Hmm. Reminds me when I got my Springer pup - she's passed now after 15 great years - I used cedar chips to cover the side yard kennel. Before I brought in the cedar though, I rolled out and staked down wire link fencing on the ground, then covered it in 6" of cedar.
Now I never saw that dog dig, and she had the run of the whole yard when she was older. Some of those Springers are notorius diggers. I wonder if she knew the earth was fenced 6" down? <img src="/ubbthreads/images/graemlins/smile.gif" alt="" />
To your concern though, the dog never had ill health and the cedar was always nice to work with, even when wet. And I did use it in her house for a while, but always seemed a problem keeping the chips in the house.