Fracking, Earthquakes and Civil Authority

In last week’s post, we discussed the rapid development of the hydraulic fracturing (“fracking”) industry in the United States, and some of the innate risks presented by those operations. In particular, the post focused on a recent study that has found a causal link between wastewater disposal/injection, a by-product of fracking, and earthquakes occurring around high-fracking areas in the United States. Initially, it was speculated that earthquakes were caused by fracking itself, a process whereby millions of gallons of water, sand and chemicals are injected underground to break apart rocks to release gas.  However, it has now been proven that most of these earthquakes are caused by the underground injection of disposal water (see original post for more detail).

The popularity of fracking as an extraction method has extended beyond the United States, and has been readily adopted in countries like Canada, Argentina and Australia with huge shale oil and gas potential. In Canada, the provinces of British Columbia, Alberta and Saskatchewan have the highest concentrations of (fracking) wells. A group of scientists from the University of Calgary has recently released a study evaluating whether there is a causal connection between fracking in western Canada, and an increase in seismic activity around the well-sites. The study revealed that unlike the United States, where earthquakes are induced by the subsoil disposal of wastewater, a series of earthquakes in Alberta within the last five years has been attributed to fracking, or hydraulic fracturing, in which water, chemicals and sand are injected at high pressure into a well drilled in a shale formation to break up the rock and release oil and gas.

According to the study, the quakes were induced in two ways: by increases in pressure as the fracking occurred, and, for a time after the process was completed, by pressure changes brought on by the lingering presence of fracking fluid. To the east in the fault zone, the earthquakes occurred during the fracking process itself, which continued for up to a month after the fracking process was completed. To the west, most earthquakes occurred intermittently over several months after the fracking ended. While Alberta and other affected areas do not have the infrastructural density that Oklahoma has, several major pipelines and operations are found within the proximity of Fox Creek, where these earthquakes have been occurring.

Last week we discussed earthquake coverage and how it may respond to losses caused by human-induced earthquakes. Another, often-forgotten, coverage that may become relevant in the next few years as the risk of earthquakes increases in these areas is Civil Authority coverage. Civil authority provisions are usually written as additional coverage provisions, not exclusions, and provide coverage for lost business income due to an action taken by a civil authority. So, how do civil authority clauses and earthquakes interact? Generally, civil authority claims arise out of the loss of business income due to mandatory curfews, evacuations, or restrictions of access (e.g. Hurricane Katrina, 9/11, etc.).

Following the occurrence of a MW 3.9 earthquake on 23 January 2015, the Alberta Energy Regulator, introduced new regulations for the notifications and monitoring of earthquakes around well areas.  Included among them, was the implementation of a “traffic light protocol” that requires the immediate shutdown of hydraulic fracturing operations following an earthquake of local magnitude 4.0 or greater within 5km of an affected well. While these shutdowns tend to be temporary, an increase in occurrences or severity may result in a long period of operational shutdown. Failure to comply with these procedures may result in an enforcement action which could include the prolonged shutdown of operations.

Other jurisdictions have implemented similar protocols, and some U S. states, and countries have banned this type of operation altogether.

While it is hard to predict the likelihood of a catastrophic event resulting from a fracking-induced earthquake, several of the areas affected by this peril are pipeline and oil/gas hubs. A large enough earthquake or series of earthquakes could result in a prolonged shutdown of operations by order of the relevant regulatory body, thus causing severe business interruption losses to well and pipeline operators. Traditional civil authority provisions read: we will pay for the actual loss of Business Income you sustain and necessary Extra Expense caused by action of civil authority that prohibits access to the described premises due to direct physical loss of or damage to property, other than at the described premises, caused by or resulting from any Covered Cause of Loss. Most often, these clauses are also subject to the BI waiting period, and only offer coverage for limited periods of time.

For coverage under Civil Authority provisions, an insured is usually required to demonstrate that the physical damage to its property is the result of a peril covered under the policy. And, as discussed in our last post, insureds will first have to demonstrate that earthquake is a covered peril under the policy, and the denial of access or “action” must be the proximate cause of a loss of business income.

As the risk of fracking-induced earthquakes increases, regulatory authorities may take a harder stance against widespread fracking in the future. In the short-term, a significant enough earthquake may result in the interruption of operations of wells and pipelines surrounding the quake-affected areas. While most of the coverage issues will have to be sorted out on a case-by-case basis, insurers should be aware of this new, or at least unconventional, risk that may affect their insureds’ business operations.

Posted by Hernán Cipriotti

Fracking, Earthquakes and Insurance. What the Frack is Going on?

