Fracking Debate Moves into Insurance Realm

The gloves are off in a lawsuit in the Southern District of New York where an insurer and an oil and gas company disagree about whether the company’s insurance policy covers claims that fracking causes earthquakes. On June 27, 2016, insurer Lloyd’s sued New Dominion, arguing that the Lloyd’s pollution liability policies do not provide coverage because fracking is not a “pollution condition.” (See: Complaint for Declaratory Relief.) The Lloyd’s lawsuit relates to five other Oklahoma lawsuits addressing the same issue. (See: Complaints in Oklahoma lawsuits.)

With this lawsuit, the fracking debate moves into a new arena: insurance coverage disputes.

The Earthquake Lawsuits

The underlying Oklahoma cases pit Oklahoma residents and an environmental group against oil and gas companies. These plaintiffs argue that the companies caused significant earthquakes across the state, including in central Oklahoma, by injecting fracking waste water into disposal wells. Some of the lawsuits cite scientific studies or journals, including United States Geological Survey (USGS) studies and Oklahoma Geological Survey presentations, to argue that (1) there is a correlation between increased fracking and increased earthquakes, and (2) waste water injection induces large earthquakes.

The Insurance Action

Cross country to New York:  The parties to the New York insurance dispute disagree about whether the fracking claims in the Earthquake Lawsuits are covered “pollution conditions” in the Lloyd’s insurance policies. The policies specifically require Lloyd’s to defend and indemnify New Dominion for lawsuits that seek damages for injury or property damage that “result from pollution conditions” at New Dominion’s fracking sites. The policies define “pollution condition” as “the discharge, dispersal, seepage, migration, release or escape of pollutants” and “pollutant” as “any solid, liquid, gaseous or thermal irritant or contaminant.”

Lloyd’s argues the policies do not cover the Earthquake Lawsuits. It argues it doesn’t have insurance obligations to New Dominion because the waste water is not a “pollutant” under the policies, and the lawsuits do not claim there was property damage that “resulted” from a “pollution condition.” New Dominion disagrees, and argued in a recent motion to dismiss that there is insurance coverage because the Earthquake Lawsuits claim a “pollutant”—fracking waste water—caused the earthquakes. So far, the court has not ruled on whether the insurance policies cover fracking-induced earthquakes.

The Science

There is an ongoing debate about whether fracking activities cause significant earthquakes that endanger the public. In February 2015, an EPA workgroup released a report on seismicity and the injection of waste water from oil and gas activities into disposal wells. The study was designed to help EPA program managers address whether disposal wells could impact waste containment and affect drinking water. Although the study did not examine the extent to which oil and gas production causes earthquakes, it acknowledged that disposal wells have the potential to induce earthquakes and briefly noted there was a “low likelihood” fracking could cause significant earthquakes. It then identified approaches to reduce the likelihood of significant seismic events caused by disposal wells.

Similarly, the USGS has recognized that waste water disposal wells for oil and gas operations can cause earthquakes, and is currently conducting studies that evaluate the hazards of human-induced earthquakes.

Those impacted by fracking will need to wait for answers to these scientific and legal questions. Insurers will be waiting too, as they face lawsuits claiming that fracking activities have caused earthquakes.

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Made in the USA (For the Most Part)

Newspaper headlines report a new economic trend—manufacturing is returning to the United States. The country’s industrial production grew by 0.7 percent in July, its biggest jump since November 2014. This number represents everything made by factories, mines, and utilities. Before companies start slapping “Made in the USA” labels on their wares, they need to make sure they are familiar with the legal requirements to do so.

The Federal Trade Commission (the FTC) monitors the marketplace and aims to keep businesses from misleading consumers. Within the FTC’s jurisdiction is regulating “Made in the USA” claims.

If a product is labeled as “Made in the USA,” without any qualification, it must be “all or virtually all” made in the United States. “[A]ll significant parts and processing that go into the product must be of U.S. origin. That is, the product should contain no – or negligible – foreign content.” The FTC contemplates the site of final assembly or processing, the proportion of manufacturing costs paid to the U.S., and how detached the foreign material is from the finished product. For many businesses, this standard can be hard, if not impossible, to meet.

Since January 2015, the FTC has issued 46 letters to companies asserting misleading U.S. origin claims on a wide range of products, such as cookware, snow blowers, auto parts and pet products.

For example, the FTC recently determined that Shinola—a Detroit-based manufacturer of high-end watches, bicycles, and leather goods—did not meet it. Shinola advertises its products with the slogans “Built in the USA” and “Built in Detroit.” But in June of this year, the FTC called this labeling misleading because “100 percent of the cost of materials used to make certain watches . . . [and] more than 70 percent of the cost of the materials used to make certain belts” goes to imported materials. For example, Shinola’s watches incorporate Swiss-made timekeeping components.

Shinola’s founder had a good reason for why his company incorporated foreign parts:  many of the components are unavailable in the U.S. The components are imported to Detroit where Shinola’s 400 employees assemble watches in the company’s factory. The FTC, however, applied its “net impression” analysis and determined that Shinola’s slogans contradict reality. Shinola’s advertisements will now read “Built in Detroit using Swiss and Imported Parts.”

In light of the FTC’s stance on U.S. origin claims, companies should follow FTC decisions and exercise caution when saying “Made in the USA.” There is no bright line rule for whether a product is “all or virtually all” made in the USA. Companies should consider how their products fit within the FTC’s framework and only then decide whether their merchandise has, according to the FTC, been “Made in the USA.”

