J. Kent Holland, Jr., J.D.

Where a hydraulic fracturing well driller was sued by a homeowner who alleged his drinking water was contaminated by the release and discharge of pollutants and contaminants due to improper cement casing of the gas wells and other activities involving the gas wells, the driller tendered the claim to its commercial general liability (CGL) insurance carrier to defend the claim and indemnify against any damages awarded.  The carrier, ACE Insurance, denied coverage based on a pollution endorsement that limited coverage to only sudden and accidental incidents.  After settling the case with the homeowner, the well driller filed suit against ACE, alleging that the failure to provide a defense constituted bad faith.  The case is Warren Drilling Co., Inc. v. ACE American Insurance Company and Equitable Production Company, (Court of Common Pleas – Noble County, OH – Case No. 212-0088).

As of the date when this article was written, the suit is currently pending.  The driller seeks to recover under its policy for over $100,000 in legal fees and expert witness fees incurred in the underlying case, as well as $40,000 incurred in reaching a settlement with the homeowner.   It is likely that the carrier will respond to the suit with a motion to dismiss or motion for summary judgment, asserting that the case must be dismissed as a matter of law based on what it will argue is clear and unambiguous language of the policy.

The Homeowner’s Complaint of Bodily Injury and Property Damage

In the underlying homeowner’s suit, the plaintiffs alleged that pollutants and industrial waste, including “fracking fluid”, was discharged into the ground water or onto the waters near the plaintiffs’ home and into the ground water wells, which contaminated the water supply plaintiffs consumed and relied on as their water supply.  As set forth in the Homeowner’s Complaint:

“Plaintiffs complain of environmental contamination and polluting events caused by the conduct and activities of the Defendants herein, who caused the releases, spills, and discharges of gases, hazardous chemicals and industrial wastes from its oil and gas drilling facilities and/or drilling activities.  These releases, spills and discharges caused the Plaintiffs and their property to be exposed to such hazardous gases, chemicals and industrial wastes and caused damage to the natural resources of the environment in and around the Plaintiffs’ property, causing Plaintiffs to incur health injuries, loss of use and enjoyment of their property, loss of quality of life, emotional distress, and other damages.”

The Homeowner’s Complaint names as a defendant the Equitable Production Company (EPC), who apparently owned and operated the gas wells in question.  It also named Warren Drilling Company and Halliburton Energy Services, Inc. for their roles in conducting drilling operations on the gas wells located in Jackson County, West Virginia. The complaint states that the defendants “used a drilling process known as hydraulic fracturing and horizontal drilling, a process that “requires the discharge of enormous volumes of hydraulic fracturing fluids, otherwise known as ‘fracking fluid’ or ‘drilling mud,’ into the ground water under extreme pressure in order to dislodge and discharge the gas contained under the ground.”

As a result of the hydraulic fracturing process used for drilling the gas wells, the homeowner sought remediation costs, property damages, personal injury damages, costs of future health monitoring, and an injunction to stop further drilling.

ACE Denies Coverage Under the Driller’s Policy

ACE Insurance, the CGL carrier for Warren Drilling, denied any obligation to either defend or indemnify the driller under the policy.  This denial was based on language in the Energy Pollution Liability Extension Endorsement of the policy that provides insurance will not apply to injuries and damages arising out of, or in any way related to a “pollution incident” from the discharge of “pollutants” except where the following five conditions are satisfied:

“1. the discharge is both unexpected or unintended from the standpoint of the ‘insured’; and

2.  the discharge commenced abruptly and instantaneously and can be clearly identified as having commenced entirely at a specific time on a specific date during the policy period; and

3. the discharge commenced, at or from, a site location or premises….; and

4.  the discharge was known by any ‘insured’ within 30 days of the commencement of the discharge of ‘pollutants’; and

5. the discharge was reported to us within 60 days of the commencement of the discharge of ‘pollutants’.”