The advances and proliferation of hydraulic fracturing (“fracking”) in oil and gas exploration and extraction have provided the United States with tremendous benefits with respect to previously unaccessible fossil fuels. Those benefits, however, come with a price. Among other complaints about the negative impacts of fracking, it now seems certain that the wastewater injection process associated with fracking can and will cause earthquakes of varying degrees of severity. In a study published in the September 2016 issue of Science, Stanford University researchers demonstrate a causal connection between the fracking wastewater disposal/injection process and a series of earthquakes in east Texas, including the largest earthquake ever recorded in that region. A study published earlier this year found that fracking itself was inducing earthquake activity. The authors of the study concluded that the danger of earthquakes caused by “hydraulic fracturing has received less attention than that from wastewater disposal, but it is clearly of both regional and global importance,” and that “the likelihood of damaging earthquakes and their potential consequences needs to be carefully assessed.”

While the United States Geological Survey has been traditionally more reluctant to confirm that fracking and wastewater injection are responsible for the rash of seismic activity in and around the areas where fracking is taking place, they have at least officially acknowledged that at least some of the observed earthquakes have been caused by fracking wastewater injection. In a study released in April 2015, the USGS identified 17 areas within Alabama, Arkansas, Colorado, Kansas, New Mexico, Ohio, Oklahoma, and Texas, as showing sharp increases in seismic activity due to injection of wastewater in deep wells.

And it stands to reason that fracking operations are triggering earthquakes. Earthquakes are now just as likely to occur in Oklahoma as they are in California. Just last week, Cushing, Oklahoma sustained an earthquake of a 5.0 magnitude. Cushing is the largest oil storage hub in the world, holding billions of dollars worth of oil, and is nicknamed the Pipeline Crossroads of the World. While the storage infrastructure and pipelines did not sustain major damage, more than 40 buildings in Cushing sustained severe damage spread over a 16-block area and dozens of people were displaced. Oklahoma regulators said they would shutdown some disposal wells and reduce volume in others following the earthquake. 

The earthquake in Cushing was just the sixth 5.0 earthquake to hit Oklahoma since 1882, but 3 of those 6 major earthquakes occurred in 2016, including the strongest earthquake in Oklahoma history, a 5.8 Mw earthquake in September. In 2016, Oklahoma sustained 518 earthquakes of 3.0 magnitude or higher. From 2004 to 2008, right before the fracking oil boom hit, there was a total of nine. George Choy, a geophysicist with the U.S. Geological Survey, was quoted by USA Today as saying "The oil companies have said for a long time that these are natural earthquakes, that they would have occurred anyway, but when you look at the statistics, that argument does not fly."

Generally speaking, losses due to the peril of earthquake/earth movement, are typically excluded from coverage under standard commercial all-risk property policies. However, most carriers will give policyholders the option to purchase this coverage through an endorsement to the policy. And, in historically seismically stable areas, such as Oklahoma, such an endorsement might have been offered at a premium price that no longer corresponds to the risk. 

Some insurance regulatory bodies are taking proactive steps to prevent uncertainty regarding property insurance coverage for fracking-related earthquake damage. The Pennsylvania insurance commissioner has prohibited insurance carriers from denying homeowners insurance claims for earthquake damage on the basis that the quake was caused by fracking. In Oklahoma, the insurance commissioner required insurers to give official notice to policyholders as to whether or not coverage extends to earthquakes resulting from fracking. 

Despite these steps, it presently appears that most of the coverage questions surrounding fracking-related earthquake damage have yet to be answered. Given the variation in property insurance policies, the first questions will center on whether or not earthquake damage is covered or excluded under the policy wording. If earthquake damage is excluded, perhaps there is supplemental coverage for a resulting fire or water damage by virtue of a covered ensuing loss provision? Or coverage might be eliminated completely by an anti-concurrent causation provision? Perhaps the policy/endorsement covers earthquakes but excludes earthquakes or earth movement caused by non-natural or man-made causes such as fracking. What evidence might an insurer need to bring to court to prove that some earthquake damage was definitively induced by fracking operations as opposed to natural seismic activity. Additionally, if an insurer pays insurance proceeds under any of the coverage scenarios outlined above, what evidence will be required to make a recovery from the oil and gas extraction firm through subrogation?

While these issues will need to be sorted out on a case-by-case and policy-by-policy basis, it seems that it would behoove property insurance carriers to make certain they are aware of the new seismic coverage risks they face in traditionally stable areas in North America.

Posted by Matt Gollinger

Zika Claims Fly In

The Zika virus is a mosquito-borne flavivirus that was first identified in Uganda in 1947. Although the primary form of transmission is mosquitos, there have also been reports of sexually transmitted cases of Zika. Adults infected with Zika virus may not display any symptoms. If they do manifest symptoms, they range from fever, rash, joint pain, conjunctivitis, muscle pain and headache. These symptoms can last for several days to a week and are commonly confused as being the flu. 

While the virus is not fatal to adults, it presents severe complications for fetuses and infants. The CDC reports that Zika infection during pregnancy can cause a birth defect of the brain called microcephaly and other severe fetal brain defects. CDC also reports that in areas affected by Zika other problems have been detected among fetuses and infants infected with Zika virus before birth, such as defects of the eye, hearing deficits, and impaired growth, as well as increased reports of Guillain-Barré syndrome, an uncommon sickness of the nervous system.