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CPSC Chairman Attempts To Bridge The Divide, Signaling That Higher CPSC Civil Penalties Are Here To Stay

Airing dirty laundry. The CPSC has made public its internal dispute over civil penalties. On July 20, 2016, Consumer Product Safety Commission Chairman Elliot Kaye and Commissioner Robert Adler issued a joint statement addressing the diverging views among the CPSC commissioners over the agency’s recent settlements. The joint statement responded to other commissioners who had criticized CPSC’s higher civil penalty settlements.

Effective on August 14, 2009, the Consumer Product Safety Improvement Act (15 U.S.C. § 2069) increased the maximum amount of civil penalties CPSC could seek for a violation of the Consumer Product Safety Act (15 U.S.C. §§ 2064-2068) from $1.825 million to $15 million. The CPSC has taken advantage of its new authority: in the last two years, CPSC civil penalties have increased as much as seven times.

Most recently, in May and June 2016, the CPSC approved two significant civil penalty settlements, each for over $3 million.

The CPSC commissioners did not unanimously approve these settlements. Dissenting Commissioner Joseph Mohorovic argued that no civil penalty should have been imposed in one case and that the other penalty was too high. Specifically, he criticized the agency’s lack of a formula to compare prior settlement amounts.

On the other side, Commissioner Marietta Robinson issued a statement supporting the settlements. She stated that she “believe[s] the facts in each of these cases fully support the penalty amount agreed upon by the parties.” She argued as well that it would be nearly impossible to create a formula or matrix to compare CPSC cases because they are highly fact-specific and widely vary. Commissioner Robinson also argued that a formula would create bad incentives, encouraging companies to do a risk-reward analysis of whether they could profit by delaying a report.

Then Chairman Kaye and Commissioner Adler entered the debate. Their strongly worded joint statement defended the agency’s approach to imposing civil penalties. They first noted that while CPSC civil penalty amounts have increased, the number of penalties imposed are “few and far between”—roughly 2% of 15(b) failure-to-timely-notify-of-safety-hazard cases over the last 10 years have involved civil penalties.

The Chairman and Commissioner also addressed each of the complaints lodged against the agency by dissenting commissioners and manufacturers. The joint statement argued that calls for greater transparency “ring hollow” because these critics include manufacturers who invoke confidentiality of the settlement agreements under the CPSA. The Chairman also noted that the CPSC considered and rejected adopting a formula approach to help make civil penalty amounts more transparent and predictable in 2006, 2009 and 2010, and that the same manufacturers who then disapproved a formulaic approach now call for use of a formula as a way to suppress higher civil penalties.

The joint statement concludes with an olive branch, saying that the agency hopes to continue the dialogue on civil penalties, “as long as it is an honest one.”

While it remains to be seen if the joint statement will help bridge the divide between the CPSC commissioners, one thing is clear: manufacturers should expect higher civil penalty amounts to continue. While the CPSC “stand[s] willing to consider thoughtful proposals from our stakeholders,” the agency is “unwilling to agree to any methodology that will simply depress civil penalty settlement amounts.”  

In the meantime, Chairman Kaye’s term expires in 2020, and the nomination of the next CPSC chairman will be in the hands of a new president.

The complete joint statement can be read here.

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Tesla Crash: Don’t Slam the Brakes on Autopilot

After 130 million miles driven without a fatality, Tesla Autopilot’s perfect track record ended tragically on May 7 with the first fatal crash of a car using Autopilot. Given the infrequency of fatal crashes involving autonomous vehicles, why are commentators suggesting that the auto industry “put the brakes” on this technology?

That’s unclear, especially with the facts here. Autopilot has a better safety record than human drivers. Overall, drivers in the United States cause one fatality roughly every 93 million miles. This was Autopilot’s first fatal accident in over 130 million miles driven.

Moreover, the May 7 accident involved two human drivers. The crash was a relatively standard side impact (T-bone) collision. A tractor-trailer travelling westbound turned left, crossing the eastbound lanes to turn onto a side street. It passed in front of the eastbound Tesla driven by the victim, which struck the trailer. Based on the limited available data, it appears that both human drivers were at fault under Florida law: the tractor-trailer driver for failing to yield to the oncoming Tesla and the Tesla driver for failing to spot the trailer or avoid it.

In fact, the NHTSA may classify this crash as one caused by driver error, the cause of 94 percent of all accidents. Under the NHTSA system for classifying crashes, the “critical reason” for a crash is “the last event in the crash causal chain.”

In this crash’s causal chain, there were three distinct errors. First, the tractor-trailer driver made an illegal left turn in front of oncoming traffic. Second, the Tesla Autopilot didn’t detect the collision risk posed by the turning truck. Finally, the Tesla driver didn’t intervene to prevent the accident. Because it was the last event in the causal chain, this final human error would be the “critical reason” for the accident. Although Autopilot failed to detect the risk and properly intervene, crashes are almost always caused by a chain of failures, and human errors were significant causes of this one. A related NTSB investigation has yet to assign blame for the crash, but the facts outlined in its July 26 preliminary report agree with this chain of events.

The presence of human error here also refutes claims that autonomous vehicle technology shouldn’t be used because it “isn’t safe yet.” In product liability disputes, courts frequently use a risk-utility test to determine whether a product’s design or warning is defective. Under this test, a court would likely consider whether the economic costs of autonomous vehicle technology exceed the cost of redesigning the product plus any loss of use from the redesigned product.

The question, therefore, is not whether autonomous cars are risk-free. Nothing is. But autonomous car technology shows enormous utility and not an inordinate amount of risk.

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