ON SHAKY GROUND: COMMERCIAL GENERAL LIABILITY COVERAGE FOR INJECTION-INDUCED SEISMICITY
| Jurisdiction | United States |
University of Denver Sturm College of Law
J.D. Candidate 2021
Denver, Colorado
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Synopsis
I. Introduction
II. Background
A. Scientific Recognition of Induced Seismicity
B. Rise of Induced Seismicity Litigation
III. Commercial General Liability Coverage in Claims for Induced Seismicity
A. Introduction
B. Injection-Induced Seismicity Coverage Under a Commercial General Liability Policy
1. Coverage for the Damages Sought
2. Damages Caused by an Occurrence
C. Elimination of Coverage for Injection-Induced Seismicity Under a Pollution Exclusion
1. Release of a Pollutant
2. Damages Caused by a Polluting Event
D. Elimination of Coverage for Injection-Induced Seismicity Under an Earth Movement Exclusion
IV. Conclusion
I. Introduction*
Managing increased volumes of produced water has posed a costly challenge to domestic oil producers. Due to high treatment costs and concerns with surface reuse, producers have largely utilized injection disposal to manage booming volumes of produced water. In recent years, however, the U.S. Geological Survey (USGS) has linked injection disposal to induced seismicity. As litigation concerning induced seismicity continues to rise, some insurers have disclaimed coverage for the seismic damages allegedly caused by injection disposal operations.
This article examines the availability of seismic coverage in commercial general liability (CGL) policies. Part II provides background
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on the increased prevalence of induced seismicity and scientific recognition of causation. Additionally, Part II summarizes underlying litigation shaping the future of seismic coverage in CGL policies. Part III examines CGL policy terms, pollution exclusions, and earth movement exclusions that frequently dictate whether a CGL policy entails seismic coverage. Finally, Part IV concludes by summarizing the impact of litigation on seismic coverage and the policy provisions most likely to impact the availability of coverage.
II. Background
A. Scientific Recognition of Induced Seismicity
Hydrocarbon reservoirs generally contain a mix of hydrocarbons and water, both of which are produced in an effort to extract the hydrocarbons. Between 2007 and 2019, U.S. oil production increased over 240%,1 resulting in the associated production of unprecedented volumes of water. Furthermore, the amount of water produced per barrel of crude oil is likely to continue climbing as the fields mature and require more stimulation. Although the average national water-to-oil ratio is only sporadically reported, the trend is nonetheless apparent. In 2007, the water-to-oil ratio for domestic onshore production was 7.6:1.2 By 2012, a mere five years later, the water-to-oil ratio had climbed to 9.2:1, resulting in 21.2 billion barrels of produced water.3 Studies estimate that the water-to-oil ratio will reach 12:1 by 2025.4
Managing increased volumes of produced water poses a costly challenge to domestic oil producers. The water may contain ionized salts and radioactive materials naturally present in the reservoir5 and chemicals added to the reservoir in hydraulic fracturing and other well treatments.6 Consequently, treating produced water for surface use is typically cost intensive, yet does little to quell concerns regarding unknown health and
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environmental risks.7 Because of these challenges, domestic oil producers dispose of 91% of onshore produced water through injection into Class II Underground Injection Control (UIC) wells.8
Although numerous subsurface activities may trigger seismicity, the USGS "consider[s] induced seismicity to be primarily triggered by the disposal of [produced water] into deep wells."9 Such injection-induced seismicity occurs when the earth's crust abruptly shifts due to increased pore pressure or changed stress on a fault.10 For seismicity to result from increased pore pressure, the injection pressure must directly communicate with the fault.11 Once in communication, the injectate increases the pore pressure along the fault, separating the rock faces and decreasing frictional forces that stabilize the fault.12 Seismicity results when the tectonic forces urging the rock faces to shift along the fault exceed these decreased stabilizing forces.13
Unlike seismicity due to increased pore pressure, seismicity due to changed stress does not require that the injection pressure directly communicate with the fault.14 Rather, the injectate causes the surrounding rock matrix to expand, which in turn exerts force on the fault.15 Seismicity results when the changed stress regime urges the rock faces to shift along the fault.16 Although scientists recognize these two mechanisms, injection-
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induced seismicity is nonetheless difficult to predict because of limited understanding of subsurface faults and forces.17