According to the Centers for Disease Control and Prevention, as of late October, there were 32,814 confirmed Zika cases in the U.S., including 4,091 cases in the continental U.S. and 28,723 confirmed cases in the U.S. territories of Puerto Rico, the U.S. Virgin Islands and American Samoa.

Source (https://www.cdc.gov/zika/intheus/maps-zika-us.html)

In Florida, the number of reported Zika cases to date has risen to 1,144, with 915 stemming from people who brought the virus into the state after being infected elsewhere. Florida has had three identified Zika Zones where there have been local transmission of Zika virus. The first Zika Zone in Wynwood was announced on September 19, 2016. The Wynwood Zika Zone was originally about one square mile. After 45 days of localized spraying and public quarantine announcements, the Zika Zone designation was lifted when was no evidence was found of active Zika transmission. The second identified Zika Zone is about 4.5 square miles in Miami Beach within the boundaries of 8th and 63rd streets.

The third Zika Zone is about one square mile within the boundaries of NW 79th Street to the North, NW 63rd Street to the South, NW 10th Avenue to the West and North Miami Avenue to the East.

Source (http://www.floridahealth.gov/diseases-and-conditions/zika-virus/)

The spread of Zika is not only terrifying for overall public health and safety, but this well-publicized health problem also has a chilling effect on Florida’s lifeline, tourism. In 2012, Florida welcomed 89.3 million visitors who spent $71.8 billion. In 2014, the state tourism data estimated 97.3 million people visited Florida. In the first six months of 2015, Florida welcomed 54.1 million visitors. The majority of those tourists (about 96%) come into the state through Miami. Miami International Airport is the state's busiest for international travelers, who make up 70 percent of all foreign visitors to Florida annually. That overall revenue comes from individualized tourism, as well as the appeal of hosting events in Florida.

The emergence of Zika Zones in South Florida has caused major concerns for travelers and directly impacted the hospitality industry. This is noted in the recent emergence of Zika-related event cancellation claims that insurers are receiving. These lines of viral demarcation now become pivotal pieces of claim and adjustment information as Zika related cancellation claims begin to fly in. 

The key to addressing these claims, as it is with all insurance-related issues, is to perform a thorough review of the governing policy language in determining coverage. Event cancellation policies are not standard, and the indemnity language may be tailored to the insured’s traditional business needs. On the one hand, you may have language that may recognize a Zika Zone as a related peril, such as the following:

Coverage Extension.

A. Cancellation of Bookings - This Policy is extended to cover a loss sustained by the Insured resulting from the cancellation of, and/or inability to accept booking or reservation from accommodation and/or interference with the business at any Insured location sustained as result of the occurrence of:

2.  contagious or infectious disease

*          *          *

5.  any of the following:

            a.         outbreak of contagious and/or infectious disease

within a radius of 25 miles of the Insured Location to the extent such Time Element loss is not otherwise covered under this Policy such as under the Civil or Military Authority or Ingress/Egress Extension. 

Or, you may have an event cancellation policy that contains language similar to the following:

INSURING CLAUSE - Subject always to the terms, conditions, limitations and exclusions contained herein or endorsed hereon:
1. This Insurance is to indemnify the Insured for their Ascertained Net Loss should any Insured Event(s) be necessarily Cancelled, Disrupted, Rescheduled which necessary
Cancellation, Disruption or Rescheduling is the sole and direct result of a cause not otherwise excluded which occurs during the period of insurance and is beyond the control of both the Insured and the Participant therein.

2. This Insurance also indemnifies the Insured for proven additional costs or charges reasonably and necessarily paid by the Insured to avoid or diminish a loss payable hereunder, provided such additional costs or charges do not exceed the amount of loss thereby avoided or diminished.

3. The Underwriters' maximum liability shall not exceed the Limit of Indemnity stated in the Schedule for the relevant Insured Event(s) nor the Aggregate Limit of Indemnity stated in the Schedule.

EXCLUSIONS - This Insurance does not cover any loss directly or indirectly arising out of, contributed to by, or resulting from:

20. any communicable disease or the threat or fear of any communicable disease whether actual or perceived. A communicable disease means an illness caused by a pathogen and transmitted from an infected person or animal to another person or animal. 

The determination of coverage for Zika-related event/booking cancellation claims under each respective policy will have divergent results. However, the complexity of handling these types of claims does not cease with the analysis and application of policy language. The process of adjusting the claim itself requires relentless attention to detail and the ability to pilot insurers through murky waters.  

The best way to deal with these unique claims is to prepare yourself with the most effective and knowledgeable adjustment team, which starts with knowledgeable counsel. In these trying times of Zika Zones and cancellation confusion, Zelle is poised to help guide insurers and its insureds in the handling of Zika-related event cancellation claims.  

By Anaysa Gallardo Stutzman and Christine Renella