Source: http://www.lexology.com, January 15, 2014]
By: Jake P. Skaggs, Cozen O’Connor
Energy production in the United States is at an all-time high. In 2013, an average of 7.5 million barrels of oil were pumped every day, which bested the previous production record (2012) by one million barrels. Domestic oil production has increased every year from 2011 to 2013. By comparison, between 1971 and 2011, oil production in the United States decreased 29 of the 40 years. Regardless of whether this level of domestic production can be sustained for the long term, elevated domestic oil production is a reality for the near future. Unfortunately, more oil production (and the by-products that are created as a result of that production) increases the chances that a spill or release resulting in damage to property will occur and give rise to an insurance claim.
Drilling, pumping and refining oil and other energy resources is a complicated process that requires a tremendous amount of human labor and mechanical equipment. Because of energy production’s heavy reliance on human labor and equipment, there is a potential for breakdowns and failures in the process that can cause an unexpected release of product into the environment. Further, harmful and dangerous compounds (brine, heavy metals, NORM) are also brought to the surface as byproducts. These byproducts must be transported and disposed, which increases the chances of an unforeseen release into the environment.
Depending on the composition of the pollution that was released into the environment and the size of the release, the costs associated with remediating the effected land can be astronomical. For example, in a matter handled by this firm, where a fracture along a PVC pipeline caused a small amount of saltwater brine to spill into two tracts of land, the remediation costs were in excess of $1 million. Further, the effected land can also be permanently damaged or altered. For example, a 8.5 acre sinkhole suddenly opened up in Ascension Parish, La., after an underground salt cavern that was being used to store natural gas collapsed. The costs associated with the Ascension Parish sinkhole are expected to exceed $100 million. Therefore, it is important for the claims handler and attorney to examine pollution-related claims to determine if there is potential for subrogation.
When presented with a claim involving pollution-related property damage, the first step in a recovery analysis should be to determine whether the claim falls under a property policy or a liability policy. If the claim is covered by a property policy, it is important to engage the proper expert because most states do not recognize strict liability for pollution release. Therefore, it is necessary to retain an expert to prove negligence on the part of the alleged responsible third party. Alternatively, if your insured is the alleged polluter/tortfeasor and the subrogation rights arise out of settling third-party claims, state law may bar recovery and/or contribution actions after a third-party settlement. Therefore, it is important to identify the type of policy involved in the claim and the applicable state and/or federal law.
All the contracts executed amongst all the parties involved in the operation that created the pollution should be closely examined. Generally, these contracts are very sophisticated and contain broad indemnity language, waivers and limitations on damages. A lease agreement or right-of-way agreement will govern liability between the mineral-rights owner and the energy production company. Amongst drillers (and their subcontractors) and well-owners, a Joint Operating Agreement (JOA) is the common instrument that defines the parties’ rights and responsibilities. Because JOAs can be very old and have several amendments, it is important to obtain the entire JOA; including the master agreement and all amendments.
Lastly, it is important to determine whether the third-party tortfeasor has liability insurance coverage for your claim. Most standard CGL policies contain language that excludes coverage for pollution claims, and many small and mid-size production companies do not have the resources to satisfy a multi-million dollar judgment or provide meaningful funding to a pre-suit settlement. Also, “Completed Operations,” and “Your-Work,” exclusions can limit the available insurance coverage. It is deflating to work extremely hard on complicated pollution case, only to discover that the defendant(s) do not have the ability to pay for the damages caused by their negligence.