This document summarizes a webinar on hydraulic fracking and insurance. It begins with introductions and an agenda. It then provides background on fracking, including the process, risks to water, air, and land. It discusses stakeholders, industry collaboration efforts, and insurance implications. Key insurance issues include potential claims from homeowners, energy companies, workers and more related to water contamination, earthquakes, air pollution and other risks. The document examines insurance precedents and guidelines related to fracking coverage.

1. Hydraulic Fracking and Insurance
January 9, 2014
Transitioning to Green
For MSO

2. Agenda
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Welcome, Introductions and Background
Hydraulic fracking context
Hydraulic fracking basics
Hydraulic fracking risks
Stakeholders and Industry collaboration
Q & A (5 min)
Insurance industry response
Insurance industry precedents and policies
Insurance Claims and Coverage Issues
Conclusions, Q & A and next event (10 min)

3. Welcome
Jan Scites, CEO & President, MSO
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TTG Vendor partner with MSO
Survey on Green and Sustainability 2013
Webinar terrific response
MSO national footprint
MSO committed to providing education to the
insurance industry

4. Welcome
Jeana Wirtenberg, President & CEO, Transitioning to Green
• Transitioning to Green, LLC
– Help organizations determine where they are, where they want to
go and how they can get there in the green economy
– We do this through, consulting, training and LeaderShip for
Sustainability.
• Our promise is simple… by applying “holistic
sustainability” business practices, we assist every
organization we touch to simultaneously and
synergistically:
– Engage your People
– Sustain Our Planet
– Optimize your Profitability
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5. Today’s Presenters
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Linda Kelley, Principal,
Transitioning to Green, LLC
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Enterprise Ecologist
Artist and naturalist
Practitioner of whole systems approach to
strategy, innovation, collaboration, and
learning
Consultant to business and government
Pioneer in virtual technologies for
collaborative learning
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Bill Russell, Principal,
Transitioning to Green, LLC
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Chemical Engineer, MBA-Finance
Hazardous waste site investigator / engineer
Former US environmental practice leader of
PwC
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Expert witness on Superfund and Asbestos
Litigation
Advisor to insurance industry on new
environmental risk products
Advisor to industry on Sustainable Enterprise
practices
Professor, Green Accounting Columbia
University
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6. Transitioning to Green Webinars
• High level perspective of sustainability related to
insurance risks
• Highlighting the nexus between traditional insurance
interests and the emerging nexus of energy, water and
food
• A series of three webinars that address concerns and
interests expressed by insurance professionals in the
MSO Survey in the Spring of 2013
– Hydraulic Fracking and Insurance
– Insurance Risks and Freshwater Quality
– Issues of Food Security and Insurance

7. Top Industry Risks Related to Greening, continued
4. How important are risks related to
water and energy quality and reliability?
Important + Critical = 48%
4
38
10
Important + Critical = 46%
12. How important is quantifying
economic impacts and financial value of
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"green" risks?
43
3
Column1
Column2
Column3
Important + Critical = 40%
7. How important are risk issues related to
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air pollution, smog and indoor air quality?
40
Important
0
Critical
Important + Critical = 39%
8. How important are risk issues related to
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wetlands preservation, biodiversity and
ecosystem conservation?
29
0
10
20
40
60

8. Top Industry Risks Related to Greening, continued
10. How important are Directors and
Officers insurance policy
implications/riders for green/sustainability
business practices?
Important + Critical = 36%
Important + Critical = 30%
3. How important are risks related to
green vehicles, accidents and repair?
11. How important is green marketing and
false advertising liabilities related to
"greenwashing"?
1. From your company's perspective, how
important is assessing risks related to
green buildings certifications and service
professionals performance claims (e.g.
architect design not able to achieve LEED
Gold certification level as originally
planned?)
Important + Critical = 26%
Important + Critical = 16%

9. Hydraulic Fracturing Sustainability Context
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World Economic Forum Business Risks
Energy, Water, Food Nexus
Climate change and Energy supplies
Increasing role of Natural Gas

