for an alleged failure to comply with an

emergency order issued under the EPAs emergencypowers pursuant to the SDWA. Under Section 1431 ofthe SDWA, the EPA may exercise emergency powerswhen it has information that a contaminant is presentor likely to enter a public water system. 42 U.S.C.A. 300(i).

In response, the well operator primarily arguedthat the EPA had to prove that the operator was liable forthe contamination before EPA could invoke emergencyenforcement powers. The court stayed the actionbecause the EPA could not prove that the operatoractually contaminated the wells at issue.59

E. First Responders

Explosions and other accidents during thefracking process may expose companies to liabilitynot only from injured laborers, but also by re, policeand medical personnel who arrive on the scene toadminister emergency services following the incident.

As demonstrated by many of the rst respondersto Ground Zero following the September 11, 2001

terrorist attacks, even momentary exposure to highconcentrations of hazardous materials may resultin long-term health consequences (or allegations ofsame), leading to efforts to seek compensation fromallegedly responsible parties.

58 http://www.oag.state.md.us/press/2012/061412.html

59 The case was subsequently dismissed by the parties without

prejudice in March 2012.

F. Other Liability Suits

Dozens of fracking lawsuits are currently pendinin states such as Pennsylvania, Texas, Arkansas anWest Virginia. These suits involve homeowners, nearbresidents, small drilling companies, component supplie

companies, stafng companies and engineering rms awell as state and federal government entities. Substantialmore litigation will follow in the coming years.

Despite the expected onslaught of frackinlitigation, companies will not be discouraged fropursuing the vast economic benets promiseby fracking. Instead, these entities will rely upotheir insurance carriers to provide defense anindemnication for these lawsuits. As liability issuerelated to fracking continue to unfold, it is likely thacoverage issues, as those addressed in the followinsection, will be on the rise.

III. COVERAGE ISSUES

As the number of fracking-related claims rise, thneed to recognize and analyze the insurance coveragissues associated with these claims becomes vitalimportant. The insurance industry is just beginning address the myriad of coverage issues that arise out othe alleged losses due to fracking activities.60There havbeen no reported insurance coverage decisions,61but this likely to change as more claims are led. Set forth beloare some of the more unique insurance coverage topicthat will likely arise in connection with fracking claims.

60 Nationwide Insurance Company, for one, has chosen not underwrite risks involved with hydraulic fracturin

http://huffingtonpost.com/2012/07/13/nationwide-insurance

fracking_n_1669775.html61 In January 2013, ACE American Insurance Company settled

Ohio federal court lawsuit led against it by an insured in wh

was considered the rst fracking-related coverage litigatio

ht tp: / /www.businessinsurance.com/art ic le/20130224

news07/302249990. The insured, a drilling company, sued ACE

after the insurer denied coverage for a third-party claim involvin

drilling activities that allegedly contaminated a property ownedrinking well. http://www.claimsjournal.com/columns/burke

law/2012/09/05/213109.htm

ACE claimed that the Energy Pollution Liability ExtensiExtension endorsement and the Underground Resources a

Coverage endorsement on a commercial general liabil

policy issued to the driller were not triggered.


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A. First-Party Insurance Coverage Issues

1. Loss or Damage to Covered Property

A preliminary coverage issue presented byany claim submitted under a rst-party property policy

concerns ensuring that the claim actually falls withinthe scope of the particular grant of property insurancecoverage. First-party fracking claims will likely implicateboth personal lines and commercial policies. Personallines and business policyholders could assert a widevariety of purported claims for actual property damage.In addition, certain types of claims may be dependentupon establishing the existence of physical loss ordamage to covered property. Businesses may pursueclaims for loss of business income, extra expenseincurred or other time element losses that customarilyrequire, as a threshold to coverage, actual physicalloss or damage to insured property from a coveredcause of loss. Similarly, homeowners could seek torecover for loss of use (or additional living expenses)incurred as a result of damage to insured propertyfrom a covered cause.