In 2014, the USGS held workshops to incorporate induced seismicity into the National Seismic Hazard Model.18 The subsequent report issued by the USGS documents 17 zones of induced seismicity across Colorado, New Mexico, Arkansas, Oklahoma, Kansas, Texas, Ohio, Alabama, and Florida.19 Of these states, Oklahoma has suffered the most significant increase in the number of induced seismic events.20 Prior to 2008, the state observed fewer than two earthquakes per year exceeding a magnitude of 3.0.21 By 2015, Oklahoma became the most seismically active state in the country with more than two earthquakes per day exceeding a magnitude of 3.0.22
B. Rise of Induced Seismicity Litigation
While the majority of induced seismicity litigation concerns property damage, a minority of plaintiffs have also claimed emotional distress and two plaintiffs have brought claims for personal injury. Because of the historical lack of seismicity in many impacted areas, induced seismicity has caused substantial property damage to structures not designed to withstand earthquakes. As a result, numerous Oklahoma and Arkansas plaintiffs have filed lawsuits against injection disposal operators for property damage arising from the increased seismic activity.23 A minority
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of these plaintiffs have also asserted damages for emotional distress. Because claims for emotional distress have either settled or are currently pending, the outcome of these claims is uncertain.24 In September 2017, an operator and an Oklahoma plaintiff settled the plaintiff's personal injury claim for injuries sustained during an earthquake.25 Subsequently, a second Oklahoma plaintiff filed suit after falling during an earthquake and sustaining "nerve damage . . . from which she is now permanently disabled."26
Although future litigation will certainly affect insurance markets, the degree of its potential impact is uncertain given the present scarcity of litigation on the merits. Nevertheless, a few trends are noteworthy. Plaintiffs alleging seismic damages most often proceed under theories of strict liability, negligence, nuisance, and trespass. While courts have not applied strict liability to injection disposal, some states have sought to legislatively mandate its application.27
Even if strict liability remains unavailable, a plaintiff proceeding under a theory of negligence still bears the burden of establishing duty, breach, causation, and damages. As induced seismicity has garnered greater scientific backing, plaintiffs have become increasingly foreseeable. As a result, operators may be less able to effectively deny the existence of a duty. Furthermore, increased scientific backing may allow the plaintiff to more readily establish causation despite the (1) distance between the at-fault injection well and the earthquake's epicenter, (2) delay between the time of injection and the resulting seismicity, and (3) difficulty of identifying the at-fault injection well if multiple wells are in close proximity.
Finally, courts have not decided the impact of an injection permit on an operator's trespass liability within the context of induced seismicity. In most claims for subsurface trespass, courts have declared that "a permit is
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not a get out of tort free card."28 A minority of jurisdictions, however, have found a government issued permit to limit the operator's trespass liability.29 Nevertheless, given the rapidly evolving science and lack of precedent, plaintiffs alleging seismic damages will likely continue to choose settlement over the uncertainty of litigation.
III. Commercial General Liability Coverage in Claims for Induced Seismicity
A. Introduction
Claims for induced seismicity may implicate numerous first-party and third-party insurance policies. While first-party insurance covers adversely affected individuals and their property, third-party insurance covers an individual's or company's liability to others.30 CGL policies protect businesses from third-party liability for bodily injury and property damage "arising out of premises, operations, products, and completed operations."31 Whether CGL coverage is available for seismic damages largely depends upon the terms of the policy, applicable pollution exclusions, and applicable earth movement exclusions. In litigation, the insured must first prove that the CGL policy provides coverage for the alleged damages.32 If the insured is successful, then the burden shifts to the insurer to prove that an exclusion eliminates such coverage.33 Because courts interpret ambiguous coverage terms in the insured's favor, exclusions eliminating coverage "must employ language that clearly and distinctively reveals that which it limits."34
Although the insured has the benefit of the court's interpretation of ambiguous coverage terms, the insurer has the benefit of selecting the
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venue for litigation. In Certain Underwriters...
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