10. Serious, strategic, preventable risks. World Economic Forum, 2013

11. Water-Food-Energy nexus
Water, food and energy are inexorably interconnected

12. Global energy consumption projections
http://www.eia.gov/forecasts/ieo/world.cfm

13. US Consumption of Natural Gas
In 2012, the U.S. consumed approximately 25.46 trillion cubic
feet (Tcf) of natural gas in seven consumer end-uses.
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Electric power generation: 9.14 Tcf (36%)
Industrial: 7.10 Tcf (28%)
Residential: 4.18 Tcf (16%)
Commercial: 2.90 Tcf (11%)
Lease and plant fuel consumption: 1.39 Tcf (5%)
Pipeline and distribution: 0.71 Tcf (3%)
Vehicle fuel: 0.03 Tcf (<1%)
Note: Total does not equal the sum of consumer end-uses due
to rounding.

14. US Natural Gas production
http://fuelfix.com/blog/2014/01/06/10-things-to-consider-about-the-marcellus-shale/

15. US Natural Gas production by shale source

16. Hydraulic Fracturing Basics
• Insertion of a mix of fluid chemistry—
including water—into an encased drill hole
under extreme pressure
• Result: hydraulic fracturing of deep rock layers
• Rather than a simple drill hole, the process
employs vertical drilling that then bends and
extends horizontally

17. http://usatoday30.usatoday.com/news/nation/story/2012-05-29/fracking-environment-gas/55845708/1

18. Environmental Protection Agency illustration of the water cycle of hydraulic fracturing

19. Geographic areas with shale gas
• Shale beds
http://energyblog.nationalgeographic.com/2011/08/11/shale-panel-better-greenhouse-gas-data-needed/

20. Mid-Atlantic geographic area with
underlying shale gas
Figure 1:
• The green area on this map marks
the geographic extent of the Utica
Shale. Included in this extent are two
laterally equivalent rock units: the
Antes Shale of central Pennsylvania
and Point Pleasant Formation of Ohio
and western Pennsylvania. These
rocks extend beneath several U.S.
states, part of Lake Erie, part of Lake
Ontario and part of Ontario, Canada.
If developed throughout this extent,
the Utica Shale gas play will be larger
than any natural gas field known
today.
• Inside the yellow line outline is the
higher Marcellus shale bed
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http://geology.com/articles/utica-shale/

21. Hydraulic Fracturing Risks
• Water
– Use in the drilling and production process
– Groundwater protection
– Wastewater management and disposal
• Air
– Methane Gas Emissions contributing to Climate Change
• Lands
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Earthquakes
Property rights and leases
Construction site impacts and environmental effects
Abandoned wells and environmental restoration

22. Competition for Water
This map, produced at www.ceres.org, shows that nearly half of all US shale gas and oil wells are being developed in
regions of the US with high to extremely high water stress. The research is based on well data from FracFocus.org.
http://scienceblogs.com/significantfigures/index.php/2013/06/27/the-growing-evidence-of-the-threat-of-frackingto-the-nations-groundwater/

23. Competition for Water
Fracturing a single Chesapeake Niobrara deep shale
well requires an average of 4 million gallons of water
How much is 4.3 million gallons?
• The 4.3 million gallons of water needed to drill and hydraulically
fracture a Niobrara Shale well is equivalent to the amount of water
consumed by:
• The City of Denver in approximately 26 minutes
• A 1,000 megawatt coal-fired power plant in approximately 10.5
hours
• Irrigating a typical Colorado golf course for 21.5 days
• Irrigating 6.5 acres of Wyoming wheat for a season
While these represent continuing consumption, the water used to produce oil
and natural gas from a deep shale well is a one-time use.

24. Water contamination
“Robert Jackson, a chemical engineer at Duke
University, found methane in 115 of 141
shallow, residential drinking-water wells.
The methane concentration in homes less
than one mile from a fracking well was six
times higher than the concentration in homes
farther away.
Isotopes and traces of ethane in the methane
indicated that the gas was not created by
microorganisms living in groundwater but by
heat and pressure thousands of feet down in
the Marcellus Shale, which is where
companies fracture rock to release gas that
rises up a well shaft.”
Scientific American, September 12, 2013
http://www.scientificamerican.com/article.cfm?id=groundwatercontamination-may-end-the-gas-fracking-boom