Property policies based on a common ISOinsuring agreement may state that a carrier will affordinsurance only for direct physical loss of or damageto Covered Property at the premises described in theDeclarations caused by or resulting from any CoveredCause of Loss. Other policy language may state that

the insurance company insures against risk of directphysical loss to property described, or require suddenand accidental direct physical loss.62 The wording ofthese types of provisions may raise several rst-partycoverage questions.

Under a typical insuring provision, propertycoverage is dependent upon the existence of directphysical loss or damage to covered property at thepremises described in the Declarations, as opposedto some unnamed, distant location not identied at allin the policy. Thus, rst-party insurance coverage may

be unavailable to the extent that the only claimed (orknown) direct physical loss or damage that forms thebasis of a particular fracking claim happened at someoff-site location not otherwise insured under the policyat issue.63

62 See, e.g., Tinucci v. Allstate Ins. Co., 487 F. Supp. 2d 1058

(D. Minn. 2007) (water damage loss was not abrupt andunexpected so as to be sudden and accidental).

63 See, e.g., Haines v. Continental Ins. Co., 852 F. 2d 1289

(9thCir. 1988) (interpreting the meaning of the term premises).

Another important aspect of analyzing coveragfor a rst-party fracking claim may involve establishinthat the alleged direct physical loss or damagoccurred to property that is covered under the termof the subject policy. In this regard, many properpolicies tend to dene the term property or covere

property (i.e. what property is covered under thpolicy) by simply listing several examples of physicatangible objects deemed to be covered propertysuch as buildings, additions, tenant improvementpermanently installed equipment, personal property obusiness personal property.

Traditional property policies also impossignicant limitations that could restrict the scopof insurance protection afforded for potential claimasserted for loss or damage allegedly caused bfracking. Many property policies generally dencategories of objects that are not covered (within thterms of the insuring agreement), or are excludeunder the policy. In that regard, rst-party properpolicies specify that covered property usually doenot include land or water (which could include lanthat the insureds property is located). Such terms anconditions may operate to limit insurer liability for claimlikely to result from fracking operations, precluding rsparty property claimants, including homeowner and/ocommercial or business claimants, from successfulobtaining coverage for claimed loss or damage tha

happened to underlying water sources, wells or wateaquifers, or the geologic formations underlying theproperties.

A related insurance issue concerns the bascoverage prerequisite that the insured establish thaa covered peril caused direct physical loss of odamage to insured property. For example, as a resuof fracking, insureds may submit environmental-relateclaims, contending that some pollutant, toxin or wastby-product somehow contaminated their property. Otheclaimants may contend that airborne particulate matte

caused property damage, or that an odor has preventethe use and enjoyment of insured property. Dependinupon the specic facts underlying the claim, it may bpossible that the alleged contaminating substance aissue did not actually change the otherwise satisfactophysical properties, character or nature of any covereproperty by operation of some external event, nomaterially decrease the insureds ability to use th


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property.64An insurer evaluating such claims, therefore,may need to address the legal concept whether or notdirect physical loss or damage to property occurredfor purposes of triggering rst-party property coverage.

Any insurer presented with such a claim must

be cognizant that the nature or degree of the allegedcontamination or damage may rise to such a level thata court may consider the extent of the contamination tobe the functional equivalent of physical loss or damagesufcient to enable an insured to tap into rst-partyinsurance coverage. For instance, in a case involvinga comprehensive, governmental response to remediatea released fracking pollutant, toxin or waste by-product,extensive remediation efforts may effectively constitutedirect physical loss or damage to the adverselyaffected property.

2. Trigger of Coverage inFirst-Party Cases

Covered property loss or damage is a predicateto insurance indemnity under a rst-party policy ofinsurance. The inherent nature of fracking presentsunique coverage issues in the context of an insuranceclaim that involves latent, progressive or continuousloss or damage that occurred during multiple orsuccessive policy periods. In a usual rst-partyinsurance case, both the subject property damage as

well as the insureds realization that covered propertysustained damage, occurs virtually simultaneously such as when lightning strikes a structure. Frackingactivities present the potential for causing regular and/or uninterrupted loss or damage for an extended spanof time (possibly years) before any insured recognizesor fully understands that damage has actually occurredto insured property.

