Risks and Rewards: Insurance Coverage for Fracking Operations

by Sherman & Howard L.L.C.
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Hydraulic Fracturing, or "fracking", has been used as an extraction tool for natural gas and oil for several decades. Relatively recent developments in horizontal fracking technology have opened major new shale plays throughout the country, including the Bakken in North Dakota, Barnett and Eagle Ford in Texas, and the Marcellus in Pennsylvania and surrounding states, bringing with each significant opportunities for those participating in the oil and gas industry.

The new opportunities fracking presents come with significant risks as well. These risks include potential environmental contamination (particularly to drinking water supplies), earthquakes, operational risks (such as well blowouts, employee injuries, damage to third-party equipment and transportation accidents) and company risks (such as derivative litigation and governmental investigations). Indeed, the number of lawsuits filed and governmental investigations initiated arising from fracking activities has increased significantly since 2009.

In light of these risks, it is incumbent upon companies involved in fracking to maintain appropriate risk management procedures, including obtaining the proper insurance coverage for fracking risks. Fracking activities implicate many different types of insurance, including:

Commercial General Liability - To cover claims asserted by third parties for bodily injuries or property damage allegedly caused by fracking activities.

Environmental Liability (including Contractor's Pollution Liability and Pollution Legal Liability) - To cover first-party and third-party claims arising from alleged environmental contamination caused by fracking activities.

Operator's Extra Expense - To cover the cost of regaining control of a wild well, as well as returning the well to its depth and condition immediately prior to the blowout.

Commercial Property - To cover losses to a company's own property, as well as property of others for whom a company is legally or contractually responsible.

Worker's Compensation - To cover injuries to a company's employees and employees of uninsured contractors.

Directors & Officers Liability - To cover claims which may be asserted against a company or its officers and directors by shareholders and others as well as governmental investigations of fracking operations.

Each insurance policy type and, indeed, every individual policy, is subject to its own terms, conditions and limitations. Moreover, companies involved with fracking should expect insurers to resist coverage given the potentially significant exposure fracking related claims may pose.

Accordingly, it is important for companies involved in fracking to develop a comprehensive and well thought out insurance program to provide the necessary protection against fracking risks. Such a program should be developed in conjunction with experienced risk managers, insurance brokers specializing in the oil and gas industry, and legal counsel experienced in insurance coverage matters.

Fracking presents a tremendous opportunity for many in the oil and gas industry, but also substantial risks. Proactively preparing a comprehensive risk management program, including securing the appropriate types of insurance coverages, can help mitigate those risks so that companies in the oil and gas industry can focus their energies on extracting the most from this potentially significant opportunity.

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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