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Denton’s Fracking Ban: Will “Civil Authority” Insurance Coverage Apply To Lessees’ Loss Of Natural Gas Revenues?

On November 4, 2014, voters in Denton made that city the first in Texas to ban hydraulic fracturing within city limits.?á Within a day, lawsuits were filed by the Texas General Land Office and the Texas Oil and Gas Association, and state lawmakers and regulators voiced strong opposition to the ballot measure.?á Whatever the outcome of these legal challenges, lessees holding interests in the more than 270 natural gas wells affected by the ban potentially stand to lose significant revenues in the interim while litigation remains pending.

For energy companies, whose operations may be curtailed by Denton?ÇÖs ?Ç£Fracking Ban Initiative,?Ç¥ one alternative source of relief may be found in insurance.?á Most commercial property policies contain some form of ?Ç£civil authority?Ç¥ coverage, which generally insures against the loss of business income sustained by an insured when, as a result of covered physical loss or damage to other property, access to the insured?ÇÖs real or personal property is prohibited by order of civil or military authority.

Historically, ?Ç£civil authority?Ç¥ coverage has been invoked when the damage that occurs or may be anticipated from a hurricane, terrorism or other accidental occurrence causes authorities to restrict access to a defined location, thereby affecting business operations within the restricted area.?á Depending on the terms of the applicable insurance policy, Denton?ÇÖs ?Ç£Fracking Ban Initiative?Ç¥ may trigger ?Ç£civil authority?Ç¥ coverage for affected lessees.

The terms of the Fracking Ban Initiative expressly cite as justification certain ?Ç£findings?Ç¥ relating to damage to the City?ÇÖs environment and infrastructure allegedly caused by natural gas drilling and production operations, including ?Ç£road repair issues due to the use of heavy equipment?Ç¥; ?Ç£ground and surface water contamination, [and] air pollution.?Ç¥?á Under some commercial property policies, such damage may qualify as covered or non-excluded property damage.

Under Texas law, a lessee?ÇÖs interest in minerals granted under a typical oil and gas lease is an ownership interest in real property.?á If, as suggested by the terms of the ordinance itself, insureds are prohibited from engaging in hydraulic fracturing to access natural gas within the Barnett Shale overlapping the city limits, because of non-excluded damage to water, land or infrastructure, Denton?ÇÖs ?Ç£fracking?Ç¥ ban may trigger the ?Ç£civil authority?Ç¥ coverage in the commercial property policies of affected lessees.

Each policy?ÇÖs terms are unique.?á Some ?Ç£civil authority?Ç¥ coverage is subject to specific sublimits or other conditions.?á But given the potential loss of revenue to operators with leases affected by the ban, energy companies should examine their policies carefully to determine if ?Ç£civil authority?Ç¥ coverage is available to offset revenue losses resulting from this ballot initiative.

Micah Skidmore represents policyholders in significant insurance coverage disputes involving a variety of claims from commercial general liability, directors and officers liability, employment practices liability, and errors and omissions liability to first-party property claims, trade credit, and crime and fidelity claims. He may be reached at micah.skidmore@haynesboone.com or 214.651.5654. Add Micah to your LinkedIn network.

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November 2014