There are several theoretical alternative methodsor approaches to determine which one of multiplerst-party policies must respond to cover continuous,

progressive damage that had remained undiscoveredfor a prolonged period of time: (1) the property policy thatwas in effect when the loss or damage rst commenced;(2) the property policy in effect when the loss or damagerst manifested; or (3) any property policy in effect whenany loss or damage occurred. By way of analogy, in the

64 See, e.g., Universal Image Prod. v. Chubb Corp., 703 F. Supp. 2d705, 709-11 (E.D. Mich. 2010).

context of determining the scope of insurance coveragavailable to claimants in third-party progressive bodiinjury insurance cases, courts have enumerateseveral rules, or approaches, using nomenclature sucas manifestation, injury-in-fact, triple-trigger and/ocontinuous injury.

As a general rule, courts usually apply manifestation trigger of coverage to rst-partproperty insurance cases that involve continuinor progressively deteriorating unwanted damage tinsured property. Under such an approach, an insureis considered to have sustained covered properdamage during the policy term when the properdamage became manifest.65 Therefore, the date of thmanifestation of the property damage at issue typicalcontrols if a particular rst-party policy otherwise affordcoverage for claimed loss or damage. In additiogenerally, the duty of a property insurer to indemnify fothe entire scope of the progressive loss or damag(not otherwise excluded) falls on the insurer on the risat the time of manifestation, as opposed to only thportion of the loss or damage discovered during thmanifested policy period.

Most courts dene the date of manifestatio(i.e., when covered progressive property loss odamage is deemed to have occurred) as the datwhen the property damage rst becomes apparen

appreciable, identiable or capable of being recognizeand understood by the insured. An insureds attemto rely exclusively upon a claimed subjective date odiscovery (i.e., when the insured actually discovereloss or damage) usually is not sufcient to enable ainsured unilaterally to manipulate the manifestation daton which insurance coverage triggers under a rst-parcoverage grant.66 Rather, an objective evaluation the facts and circumstances known to the insured (anreasonably discoverable by the insured) plays a kerole in establishing the appropriate manifestation date.In any event, determining the date of manifestatio

presents a fact-intensive analysis unique to each claim

65 See, e.g., Flores v. Allstate Texas Lloyds Co., 278 F. Supp.

810, 815-16 (S.D. Tex. 2003); Prudential-LMI Commercial In

51 Cal. 3d 674, 274 Cal. Rptr. 387, 798 P. 2d 1230 (1990).66 See Flores, 278 F. Supp. 2d at 816.

67 See, e.g., United Natl Ins. Co. v. Best Truss Co., No. 09-2289

CIV, 2010 WL 5014012 (S.D. Fla. Dec. 3, 2010) (discussing thdate of manifestation).


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Establishing the trigger rule applicable to a rst-party claim can signicantly impact claim valuations.The manifestation rule affords insurers a stronglysupportable argument to avoid liability when a latent,gradual loss rst manifests prior to (or after) an insurerseffective policy period.68 For example, a rst-party

property insurer after the date of initial manifestation ofloss or damage may avoid coverage for a potential claimrelating to a previously manifested loss, or possibly forany additional related loss or damage that may havecontinued into the carriers policy period.

Generally speaking, property insurance isnot intended to indemnify for loss that is ongoing andknown to the insured, causing many courts to apply amanifestation trigger in rst-party property insurancecases involving latent, protracted loss or damage.Depending upon the application of the law governingthe resolution of any insurance contract dispute atissue, and the language of the policy at issue itself,insurance claims professionals must be aware thatsome jurisdictions use an approach similar to aninjury-in-fact trigger of coverage in order to resolverst-party property trigger disputes.69 In such cases,courts impose rst-party property insurance coverageliability for actual, but undisclosed, loss or damage thatoccurred over a prolonged time span, regardless ofwhen that loss or damage became manifest.

Overall, these trigger issues and the relevantfactual circumstances must be carefully investigatedand reviewed when undertaking any rst-partycoverage analysis.

3. Collapse Coverage

The principal methodology utilized by companiesto extract natural gas through fracking may give riseto claims that the structural integrity of residential orcommercial buildings has been adversely affected, and,in some cases, that structures collapsed or were at risk

of collapse.