25. Earthquake
This map shows
the intensity of
shaking in the area
of a magnitude-3.9
earthquake that
struck near
Youngstown, Ohio,
on Dec. 31, 2011.
Research has
linked this
earthquake to the
underground
injection of
wastewater from
fracking.
http://www.nbcnews.com/science/fracking-practices-blame-ohio-earthquakes-8C11073601

26. Global greenhouse gas emissions from
natural gas production
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Leaks from natural-gas production and other human activities may be
releasing more of the powerful greenhouse gas methane into the atmosphere
than the Environmental Protection Agency thinks. (MIT Technology Review)
http://www.technologyreview.com/view/522021/greenhouse-emissions-from-natural-gas-production-and-agriculture-higherthan-expected/?utm_content=buffer1385d&utm_source=buffer&utm_medium=twitter&utm_campaign=Buffer
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Estimated CO2 emissions from energy sources
http://therivardreport.com/wp-content/uploads/2013/01/consumption_emissions_pie.jpeg

27. Who are the stakeholders?
• Energy related companies
– Energy companies
– Drilling companies
– Component manufacturers
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Farmers and ranchers
Homeowners and business owners
Municipalities
And more…

28. Industry Collaboration
The Center for Sustainable Shale Development
• CSSD is an independent 501(c)(3) nonprofit organization
whose mission is to support continuous improvement and
innovative practices through performance standards and
third-party certification. [It is focused ]on shale development
in the Appalachian Basin
• The Center provides a forum for a diverse group of
stakeholders to share expertise with the common objective of
developing solutions and serving as a center of excellence for
shale gas development.
https://www.sustainableshale.org/

29. Industry Collaboration
Center for Sustainable Shale Development Partners
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Chevron
Citizens for Pennsylvania’s Future (PennFuture)
Clean Air Task Force
CONSOL Energy
Environmental Defense Fund
EQT Corporation
Group Against Smog and Pollution (GASP)
Heinz Endowments
Pennsylvania Environmental Council
Shell
William Penn Foundation
• No insurance companies???

30. Precautionary Principle
“The precautionary
principle or precautionary
approach states that if an
action or policy has a
suspected risk of causing
harm to the public or to the
environment, in the
absence of scientific
consensus that the action or
policy is harmful,
the burden of proof that it
is not harmful falls on
those taking an action.”
http://en.wikipedia.org/wiki/Precautionary_principle

31. Q&A
5 minutes

32. Insurance Industry Implications
• Insurance industry precedents and awareness
• Insured policy and claims issues
• Insurance coverage issues

33. Industry Precedents
• Oil and Gas Drilling
• Underground Storage Tanks
• Hazardous waste sites and
Superfund
• Natural Resource
Damages
BP oil spill

34. Fracking Regulation Timeline
• 1996 - EPA concluded that the UIC did not apply to fracking.
• 1997 - The United States Court of Appeals for the Eleventh Circuit
overturned this EPA policy.
• 2003 - The EPA entered into a Memorandum of Agreement with the
three largest providers of hydraulic fracturing fluids.
• 2005 - Congress exempted hydraulic fracturing from the SDWA
under the Energy Policy Act.
• 2010 - The EPA began to reassess the effect of hydraulic fracturing
on drinking water.
• 2011 - The SEC entered into dialogue and began “asking” oil and gas
companies to provide detailed fracking information, including
chemicals.
• 2013 - The U.S. Environmental Protection Agency issued “significant
new use rules” under the Toxic Substances Control Act for 15
chemical substances.

35. Nationwide Underwriting Guidelines
• In July 2012, the Associated Press reported on an internal
memo from Nationwide Mutual Insurance Co. “detailing
underwriting guidelines” regarding hydraulic fracturing
(“fracking”).
• The Associate Press quoted the memo, which said:
After months of research and discussion, we have determined that the
exposures presented by hydraulic fracturing are too great to ignore. Risks
involved with hydraulic fracturing are now prohibited for General Liability,
Commercial Auto, Motor Truck Cargo, Auto Physical Damage and Public Auto
(insurance) coverage.
Nationwide confirmed the memo was genuine, but not intended for public
dissemination.

