Source: http://www.lexology.com, June 24, 2014
By: Kami E. Quinn and Michael P. Hatley, Gilbert LLP
A jury in Dallas recently awarded $2.9 million to a Texas family in one of the first trials involving allegations that hydraulic fracturing caused nearby residents to suffer health problems and property damage. Although commentators were quick to point out that there was no evidence that fracking actually caused the plaintiffs any injury, the jury’s verdict contains an important lesson for the discerning energy company risk manager: regardless of the scientific support for the alleged dangers associated with the process, there may be greater risk of third-party liability associated with fracking than many in the industry have expected. If they do not want their companies stuck footing the bill, risk managers working in the energy space should consider how their insurance portfolio might address this unexpected liability and be prepared to challenge insurer coverage denials if warranted.
In Parr v. Aruba Petroleum Inc., the Parr family, who owns a 40-acre tract of land in Wise County, claimed that Texas-based Aruba Petroleum exposed them to hazardous gases, chemicals, and industrial wastes through the operation of 22 nearby gas wells. They alleged that they had suffered from a host of medical problems since Aruba began drilling in 2008, including nosebleeds, rashes, and vomiting. The Parrs sued Aruba and a handful of other Barnett Shale drillers in 2011, asserting claims for negligence, trespass, and nuisance.
On the eve of trial, the general consensus among Aruba’s lawyers and industry experts was that the Parrs would fail because they would not establish that Aruba’s drilling activities actually caused their injuries. One month later, in a 5 to 1 verdict, a jury found that Aruba intentionally created a private nuisance and awarded the Parr family $2.9 million for physical and mental pain and suffering and diminution of the family’s property value.
Since the trial, energy industry lawyers and other commentators have downplayed the significance of this verdict in relation to the broader ongoing litigation involving fracking. They have asserted that the Parr case should be disregarded as an “anomaly,” “fact-specific,” and certainly not precedential or indicative of future wins for plaintiffs with fracking-related claims.
But Parr v. Aruba illustrates that, for a number of reasons, it is too soon to dismiss the possibility of massive third-party liability associated with fracking:
Rather than ignoring the verdict in Parr or writing it off as an anomaly, the discerning risk manager will appreciate the lesson that it offers: Whatever the current state of fracking litigation or the scientific basis of the risks ascribed to the controversial drilling process, hydraulic fracturing could still result in significant unexpected third-party liability for energy companies and contractors. In order to mitigate this potential liability, energy risk managers should familiarize themselves with relevant insurance provisions and policies—both standard commercial general liability, directors and officers, and property policies as well as more specialized control of well and environmental impairment coverage. The coverage provided by these policies is an extremely valuable corporate asset in the hands of a risk manager who is proactive in understanding the policies and willing to question and, where appropriate, challenge coverage denials from insurers.