Promise and Pitfalls of the Marcellus Drilling

Promise and Pitfalls of the Marcellus Drilling

Source: http://www.riskandinsurance.com, October 15, 2011
By: Rob Hughes

For engineers and construction professionals, Marcellus Shale presents enticing opportunities, but firms need to weigh risks and seek the advice of a broker as pollution liability insurance policies differ by carrier.

As engineering firms and construction professionals seek to capitalize on opportunities presented by the growing number of exploration and development projects in Marcellus Shale, they need to assess carefully the unique and potentially significant exposures associated with them.

With efforts to tap the substantial natural gas resources available in Marcellus Shale continuing to expand, concerns also are widening among area residents and municipalities with respect to the related environmental issues. Engineering and construction firms involved in exploration and development projects need to be able to assess their risks with some degree of precision and take steps to mitigate them.

For these firms, an effective risk assessment must contemplate not only the indemnification clauses and other potential contractual exposures associated with their Marcellus Shale agreements, but federal and evolving state environmental regulations, pending and recent court decisions on Marcellus Shale issues, and the language and exclusions in their liability insurance policies.

The numerous and potentially substantial risks associated with natural gas operations include: craterings; explosions; uncontrollable flows of natural gas or well fluids; fires; formations with abnormal pressures; pipeline ruptures or spills; pollution; and releases of toxic natural gas and other environmental hazards and risks.

In the event any of these hazards occurs, construction and engineering firms involved in these projects could sustain substantial losses as a result of injury or loss of life, severe damage to or destruction of property, natural resources and equipment, pollution or other environmental damage, clean-up responsibilities, and regulatory investigations and penalties.

As they work to assess, manage and mitigate their potential exposures related to Marcellus Shale, engineers and construction professionals need to consider a number of issues involving insurance coverage, contractual clauses and wording, and legal and regulatory exposures, including the following:

— Duty to defend and indemnification clauses. Some contracts currently being offered to engineers impose broad duty to defend and indemnify obligations owing to multiple entities. The terms often stipulate that the engineer must fulfill these obligations, even if it can demonstrate its innocence of any wrongdoing and when the parties the engineer is indemnifying caused the loss. These duties typically extend beyond the scope of an engineer’s professional and general liability insurance policies; consequently, the engineers are unlikely to have insurance coverage for related liabilities.

— Safety. Courts in many states, including Pennsylvania, at the heart of the Marcellus Shale boom, have held that engineers are generally not liable for site safety, unless they specifically agree to such responsibility in their contracts or assume that responsibility by their actions. In many instances, engineers sign contracts that leave them with potentially significant safety obligations, and they may not be aware of the full scope of these requirements. To an engineer, a contract that says “every person has responsibility to prevent accidents,” may be viewed as a “throw away” line trying to build a team concept on a project. To a plaintiff’s attorney that language makes the engineer responsible for site safety and liable for any accidents.

— Joint and several liability. Joint and several liability addresses the concept of how to allocate liability when more than one defendant has caused the plaintiff’s harm. One state may follow a percentage-only basis, if a party is 10 percent at fault they are, under any circumstances, liable to the plaintiff for only 10 percent of his damages. On the other hand, until earlier this year, Pennsylvania imposed joint and several liability for negligence resulting in death, personal injury and property damage. In a case when an engineer may have minimal liability, plaintiffs could still recover 100 percent of their damages against that engineer. Pennsylvania now holds that if the defendant is less than 60 percent at fault, that defendant only pays its assigned percentage of responsibility, but no more. However, that limitation does not apply if the loss relates to environmental hazards, a huge concern in gas drilling. The release of fracking water, for example, in which the liability is joint and several, and the 5 percent at-fault engineer or contractor can be held responsible for paying 100 percent of the damages.

Each state within the Marcellus region may have nuances to their joint and several liability law. West Virginia looks to a 30 percent threshold while Ohio’s is 50 percent. While the engineer’s or contractor’s insurance may cover such a loss, the engineer’s exposure often far exceeds its role and compensation on the project. Further, the loss may have a significant effect on the engineer’s ability to remain insured or to obtain coverage in the future. A $1 million claim, when the engineer is 40 percent at fault, gives rise to a carrier paying $400,000 if that case is in Pennsylvania, but potentially the full $1 million if in West Virginia. The engineer’s loss history worsens and renewal premium increases in each instance, but certainly of a much larger magnitude if by chance that accident happened to be in West Virginia and not Pennsylvania.

— Mobile wastewater treatment units. One solution to the environmental exposures related to Marcellus Shale drilling is the use of mobile treatment facilities. Depending on an engineer’s professional liability insurance policy, the design of such facilities may or may not be covered under their policies. As a result, they need to check the policy wording carefully with their insurance advisors or legal counsel to make sure their insurance will respond to a related claim. In many instances, a design or construction firm may be operating the unit (or even a traditionally built water treatment facility); after all, that’s additional revenue to the firm. Operational activities are likely not covered under a professional liability policy, but could lead to significant bodily injury or environmental losses. A contractor’s pollution policy may not respond if the unit or facility is either owned or occupied by the insured, unless it has been properly detailed to the insurance underwriter and scheduled to the policy.

— Strict liability.  A legal principle which imposes liability on a party regardless of whether that party was negligent, strict liability arises when the loss is caused by what has been deemed by the courts as an “abnormally dangerous” activity. A federal court in Pennsylvania, in two separate cases, but both specific to Marcellus Shale claims brought by local homeowners against drilling companies for alleged contamination, refused to dismiss causes of action based in strict liability. The defendants argued that dismissal was appropriate because well drilling activities are not “abnormally dangerous.” The court said that Pennsylvania had not yet determined whether fracking activates should be deemed abnormally dangerous and subject to strict liability. On the other hand, the Kansas Supreme Court has held that drilling and operation of natural gas wells are not abnormally dangerous. If strict liability applies, does an engineer’s professional liability policy respond? Coverage under many professional liability insurance policies is triggered if there is a “negligent” act, error or omission, a requirement which would not have to be established in a strict liability claim.

— Roadway degradation.  State and local roads are being subjected to never before seen volume of heavy truck traffic, to or from drilling sites, and disposals sites. Roadway degradation is inevitable, and local and state governments are relying on assurances from gas producers to restore these roads to pre-use condition. If the producer reneges or looks to others to defray some of the repair costs, likely “deep pockets” are design firms that participated in permitting, access planning and maintenance plans. Liability also exists if there is an accident on these roads and over the years highway engineers have often faced their most severe claim in the context of a roadway accident with multiple deaths or severe injuries.

Engineers and construction professionals need to recognize that processes for exploring and developing natural gas resources in Marcellus Shale are often new and cutting edge. They bring new exposures, which engineers should try to address in their contracts. For example, insist on language describing the process as “new” or “untested” and that could lead to delays or the need for change orders during the project.

At the same time, they need to understand their potential exposures under federal and evolving state environmental regulations, and work with their insurance advisors to make sure they have adequate financial protection and that their policies will respond to the risks associated with their work. Some professional liability polices include pollution coverage, but the pollution coverage may extend only to “professional” services while other policies extend the coverage to all activities such as maintenance and construction.

Companies involved in exploration and development of Marcellus Shale need to maintain effective governance over their operations and take appropriate measures to assess and manage their exposures. With diligence in these matters, Marcellus Shale can fulfill its promise of providing an effective energy solution long into the future and a source of continued economic growth and prosperity for businesses, states, workers, and local citizens and communities.

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