36. Nationwide Underwriting Guidelines
Following the Associated Press story, Nationwide Mutual Insurance
Company issued a press release regarding its coverage for claims
relating to damages from hydraulic fracturing (“fracking”).
• The Columbus, Ohio-based company notes that in “recent years, oil
and gas exploration has come to New York, Pennsylvania and Ohio.”
• Nationwide said it had not changed its policies or guidelines for
fracking coverage and was not cancelling policies, but that
“[f]racking-related losses have never been a covered loss under
personal or commercial lines policies.”
• Noting that risks like “natural gas and oil drilling are not part” of
their insurance contracts, Nationwide said its “personal and
commercial lines insurance policies were not designed to provide
coverage for any fracking-related risks.”

37. Energy Companies Insurance and Claims
• Insurance coverage is a paramount concern for those engaged in
or entering the fracking industry especially in light of the extensive
negative public reaction to same.
• The main issue is whether the policy written by the underwriter will
indemnify the insured if an unintended consequence results from
the intended act of fracking.
– If a plaintiff or a class of plaintiffs alleges that a local drinking water supply
has been contaminated as the result of fracking activity will an insurer
defend and indemnify the insured or will the insurer refuse to do so based
upon the pollution exclusion contained in most CGL policies.
• While insured will argue that the contamination is an unintended
consequence of their intentional activity it remains uncertain
whether the courts will agree.

38. Other Insured Stakeholder Claims
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Homeowners
Energy Industry Workers
Business to Business
Directors and Officers
First Responders
– Liability from fire, police and medical personnel who administer emergency
services following an incident.
• Government Suits
– i.e. Attorney General files “citizen suit” seeking injunctive relief and civil penalties for
surface water contamination

39. Homeowner/Residential Claims
Allegations:
• Initially allegations of contamination of surrounding land, ground and surface water
caused by faulty well-casings, improper drilling and/or the improper disposal of fracking
fluids.
• Plaintiffs tend to live in rural areas with private water wells that they claim are
being contaminated with fracking chemicals.
• Other plaintiffs have alleged that there are now high quantities of non- fluid
substances in their wells, and that the fracking activity caused methane to migrate
into their wells.
• Allegations fracking resulted in air pollution and excess noise.
• Allegations fracking given rise to earthquakes, resulting in property damage.
• Ground subsidence or sinkhole claims.
• Limestone formation may naturally dissolve by the circulation of water. Results in
formation of underground caverns and voids. Land collapses.
• Claims also from pipelines required to transport gas extracted from the fracked wells.

40. Homeowner/Residential Claims
Defendants
• Natural gas drilling and exploration company spearheading
fracking operations
• Contractors and subcontractors who participated in fracking
operations
• Design professionals who assisted in the development of the
fracking process
• Chemical companies who prepared components used in
fracking fluids
• Property owners who leased land for hydraulic fracturing
(particularly if these owners have “deep pockets)
• Manufacturers and installers of pipelines; and
• Energy companies that utilized these pipelines.

41. Homeowner/Residential Claims
Damages
• Common- law theories : Strict liability, negligence, private nuisance, physical trespass,
medical monitoring, emotional distress, “inconvenience and discomfort” and
negligence per se.
• Trespass alleges contaminated materials generated by fracking infiltrated the
plaintiff’s property
• Strict liability alleges drilling is an “ultra-hazardous” or “abnormally dangerous”
activity.
• Other theories of damage claimed including bodily injury, diminution in property
values, breach of quiet enjoyment, loss of business, increased risk of disease and
punitive damages.
• In addition to claims for monetary damages (including punitive damages and attorneys’
fees), plaintiffs frequently seek injunctions to stop drilling activity and mandate
remediation of alleged contamination.

42. Homeowner/Residential Claims
Defenses
• Question of whether hydraulic fracturing is an “abnormally dangerous” activity not
addressed by court.
• Courts have addressed more general question whether drilling and operation of natural
gas wells may be deemed “abnormally dangerous.”
• In Williams v. Amoco Production Co., Kansas Supreme Court reversed a jury verdict
that was based in part upon the determination that strict liability should be
imposed for such activity.
• Court accepted contention that “neither the operation of a gas well nor natural
gas as a substance presents a high degree of risk of harm.”
• The Court also noted that as the drilling and operation of the wells occurred on
“the largest known reservoir of natural gas in the world,” the “drilling and
operation of natural gas wells in this area is a common, accepted and natural use
of the land.”

