The US Environmental Protection Agency (EPA) has recently announced that they will be evaluating the potential impacts to groundwater resulting from hydraulic fracturing or “fracking”. In 2004, the EPA performed a study of the impact to US Drinking Waters (USDWs) from the use of fracking in coalbed methane enhanced recovery. At the time, the EPA concluded that this type of recovery (CBM) did not have a significant impact on USDWs, but reserved the right to expand the study at a later date. On March 18, 2010, the EPA announced a “comprehensive” research study to investigate the environmental impacts of hydraulic fracturing.

While the industry has utilized fracking for many years, the EPA had never focused on this aspect of the exploration and production industry. This increased scrutiny could eventually lead to tighter regulatory framework, more permitting requirements (if, for example, the EPA were to require a new permitting regime under the UIC rules) or even a push to eliminate fracking altogether. While this last scenario seems highly unlikely, there is no doubt that this focus will result in additional scrutiny for the industry.

Unless you are currently purchasing pollution liability coverage on a stand alone basis, the risks associated with fracking, and indeed any gradual pollution loss, will likely be uninsured. Typical casualty programs often provide third party liability coverage from sudden and accidental pollution releases. Sudden and accidental or “time element” coverage requires that a pollution condition be discovered and reported within a defined period within the term of the policy. A common scenario might include a seven day discovery time period and a 21 day reporting time period. While this provides an important element of coverage, any gradual pollution condition, which can take years to be discovered, would not be afforded any coverage under this structure. Furthermore, these casualty programs do not provide any on site clean-up coverage.

Most Exploration and Production companies also carry Operator’s Extra Expense or Control of Well including pollution coverage for third party exposures as well as clean-up coverage. But, the coverage only applies to “named peril” releases associated with triggering events under the policy such as a well “out of control”. They may also contain time element restrictions. Therefore, control of well coverage would not apply to gradual losses or claims related to historic use of hydraulic fracturing.

In addition to the control of well coverage, many owner/operators also have an “underground resource” endorsement.
While the endorsement provides protection for the operators liability in the event that they damage an underground resource, the endorsement does not typically provide coverage for losses resulting from pollution events.

The EPA study proposed focuses on the effects of hydraulic fracturing on human health and the environment, but there are other gradual pollution risks associated with oil and gas exploration and production. The added EPA scrutiny of the oil exploration industry will likely result in a heightened awareness of issues, an increase in claims and more restrictive clean up requirements. The following are some scenarios/issues which could result in gradual pollution conditions which would not likely be covered under the typical policy structure described above.

• Pollution conditions resulting from historic well locations not properly plugged and abandoned
• Historic or ongoing leaks from active or improperly closed production pits
• Leaks of production fluids into shallow formations as a result of failed well casings
• Residual contamination from historic blowout releases which were either improperly remediated or cleaned up to a less stringent regulatory requirement
• Release of fracturing fluids from a formation or historic releases of these materials during drilling activities
• Gradual releases from gathering systems associated with oil fields

Any of these scenarios can result in significant third party claims from bodily injury or property damage (for example, from impacts to ground water wells) or can result in unexpected remediation costs. Fortunately, the environmental insurance market is willing to underwrite these types of risks and provide coverage for both sudden and accidental and gradual pollution conditions.

Broadly speaking, pollution legal liability or site liability coverage responds to losses resulting from pollution conditions at, on, under or emanating from a covered location. The pollution condition could have commenced prior to the inception of the policy, after the inception of the policy or both. Because these policies respond to pollution conditions which may have begun outside the policy period, they are offered on a claims made basis and may provide coverage for:

• Off-site clean up
• Third party bodily injury and property damage claims
• Civil fines, penalties and punitive damages (where allowed by law)
• Natural Resource Damages (NRD losses)
• Investigative costs
• Defense (within the limits of the policies)
• Non-owned disposal sites (liability arising from disposal of wastes to a third party disposal site)
• Transportation
• Business interruption resulting from pollution conditions

Marsh is expert at helping you evaluate these risks and transferring them via robust insurance placement where you choose. We can also assist you in obtaining seamless coverage between your General Liability, Operator’s Extra Expense and Pollution Legal Liability policies.

With the competitive nature of the environmental insurance market and increased scrutiny on environmental issues in this industry, there has never been a better time to evaluate this risk.