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