43. Business to Business Claims
• Power company filed suit against engineering firm who
constructed fracking fluid treatment plant.
– Metal piping and containers corroded forcing six month plant closure.
– Engineering firm suggested treatment technologies that did not work.
– Causes of action for breach of contract, negligence and negligent
misrepresentation.

44. Directors & Officers Liability Claims
• Not unlike the Deepwater Horizon/BP spill, where derivative
actions were brought against the directors and officers (D&O)
• Cabot Oil and Gas, a $4.2 billion corporation involved in
hydrofracking in Pennsylvania has already been named in
several groundwater contamination lawsuits, could potentially
face shareholder derivative lawsuits as a result of those
litigations and related losses.

45. Directors & Officers Liability Claims
• The SEC’s interest in fracking was presented as ensuring that
investors were being told about risks a company may face
related to its operations, such as potential lawsuits,
compliance costs, environmental liabilities, and other
uncertainties, including production estimates. Oil and gas
companies were “asked” to supply information confidentially
to the SEC. It is uncertain what further steps the agency may
take.

46. D&O Liability Claims
Stranded Assets?
• Listed companies face a carbon budget deficit
• Pro-rata allocation of the global carbon budget, this would amount
to around 125 - 275GtCO2, or 20 - 40% of the 762GtCO2 currently
booked as reserves.
• The scale of this carbon budget deficit poses a major risk for
investors.
• They need to understand that 60 - 80% of coal, oil and gas
reserves of listed firms are unburnable.
Source:
Carbon Tracker and Grantham Research Institute on Climate Change and the
Environment, LSE, “Unburnable Carbon 2013: Wasted capital and stranded assets”

47. Potential Fracking Claims
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Environmental/pollution claims: Any bodily injury or property damage caused
as a result of hydrofracking-related pollution or groundwater contamination.
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Comprehensive general liability claims: Coverage for liability resulting from
bodily injury or property damage that takes place during the policy period and
is caused by an occurrence. Unless specifically excluded, CGL policies usually
also provide coverage for losses associated with products, completed
operations, premises and operations, and contractors. Moreover, those
entities involved in the storage, treatment, transportation and disposal of
hydrofracking fluids face potential liability under their CGL policies (as well as
other possible sources of coverage).
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Operators’ extra expense claims: Hydrofracking wells have occasionally
suffered blowouts as a result of the large amounts and highly pressurized
water, “proppants” (sand or ceramic beads) and chemicals that are injected
into underground shale formations. Should a blowout occur, many of the
energy and drilling companies could look to this type of insurance to cover
their losses.

48. First and Third Party Coverage Issues
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Property Damage
Pollution Exclusions
Triggers
Number of Occurrences
Causation / Concurrent Causation
Collapse Coverage
Earth movement exclusions

49. Pollution Exclusions
• General liability policies that were issued between the early
1970s and mid-1980s usually include the “qualified pollution
exclusion.”
• This exclusion bars coverage for pollution related injuries to
persons and property.
• The clause appears almost identically in all insurance policies.
This insurance does not apply…to bodily injury or property damage arising out of the
discharge, dispersal, release or escape of ... toxic chemicals, liquids or gases, waste
materials, or other irritants, contaminants or pollutants into or upon land, the
atmosphere or any water course or body of water; but this exclusion does not apply if
such discharge, dispersal, release or escape is sudden and accidental.

50. Pollution Exclusions
• Some courts have interpreted the exception to
include coverage for injuries that were
“sudden and accidental”
• Other courts have interpreted it as barring
coverage for injuries that were “expected or
intended.”
• Under either interpretation, the insurer will
submit documents that consider the potential
risks of the fracking technique as discussed in
journals, trade publications, and in regulatory
or legislative settings.

51. Warren Drilling Co. v. ACE American Ins. Co.
• Case involves an insurer’s (ACE American Insurance) refusal to
extend coverage to its insured (Warren Drilling Company) for claims
arising out of Warren’s fracking operations.
• In 2008, a homeowner claimed water was contaminated by
pollutants from Warren’s fracking.
• Warren eventually settled its case with the homeowner but then
sought to recover its legal fees from ACE for its refusal to defend
and/or indemnify.
• For Warren to obtain a favorable ruling obligating ACE to indemnify
it and to pay its legal fees, it had to show:
(1) The fracking resulted in an unexpected and unintended discharge of pollutants; and
(2) The discharge of pollutants was abrupt and instantaneous.

