Tag Archives: Pollution exclusion

Fracking Risk and the Nationwide Underwriting Guidelines

By Kami Quinn and Michael Hatley

Nationwide Mutual Insurance Co. made headlines in the ongoing debate over hydraulic fracturing earlier this month, declaring that it won’t cover damage related to the controversial drilling process.

Hydraulic fracturing, commonly referred to as “fracking,” is a process in which a mixture of water, sand, and chemicals is injected into a drilling well at high pressure to fracture underground shale formations and release pockets of oil or natural gas.  Recent technological improvements have prompted an explosion in fracking activity, as oil and gas companies rush to develop new wells over major shale formations.

Proponents tout the enormous energy potential this technology represents, while environmental groups insist that fracking poses a number of significant environmental risks, such as the possibility for release of methane or fracking chemicals (which often contain potentially toxic compounds, including formaldehyde) into drinking-water wells.  Lawsuits related to fracking activities are currently being litigated across the United States, including in New York, Pennsylvania, Texas, Colorado, and West Virginia.  The majority of these suits have been filed against energy companies on behalf of individual property owners, primarily for property damage and personal injury resulting from water, soil, or air contamination. 

Nationwide entered the fray this month after an internal memo was posted on the websites of anti-fracking groups stating:  “After months of research and discussion, we have determined that the exposures presented by hydraulic fracturing are too great to ignore.  Risks involved with hydraulic fracturing are now prohibited for General Liability, Commercial Auto, Motor Truck Cargo, Auto Physical Damage and Public Auto coverage.”

Advocates of fracking were quick to criticize the company’s position.  Opponents of drilling, on the other hand, seized on Nationwide’s statement as evidence of the dangers inherent in the process.  Other observers wondered if this marked the start of a trend, with other insurance companies poised to follow suit.

Standing alone, however, Nationwide’s move will have little overall impact on who bears the financial impact of the risks involved in fracking, whether fracking operators or homeowners.  As a consumer-oriented insurance company, Nationwide is unlikely to have provided coverage for any of the oil and gas companies engaged in fracking in the first place. The energy company targets of fracking-related lawsuits typically carry specialty coverage designed for the industry and issued by specialty insurers. 

 As for homeowners, Nationwide would most likely deny coverage for costs related to fracking under its homeowners policies even in the absence of these guidelines.  As Nationwide has stated since the underwriting guidelines became public, those policies were never intended to cover fracking-type damages in the first place.  Indeed, standard homeowners’ policies regularly exclude coverage for the types of damage that might be caused by fracking, such as cracked foundations or contaminated drinking-water. 

To the extent that Nationwide’s position has an impact, it will be with respect to “secondary” defendants of fracking-related suits, including transportation companies that haul the potentially toxic materials and other smaller players on the jobsite.  Even these entities, though, are likely to look to the oil and gas companies’ coverage as their first line of defense. 

Litigation between energy companies targeted by fracking-related lawsuits and select insurers over the application of specialty drilling policies to fracking suits is likely, and to be sure, insurers in this industry will be looking closely at such lawsuits as they refine their own underwriting standards.  It is the response of these carriers in paying claims under existing insurance and in underwriting future coverage that will have a real impact on the allocation of fracking-related risks in the marketplace.   



Companies With Formaldehyde Risks Should Consider Insurance Issues Sooner, Not Later

By Kami Quinn and Emily Grim

In June 2011, the U.S. Department of Health and Human Services released a report identifying formaldehyde as a “known carcinogen” with possible ties to leukemia.

Commentators have speculated that this development may spur a wave of toxic tort litigation. Formaldehyde is used in a wide variety of products, including building materials, adhesives, fabrics and beauty products. The ubiquity of formaldehyde has put it on the list of torts that are mentioned as potentially “the next asbestos.”

There is some recent precedent for tort liability based on formaldehyde. In April 2012, thousands of Gulf Coast residents displaced by Hurricane Katrina won a $14.8 million settlement against companies that manufactured and installed FEMA-distributed travel trailers containing toxic levels of formaldehyde.

As defendants and potential defendants of formaldehyde-based claims are considering their defenses and strategies to reduce or avoid claims, they should be aware that insurers are also considering their own defenses against claims for coverage of these claims by policyholders. One insurer defense against these claims, the pollution exclusion, has already been litigated in Florida courts.

In In re FEMA Trailer Formaldehyde Products Liability Litigation, MDL NO. 07-1873 (Jan. 25, 2011), the court applied a total pollution exclusion in a commercial general liability policy to deny coverage to a company that provided trailers for use as temporary FEMA housing for damages related to the escape of formaldehyde-related fumes.

The wording of pollution exclusions vary, as does their interpretation under various state laws. Moreover, specialty policies are available to cover the “gap” in coverage created by this exclusion. Policyholders at risk for formaldehyde-based suits should evaluate closely their current coverage position with respect to these claims and what options may be available to them that would better spread their risk.

Insurers, however, are unlikely to invoke only pollution exclusions to avoid payment of these claims. In fact, insurers may rely on the same studies that defendants and potential defendants of formaldehyde suits use to refute causation to argue that “injury,” which triggers some insurance policies, only occurred at some point other than the policy period. Fights over appropriate trigger are familiar to those who have litigated coverage for other long-tail claims, but changing or different science could re-open those issues.

To minimize the ultimate financial impact of formaldehyde claims, policyholders must bear coverage issues in mind as they formulate their defense and carefully consider their arguments with respect to causation and injury.

This is not an exhaustive list of the likely coverage issues that will arise if formaldehyde becomes a significant mass tort, but these illustrations do make clear that a company with risks in this area would be well-advised to consider the insurance aspect of the issue sooner rather than later.