In a letter to the well driller denying coverage, ACE stated that the driller failed to satisfy all five conditions that are the prerequisites for coverage.  In response to the coverage denial, the driller’s attorney wrote to ACE acknowledging that the carrier “correctly characterized the claim as alleging that the drilling activities of Warren Drilling and other defendants contaminated the Plaintiffs’ property and ground water.” But the attorney explains that the driller’s position is that (1) “ACE may not require slavish adherence to the terms of that coverage; (2) even if the pollution liability coverage does not apply, Warren is entitled to a defense and indemnification of any property damage under [another section of the policy].”

The attorney’s letter goes on to argue that since the driller did not learn of the pollution until a couple years after it first occurred, it was impossible for the driller to notify the carrier with the time periods established in the policy, and that the there is no evidence that ACE has been prejudiced by the inability of the driller to give the notice within the 60 days of the commencement of the gas well drilling.

In response to Warren Drilling’s attorney’s letter, coverage counsel for ACE responded, “You admit that Warren Drilling did not know of the discharge of pollutants within 30 days of the commencement and did not report the discharge to ACE within 60 days of the commencement.  Accordingly, Warren Drilling has not met its burden of establishing the conditions to create an exception to the absolute pollution exclusion.”

Comment on Policy Intent

When a policy, such as the ACE policy, states it is to cover a pollution incident that “commenced entirely at a specific time on a specific date during the policy period” this is understood to mean that the policy is intended to cover only events such as a quickly occurring spill or a sudden discharge that occurs at a specific point in time that can be promptly discovered and reported to the carrier.  It is not generally understood to encompass pollution events that occur out of sight, underground, and perhaps gradually over time.

To be covered, the policy states that the pollution “discharge [must have] commenced abruptly and instantaneously and can be clearly identified as having commenced entirely at a specific time on a specific date during the policy period.”  This limits coverage to sudden and accidental events that “commenced entirely” at a specific moment in time.

There was a time when CGL policies used the terms “sudden” and “accidental” in an effort to limit pollution incidents that would be covered under the policy.  Because so many courts, however, interpreted those words to include gradual releases of pollution that were not immediately known at a specific time and place, the standard insurance policies were revised in an effort to avoid potential ambiguity or confusion over the intended limitation on coverage.

Instead of using words like “sudden”, a policy such as the ACE policy at issue here specifies that the pollution discharge must commence “abruptly and instantaneously” and be known by the Insured within 30 days of the date the discharge commenced and must be reported to the carrier within 60 days of the date it commenced.

In the coverage dispute case with Warren Drilling, ACE asserts that the effect of the above-quoted language is to exclude coverage for damages that are alleged to have been caused by a “pollutants” discharge from hydraulic fracturing that are not caused “abruptly and instantaneously” and that that are not known quickly enough to be known by the ‘insured’ within 30 days of the commencement of the discharge of  “pollutants” and be reported to the insurance carrier within 60 days of the commencement of the discharge.

Risk Management Comment:

Seeking pollution coverage under the limited pollution coverage of a CGL policy for allegations of gradual, long-term pollution that is not capable of quick discovery and reporting, is not a realistic insurance/risk management practice.  The limited pollution coverage available by endorsement to a CGL policy is not sufficient to manage the risk of the types of pollution or environmental impairments that may occur from the hydraulic fracturing gas well drilling process.  Consequently, firms involved in this process may choose to obtain a policy specifically intended to cover such risks.  A contractor’s pollution liability (CPL) policy, for example, can cover a well driller on a broad basis for pollution caused by their work without regard to whether it occurs suddenly at a specific point in time or occurs gradually over a long period of time and is not discovered until long after the construction activities that caused it to first commence.


About the author: Article written by J. Kent Holland, Jr.,  a construction lawyer located in Tysons Corner, Virginia,  with a national practice (formerly with Wickwire Gavin, P.C. and now with Construction Risk Counsel, PLLC) representing design professionals, contractors and project owners.  He is founder and president of a consulting firm, ConstructionRisk, LLC, providing consulting services to owners, design professionals, contractors and attorneys on construction projects.  He is publisher of ConstructionRisk.com Report and may be reached at Kent@ConstructionRisk.com or by calling 703-623-1932.  This article is published in ConstructionRisk.com Report, Vol. 14, No. 7 (July 2012).

Copyright 2012, ConstructionRisk.com, LLC