Categories of claimed collapse damage couldinclude complaints as innocuous as minor cracksappearing in plaster of interior walls, the sinking

68 See, e.g., Larkspur Isle Condo. Owners Assn Inc., 31 Cal. App.

4th106, 37 Cal. Rptr. 2d 3 (1994).69 Compare Ellis Court Apartments Ltd. Pship v. State Farm Fire &

Cas. Co., 117 Wash. App. 807, 812-16, 72 P. 3d 1086, 1089-91

(2003); Kief Farmers Co-op Elevator Co. v. Farmland Mut. Ins.

Co., 534 N.W. 2d 28 (N.D. 1995).

or slanting of oors or ceilings, or the appearancof deformed trusses or joists. Other types of sucdamage could be as signicant as cracks in concreslabs, footings and foundations; leaning facadeand walls gradually pulling away from buildings; othe breaking apart of load-bearing concrete suppo

beams. First-party claims may involve an attempt ban insured to obtain coverage by arguing that thestypes of structural issues constitute a collapse opartial collapse to covered property, or that there simply a risk of collapse.70

Determining whether a claimed property losconstitutes a collapse depends primarily upon twconsiderations: (1) the specic language of the policat issue, including any language that actually attempto dene the term collapse; and (2) the speciapproach adopted by the particular jurisdiction fdening this term.

Depending upon the particular language the policy at issue, the term collapse can appear property insurance policies in the context of either aexclusion, or as an insured peril (or a specied causof loss). Some policies simply leave the term collapsundened. Other policy forms may limit collapscoverage afforded (usually in the context of a grant an additional coverage) to collapse caused by specienumerated causes of loss (e.g., hidden decay or th

use of defective construction materials). Although nuniversal, in recent years many carriers have attempteto limit collapse exposure by inserting provisions inpolicies that dene collapse in a specic and narromanner.71 Consequently, fracking claims, in generacould implicate numerous, different policy formulationthat afford, or exclude, collapse coverage.

Attempting to dene the exact meaning anparameters of the term collapse is complicated by thfact that courts in various jurisdictions apply divergeapproaches to dene the word collapse for purpose

of property insurance coverage.72

70 401 Fourth St., Inc. v. Investors Ins. Group, 583 Pa. 445, 456,

879 A.2d 166, 172 (2005) (focusing upon the meaning of the

phrase risk of direct physical loss involving collapse).

71 See, e.g., Miller v. First Liberty Ins. Corp., Civil Action No. 01338, 2008 WL 2468 605, at *2 (E.D. Pa. June 17, 2008).

72 Zoo Properties, LLP v. Midwest Family Mut. Ins. Co., 797 N.W.

2d 779, 780-82, (S.D. 2011); Council Tower Assn v. AxisSpecialty Ins. Co., No. 4:08 CV 1605 CDP, 2009 WL 3806 994

(E.D. Mo. Nov. 12, 2009), affd, 630 F. 3d 725 (8thCir. 2011);

Annotation, what constitutes collapse of a building within

coverage of property insurance policy, 71 A.L.R. 3d 1072 (1976


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The traditional (and the most narrow andstringent) approach restricts the denition of collapseand essentially requires an actual and (for themost part) total collapse of at least some part of acovered structure. Holding that the meaning of theword collapse is plain and unambiguous, the courts

adopting this approach generally mandate that theclaimed collapse involve a sudden, relatively abruptand/or instantaneous falling down, loss of shape orreduction into a attened form of rubble. Under thisconventional rule, a rst-party fracking claim involvingalleged damage to a building that was exhibitedonly in the form of some type of cosmetic damage,minor instability or insignicant weakened structuralstate would probably not lead to property insurancecollapse coverage.

Other courts focus upon the degree of thealleged physical loss or damage, and the conclusion thatthe term collapse can be ambiguous, and interpret theterm to include coverage for any substantial impairmentof the structural integrity of covered property (whichcould include what policyholders increasingly refer toas partial collapse). This broader approach permitsinsurance coverage for alleged collapse damage that,although perhaps involving some degree of weakenedstructural integrity, does not necessarily threaten animmediate actual collapse.