52. Pollution Exclusions
• Courts faced with coverage issues arising out of fracking
operations may base their decisions on whether the claims
asserted are barred by the pollution exclusion clause
contained in the comprehensive general liability (CGL) policies
issued by insurers.
• Many involved in the fracking industry are anxiously awaiting
the court’s decision in Warren as guidance regarding the
insured’s right to coverage for fracking claims.
• As for now, each individual needs to understand the specific
wordings in their own policy in order to understand what to
reasonably expect from their insurer.

53. Triggers
Establishing the trigger rule applicable to a first- party claim can
significantly impact claim valuations.
• Generally property insurance is not intended to indemnify for
loss that is ongoing and known to the insured.
• Courts impose first-party property insurance coverage liability
for actual, but undisclosed, loss or damage that occurred over
a prolonged time span, regardless of when that loss or
damage became manifest.
• The manifestation rule affords insurers a strongly supportable
argument to avoid liability when a latent, gradual loss first
manifests prior to (or after) an insurer’s effective policy period.

54. Duty to Defend
• An insurer’s duty to defend is broader than its duty to
indemnify.
• The insurer’s duty to defend arises when a complaint against
the insured gives rise to any potential liability covered by the
terms of the policy.
• The duty to defend exists even if the alleged claims are false
or groundless.
• Additionally, the insured does not need to provide concrete
evidence that the injuries were sudden and accidental;
instead, the insured need only provide evidence of a
reasonable possibility that the injuries were sudden and
accidental.

55. Subrogation Recovery Opportunities
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Fracking has the potential to generate a great deal of troublesome coverage
and litigation issues!
That said, it provides insureds with subrogation and recovery opportunities.
Opportunities may exist when a carrier reimburses its insured for covered
losses, that are not otherwise excluded.
Subrogation targets could include natural resource companies, contractors
engaged in the drilling process and arguably complicit neighboring property
owners where the operations are being engaged.
Carriers should take appropriate steps from the outset to recognize
contribution or indemnity claims against other companies or individuals who
are arguably more responsible.
Insurers facing claims against their property owner insureds should consider
claims against those more directly involved with the drilling process on and
around the property involved.
Insurers met with claims against insureds that oversee the drilling activity
must consider claims against their contractors to the extent clearly
irresponsible activities may have given rise to such claims.

56. Subrogation Recovery Hurdles/Risks
• Factual Support: Plaintiffs have an uphill battle demonstrating
a nexus between a particular drilling activity and alleged
damages.
– If a carrier indemnifies an insured for a covered loss, it then stands in
the shoes of the insured and must eventually demonstrate in any
subrogation effort that the reimbursed damages were proximately
caused by the negligent conduct of the subrogation targets identified.
• Contractual Limitations: Possibility exists contract contains
risk allocation provisions that will limit or eliminate recovery
efforts.
– Hold harmless clauses.
– Arbitration clauses.

57. Conclusion
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Claims examples from participants
Actions going forward
Follow-up
Evaluation survey via email

58. Upcoming MSO Webinars
by Transitioning to Green
Insurance risks and fresh water quality
Issues of food security and insurance
Thursday, January 30, 2014
11:50 to 1:30 pm ET
Thursday, February 13, 2014
11:50 to 1:30 pm ET
The risk to water supply and quality
is increasing along with the rapid
growth in both public and private
demand for its use. Severe
weather events such as storms and
flooding combined with aging
infrastructure, faulty handling of
waste, and inadequate system
design among other factors
contribute to increased liability
exposure for insurers. In this
webinar we will use case examples
to look at some of the critical issues
that insurers are facing as risks to
water quality increase.
In between the obvious risks from
crop failures and livestock
epidemics, and food contamination
at the retail level are food security
issues and risks that run through
the entire food supply chain.
Because there are so many
interconnected threads in food
security, it is important for insurers
to have a grasp of the entire
picture. In this webinar we will give
an overview of food security and
safety that includes operational,
regulatory and environmental
liabilities. We will use actual cases
as examples.

59. Thank you for your participation