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By Dan Reynolds, senior editor of Risk & Insurance®

It's not a question of whether the claims will come because they will come. Like it or not, using explosives and fluid compounds to fracture shale layers to release the natural gas deep underground is a disruptive process that is bound to run awry at one stage or another.

"Everyone is looking at the emerging issues and the protection for liability and groundwater claims and allegations of bodily injuries, and we are trying to assess what the exposure is," Foggan said during a phone interview with Risk & Insurance®.

A client advisory from the energy practice at wholesale broker AmWINS Group Inc., said the richness of the Marcellus region and expanded drilling has caused an increase in numerous types of blowouts. Those include incidents when fracking for a new well has caused blowouts at neighboring, producing wells. The wholesaler also reported an uptick in incidents when well cement casings have failed and an increase in blowouts caused by surface events.

And none of this is really a surprise, because, let's face it, where does most of this country's expertise in natural gas drilling lie? It lies in the dusty, relatively level landscapes of places like Texas, Oklahoma and North Dakota.

Veteran drillers may be quite comfortable working on the geology of those states. But throw in the rolling hills and the meandering streams of New York, Pennsylvania and West Virginia and you have an entirely different story.

Environmentalists in the Northeast are raising a ruckus over fracking for natural gas, but they might be doing so without the requisite knowledge to truly inform them, said John Nevius, a New York-based shareholder and chair of the environmental law group at Anderson, Kill & Olick.

"There is a lot of hysteria out there," said Nevius, a former Environmental Protection Agency employee who combines a master's level education in geology and civil engineering with his law degree.

Nevius said one battleground for insurers and their insureds will be pollution exclusions. He said insurers historically, and wrongly, have been taking a broad approach in interpreting the pollution exclusion clauses in their liability policies. And nowhere might this broadness be more inappropriately applied than in D&O coverage, Nevius said.

"Something that sometimes is overlooked is the impact on D&O and ultimately you as an executive are going to be making decisions, especially if you are in the energy business, that relate to climate change or relate to hydrofracking," Nevius said.

It's the nature of the business in drilling that pollutants are involved. And that means that an exclusion shouldn't necessarily knock a coverage defense "out of the box," Nevius said.

"So much depends on your state and I think pollution exclusions across the board whether they are qualified 'sudden and accidental' or now 'total and absolute' have been abused by the insurance industry," Nevius said.

The AmWINS brokerage said now is the time to sit down with drilling and gas exploration clients and make sure they understand their policy limitations, particularly in the "control of well" limits, when, for example, 10 companies might be sharing a policy due to their partial ownership of a given well and don't have a clear understanding of how much of that well's insurance limit they are actually covered by.

September 20, 2011

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