How Many Occurrences? Determining the Number of Occurrences for Fracking-Related Claims in CGL Policies


The controversy surrounding the use of the natural gas drilling process of hydraulic fracturing (fracking) to extract oil and gas is well-documented.  While proponents argue that fracking presents the opportunity for an unprecedented energy boom in the United States, the potential environmental and health risks allegedly contributable to fracking has resulted in the emergence of fracking-related litigation.  Liability suits have been filed in state and federal courts throughout the nation alleging that the techniques used in fracking have, among other things, contaminated nearby land, groundwater and/or surface water, produced hazardous air emissions, induced earthquakes, violated state and federal land use regulations, and caused illnesses or diseases such as cancer.


As a result of these lawsuits, energy companies involved in fracking are turning to their insurers to provide a defense, and ultimately indemnify them for any resulting liabilities.  These lawsuits may implicate many different types of insurance coverages, including commercial general liability insurance; property insurance; business interruption insurance; contingent business interruption, civil authority, and ingress/egress coverage; workers’ compensation; operator’s extra expense; directors and officers (D&O) insurance; and errors and omissions (E&O) insurance.


However, in many instances, energy companies will seek coverage for fracking-related claims and liabilities under the “property damage liability” or “bodily injury liability” coverages of their commercial general liability (CGL) insurance policies.  As an initial matter, courts must determine whether the claim falls within the insuring agreement.  CGL insurance coverage typically affords defense and indemnity coverage “for all sums which the insured shall become legally obligated to pay as damages because of bodily injury or property damage to which the insurance applies caused by an occurrence.”  Under standard CGL policies, “occurrence” usually means “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.”  Thus, an “occurrence-based” CGL policy is triggered when the harm, i.e., the property damage or bodily injury, is sustained, rather than when the claim is asserted.  In other words, policies purchased in the past may still be implicated by present claims if the claims concern fracking-related harm that “occurred” while those policies were in force.


Depending largely on jurisdiction, courts generally apply one of four theories for determining when coverage is triggered under an occurrence-based liability insurance policy: (1) exposure; (2) injury-in-fact (the policy in effect on the date the harm takes place); (3) manifestation (the policy in effect on the date when the harm is discovered); and (4) continuous trigger (all policies in effect from the date of initial exposure until the manifestation of injury resulting from exposure).  The latter approach implicates every insurance policy covering the insured from the date of initial exposure until the manifestation of injury resulting from exposure.  This presents further issues of allocation of damages among the triggered policies to cover the loss.


While the determination of whether there has been an “occurrence” under the policy will be an important threshold question, establishing the number of “occurrences” arising from a fracking-related claim is a separate and distinct issue that insurers will undoubtedly face throughout coverage disputes.  Under “occurrence-based” policies, fracking-related claims can result from both a single-occurrence event, i.e., a well blowout, or may result from a condition spanning multiple periods, i.e., a continual environmental toxic tort claim.  Thus, it is likely that a fracking-related incident will give rise to highly contested coverage disputes as to whether the claim arises from a single-occurrence event under one CGL policy or arises from a series of events over a period of years under multiple CGL policies.  As evidenced by other long-tail or catastrophic claims such as asbestos, this is likely to be a significant issue as limits of liability and self-insured retentions or deductibles of an insurance policy are often determined by the number of occurrences.


For example, in the asbestos context, both insurers and insureds have taken inconsistent positions on the number of occurrences involved in the underlying litigation depending on the structure of the particular insurance policy.  If the policy contains substantial deductibles or self-insured retentions, the insured may seek to treat multiple underlying claims as a “single occurrence.”  On the other hand, if the policy does not contain any deductibles or self-insured retentions, an insured is more likely to argue that the multiple underlying claims are separate occurrences, each of which are covered under the policy.  Similarly, if there are no, or limited, deductibles or self-insured retentions, the primary insurer is likely to argue that all of the underlying claims are deemed to be the result of a “single occurrence” in order to exhaust their policy limits and shift the losses to excess insurers.  Naturally, excess insurers often advocate for the multiple occurrence approach in order to contain the losses at the primary level.


In attempting to determine the number of occurrences involved in the underlying litigation, courts have employed three basic approaches: (1) the “cause” test; (2) the “effects” test; and (3) the “unfortunate events” test.  The majority of courts follow the “cause” approach – that is, multiple injuries arising directly from one action or event are treated as one “occurrence,” regardless of the number of injuries or harms that arise from that action or event.  See, e.g., Safeco Ins. Co. of America v. Fireman’s Fund Ins. Co., 148 Cal.App.4th 620, 633 (2007).  Under the “effect” approach, courts examine the number of injuries resulting from the insured’s act, not on the number of acts by the insured in order to determine the number of occurrences.  See, e.g., Lombard v. Sewerage & Water Bd. of New Orleans, 284 So.2d 905, 915-916 (La. 1973).  Finally, New York has adopted the “unfortunate events” test, another minority rule.  Arthur Johnson Corp v. Indemnity Insurance Company, 164 N.E.2d 704 (N.Y. 1959) (adopted the “unfortunate event” test for construing ambiguous uses of “accident); Hartford Accident and Indemnity Company v. Wesolowski, 305 N.E.2d 907 (N.Y. 1973)(finding no material difference between the use of “occurrence” and “accident” in an insurance contracts before the court).  While the New York courts have not yet defined what constitutes such an event, the courts resolve the question by determining whether there is a close temporal and spatial relationship between the incidents giving rise to injury or loss, and whether the incidents can be viewed as part of the same causal continuum, without intervening agents or factors.


Due to the complex and latent risks inherent in fracking, a court’s determination of the number of occurrences will be a fact-intensive process.  Substantial expert involvement will be necessary to evaluate the alleged injury or damage as well as the conduct of all the drilling companies at the well site in order to determine the number of occurrences and/or parties liable for any alleged claims.  The unfamiliarity and complexity of fracking operations not only makes fracking a difficult risk for the insurance industry to underwrite, but also a costly endeavor to litigate.


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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