While the American energy industry continues to undergo a cooling-off period, disputes related to insurance coverage for damages allegedly caused by fracking are heating up. Over two years ago, Brouse McDowell warned policyholders to be aware of how their first-party insurance policies may or may not respond to damages allegedly caused by fracking or fracking-related activities such as underground disposal of fracking wastewater. Now, a federal lawsuit in New York may provide guidance on whether a pollution-liability policy affords coverage for similar claims.

In early 2016, New Dominion, an energy company engaged in fracking and wastewater disposal activities, was sued in five cases in Oklahoma state and federal court (including a lawsuit brought by the Sierra Club which was discussed in a prior blog post). The complaints generally allege that New Dominion’s wastewater disposal activities, in which the company injected fracking wastes and byproducts into underground disposal wells, had caused earthquakes which harmed the plaintiffs. The plaintiffs seek various forms of recovery, including compensatory and punitive damages as well as injunctive relief.

Lloyd’s of London issued two claims-made pollution-liability policies to New Dominion. The policies require Lloyd’s to defend and indemnify New Dominion for “claims for bodily injury or property damage that result from pollution conditions at, on, under or migrating from the Insured’s site(s) to which this insurance applies.” The policy further defines “pollution conditions” as “the discharge, dispersal, seepage, migration, release or escape of pollutants,” and “pollutants” as “any solid, liquid, gaseous or thermal irritant or contaminant, including … acids, alkalis or toxic chemicals, and includes waste.”

Lloyd’s declined New Dominion’s tender of the Oklahoma actions and filed a declaratory judgment action in the Southern District of New York arguing that there was no coverage under the policies and Lloyd’s was not required to defend or indemnify New Dominion. New Dominion filed a competing action in Oklahoma state court in mid-June, which Lloyd’s removed to federal court and is seeking to have transferred to the Southern District of New York due to a choice of forum clause in the policies. On September 7, the Southern District of New York declined to abstain from addressing or dismiss the Lloyd’s complaint, holding that the policies’ forum selection clauses applied and therefore New York was the proper forum for the dispute.

Lloyd’s complaint raises potentially illuminating questions about how to construe key terms in its policies. In addition to asserting certain common coverage defenses, Lloyd’s asserts that any damages caused by New Dominion’s disposal of fracking wastewater are not covered because the wastewater is not a “pollutant,” and therefore disposal of the wastewater is not a “pollution condition,” as those terms are defined in the policies. At first blush, Lloyd’s seems to have a tough argument: numerous studies claim to show that fracking wastewater contains various toxic chemicals and/or radioactive elements, so it seems likely that a court would reason that the wastewater was a “pollutant” under the policy. New Dominion’s wastewater disposal activities certainly involve “discharge, dispersal, [or] release” of wastewater, so if wastewater is a pollutant then the disposal would almost certainly constitute a “pollution condition.” Thus it seems likely that, at the very least, the underlying Oklahoma complaints contain sufficient allegations to invoke Lloyd’s duty to defend New Dominion.

Another interesting aspect of the case is that the policies’ choice-of-forum clauses require application of New York law. New York is not generally seen as a hotbed of oil and gas activity; indeed, a state-wide moratorium on fracking activities is currently in effect. In the future, policyholders with operations located outside New York may wish to more closely consider whether they should press for application of the law of a state more familiar with (or more invested in) oil and gas activities.

The dispute between Lloyd’s and New Dominion could represent a major test case in the evolving area of insurance coverage for damages allegedly caused by fracking or fracking-related activities. Policyholders in the energy industry would be well-advised to monitor the progress of the case to determine how the eventual outcome may impact their coverage rights.