Regardless of this, other courts acknowledge theexistence of a middle ground, requiring that a collapsebe impending, threatening or imminent as the predicateto coverage under a rst-party property policy. Underthis mode of evaluating rst-party property insurancecoverage for collapse, an amorphous possibility ofsome future substantial structural impairment shouldnot trigger rst-party insurance indemnity.

Remarkably, some property insurance policiescontain an additional related coverage grant styled assinkhole collapse, or sinkhole loss, affording

protection for direct physical loss or damage due toa sudden collapse of the land supporting an insuredstructure, subject to excluded types or causes of loss.73In geographical locations where fracking is occurringmost, sinkhole losses may result from the activity, andsuch coverage may be a factor presented by frackingclaims. In turn, although policy language ultimately

73 Betz v. Erie Ins. Exch., 2008 Pa. Super. 221, 957 A. 2d1244, 1251 (2008).

governs interpreting the meaning of collapseinsurance professionals must always try to investigathe underlying mechanisms and causes of collapse(such as possibly sinkholes) to ensure that coveragunder any collapse provision is fully considered.

4. Earth Movement Exclusions

Many personal lines and commercial rst-parproperty insurance policies exclude coverage relating tcauses of loss by earthquake, structural movement oearth movement. A typical ISO-based policy provisiomay include language that excludes categories ocauses of loss such as [e]arth sinking, rising oshifting including soil conditions which cause settlingcracking or other disarrangement of foundations oother parts of realty. Other policies may dene thexcluded peril of earth movement as any loss causeby, resulting from, contributed to or aggravated bearthquake; landslide; mudow; earth sinking, risinor shifting; volcanic eruption; unless direct loss b[specic enumerated causes of loss].74

An important coverage issue presented bthese types of exclusions concerns whether the eartmovement at issue was caused by a natural, aopposed to a human, force because courts in differen

jurisdictions have held that such earth movemeexclusions only preclude coverage for damage cause

by natural earth movements, while others have noapplied such restriction.

The intrinsic nature of fracking may adverseaffect, at least to some degree, the strength anstability of the earth underlying insured structures. turn, insureds may seek to assert a wide variety claims for damages, such as cracks appearing on walor foundations, allegedly resulting from any number ocauses related to fracking activity. Such causes couinclude access road-resurfacing work, excavatinactivities, drilling vibration or the movement of a

underlying rock formation due to the application orelease of hydrostatic pressure through the use of liqufracking materials.

Applying the terms of an earth movemeexclusion set forth in a property insurance policy ta particular claim situation is not an exact science

74 Steele v. Statesman Ins. Co., 530 Pa. 190, 192, 607 A. 742, 742 (1992).


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Material differences in the language of earth movementexclusions are a critical factor in analyzing theeffectiveness of any such exclusion. As noted above,one of the most critical aspects governing the operationof an earth movement exclusion concerns determiningif the exclusion operates to apply to loss or damage

caused not only by natural events, but also by man-made acts. Many courts have held that certain earthmovement exclusions are ambiguous and, therefore,are limited to precluding coverage for loss or damagecaused only by some natural happening or occurrence,as opposed to human doing.75

Courts holding that such exclusions do notapply to man-made earth movement forces generallynd that the policy does not specify clearly that theexclusion applies to both types of forces, and in turngrants coverage.76 Some policy exclusions deneearth movement as meaning earthquake, includingland shock waves or tremors before, during or aftera volcanic eruption; landslide; mine subsidence;mudow; earth sinking, rising or shifting. Absentspecic policy language to the contrary, courts haveruled that ambiguity exists regarding whether such anexclusion, which focuses on only natural causes of losswhen identifying examples of excluded causes of loss,applied to natural forces as well as to human forces.77Courts have reached similar conclusions with respectto other types of related earth movement exclusions,including those involving loss or damage caused by

settling, cracking, shrinking or expansion.

On the other hand, some rst-party polices setforth terms (commonly referred to as lead-in clausesor anti-concurrent causation provisions) that operateto clarify that claims arising out of earth movement(and/or other specied causes of loss) are barredregardless of whether any other cause or

fracking insurance

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