Fracking in the Marcellus Shale: Contractual Risk Transfer and Insurance Issues for Property Owners and Municipalities

BY: MICHAEL CONLEY & MEGHAN FINNERTY

The debate over how to best balance concerns for the environment with the desire to increase our nation’s energy independence is currently raging on in small town borough council meetings and the state and federal legislatures. The debate is fueled by ever escalating estimates of the amount of recoverable natural gas in shale formations across Pennsylvania, New York, West Virginia, Maryland, Ohio, Virginia, and New Jersey and the potential consequences of the methods used to extract the gas. According to the Associated Press, over 3,000 new natural gas wells utilizing hydraulic fracturing, or “fracking,” have cropped up across rural Pennsylvania in the Marcellus Shale since 2005. With tens of thousands of additional wells planned, and enthusiastic projections of natural gas abundance in the adjacent Utica and Upper Devonian Shales, fracking activities are going to expand exponentially. As with any novel science, the only thing more certain than the controversy it stirs will be the claims and lawsuits that result. Indeed, a myriad of lawsuits seeking personal injury and property damage resulting from Marcellus Shale drilling have already been filed in courts throughout the region.

Despite assurances that the process of fracking is clean and safe, it is nevertheless imperative that municipalities, property owners, and mineral rights owners evaluate how to best protect themselves from the gambit of fracking-related claims and litigation, which will include everything from on the job injuries to environmental contamination. Other than campaign statements made by Pennsylvania’s Governor Tom Corbett – who proclaimed that state regulation should require drilling companies to maintain adequate insurance – there has been surprisingly little discussion of the role that insurance and contractual risk transfer can play in protecting municipalities and property owners from these claims.

While every situation is unique, here are some considerations for property owners and municipalities when evaluating whether they are adequately protected for claims arising out of fracking:

Contractual Indemnity Provisions

Many Marcellus Shale oil and gas leases contain boilerplate indemnity provisions in which the gas company promises to indemnify and hold harmless the property owner in the event of a claim. However, when you drill down to the details, these provisions may be offering property owners a false sense of security.

First, an indemnification provision is only as good as the party agreeing to provide the indemnification. Property owners and municipalities need to investigate the financial solvency of the entity signing the oil and gas lease or applying for the oil and gas permit, particularly where larger corporations are using LLCs and subsidiaries to enter into these legal contracts.

Second, in order to ensure that you have adequate protection in the event you are personally tied to allegations of negligence or wrongdoing, the indemnification provision should be as broad as allowable under applicable law. These indemnification provisions should include language indemnifying you for your own acts of negligence where such indemnity is not otherwise against public policy.

Additional Insured Provision

Shockingly, many oil and gas leases contain no provision requiring any type of insurance on the part of the companies engaging in the drilling. Property owners should require that they be named as an additional insured on all insurance policies of the oil and gas company, as well as on the insurance policies of any contractor that comes onto the property for any purpose related to the drilling.

In addition, simply asking to be listed as an additional insured is not enough. Property owners (and municipalities who require additional insured status as part of permitting) should keep in mind that not all additional insured provisions in insurance policies are the same. If left to the insurance company to choose, undoubtedly the insurance company will utilize as narrow an additional insured provision as possible. For the greatest protection, the additional insured provision in the oil and gas lease should specify the scope of the coverage for the additional insured.

Property owner should also investigate the scope of coverage contained in the oil and gas company’s insurance policies. By way of example, most commercial general liability policies contain pollution exclusions, which insurance companies will undoubtedly rely upon to exclude coverage for the discharge of any “pollutant”. Oil and gas companies and companies involved in drilling can and should carry specialty insurance for their operation that do not contain exclusions for pollution liability or contain only limited pollution exclusions. Property owners and municipalities should be aware that this specialized coverage is available; otherwise they may be arguing with the insurance company over coverage under a policy with a pollution exclusion.

Similarly, property owners and municipalities should be aware that many companies involved in oil and gas drilling have policies written on a “claims-made” basis. Claims-made policies generally are triggered when the claim is made by a third-party. In contrast, “occurrence” based policies general provide coverage for claims that take place at least, in part, during the policy period. For property owners and municipalities, the concern with “claims-made” policies is that they may not provide any coverage if the damage does not manifest itself until years later, which is often the case with environmental contamination.

Finally, insurance coverage is in many cases only as good as the limits and deductible or self- insured retention associated with that policy. In both of these instances, the property owner or municipality should dictate the terms of coverage acceptable to them.

One last word of caution – property owners and municipalities should not rely upon Certificates of Insurance as evidence of compliance with insurance provisions of a contract, or as evidence of compliance with permitting requirements. Certificates of Insurance may not be binding on an insurance company and often contain limited and incorrect information. The only way for a property owner or municipality to make sure the insurance policies meet either the contractual or permitting requirements is to obtain, and fully review, copies of the actual policies.

Claims Handling

In the event of a potential claim, property owners and municipalities need to be vigilant in making sure that timely notice of a claim or potential claim is provided to under every potentially applicable insurance policy. In no instance should the property owner or municipality rely on the gas company or contractor to give notice on their behalf. Even if you do not have all the particulars of your claim, give notice immediately, you can always supplement the notice later.

While landowners and municipalities may not be able to avoid fracking-related liability completely, by following these guidelines and turning to insurance recovery professionals when necessary, they can nevertheless minimize their uninsured exposure.

This article is part of the summer edition of Offit Kurman’s quarterly Insurance Recovery Advisor. You can download the full Advisor here.

Michael Conley is a Principal at Offit Kurman and Chair of the firm’s Insurance Recovery practice. Mr. Conley is a frequent speaker on insurance recovery and fracking issues. He can be reached at 267.338.1317 or mconley@offitkurman.com.

Meghan K. Finnerty is an Associate at Offit Kurman and a member of the Insurance Recovery practice. Ms. Finnerty’s practice includes a focus on insurance recovery for environmental issues. She can be reached at 267.338.1322 or mfinnerty@offitkurman.com.