Fracking Insurance: Winners and Losers

Reaction to the AP story was predictable.

The leaked internal memo, indicating that Nationwide Mutual Insurance Co. had determined risks from the controversial process of hydraulic fracturing were too great to provide coverage for, was interpreted by some as vindication of their concerns and by others as ill-informed betrayal.

But the ensuing brouhaha overshadowed the asymmetric nature of the energy development insurance market -- where lessors and lessees have damage coverage options unavailable to others.

When I recently spoke with Dr. Robert Hartwig, President of the Insurance Information Institute, about why that is, he explained that insurers have no way to control and underwrite actions of a third party. In other words, if you're someone concerned about potential impacts from energy development occurring around you, but aren't in a development contract with an energy company, your only option to receive compensation for something like contamination of your drinking water, is to hire an attorney to pursue your claim through the vagaries (and expense) of the court system -- a poor substitute for the assurance of damage recovery through the force of contract with an insurance provider. Landowners who lease have the opportunity to hitch their horse to a company's insurance wagon.

Hartwig also points out there's nothing new in principle here, because many risks aren't mitigated through typical homeowner policies and therefore require similar legal action on the part of those affected by them. So in that sense, the avenue for pursuing compensation for certain kinds of fracking-related damage is no different.

True enough.

But principle and practice appear at odds here. After all, overcoming the reluctance to cover third party actions seems to occur all around us. For example, if your motor vehicle policy includes collision coverage, you don't need a court action to receive compensation for your parked car destroyed by a drunk driver -- you have a contract with your insurance company and unless there's a valid reason to the contrary, it's honored.

Furthermore, should past become prologue merely by virtue of being the past? It's a valid question generally, but particularly so for states like New York that are trying to conceive a new regulatory framework -- intended to function on a regional scale -- for an industrial activity never before permitted there -- high volume horizontal hydraulic fracturing of the Marcellus Shale.

But the disparate reality between insurance options for those party to energy leases and those who aren't carries important implications well beyond the limitations confronting non-leasing landowners trying to recover damages they might incur.

When I asked Jack Driscoll of Driscoll Insurance and Financial Services about those disparities, he not only confirmed them, but went on to explain the principle, and additional peril, of wide-net litigation, an equal opportunity damage recovery exploiter that doesn't discriminate between non-leasing landowners and those who do.

It goes something like this:

You're a non-leasing property owner proximate to gas development occurring elsewhere in the Marcellus Shale. Let's say a stream courses through your property and that of others being leased; say further that fracking-related activities have contaminated that stream.

The legal action taken by those adversely affected from that contamination is then met by the legal equivalent of, "how do you know it's me and not the other guy?" -- prompting the net of legal action to be cast widely as possible and thereby also entangling you. Those in contract with a gas company, and adequately linked to their respective company's insurance, are in a far better position than you. It's a net the extrication from which Driscoll suggests could cost you, the non-leasing property owner, hundreds of thousands of dollars in legal expenses.

The concern is further compounded by the fact that related problems can take years, sometimes decades, to discern and, well, you get the picture.

Insurance for non-leasing property owners may be available through what's referred to as specialty policies, but that doesn't mean it's affordable (that principle/practice thing again) -- a concern reduced to part of the cost of doing business for gas companies. When I contacted Public Relations at Independent Oil and Gas Association of New York for an energy industry perspective, I explained my subject area of interest -- and that I was preparing a related piece for the media. My contact information was politely requested, and I was told my query would be referred to their expert, that he'd be getting in touch with me. When I asked how much time that might take, the answer proved to be unanswerable, at least in terms of time. I appreciate IOGA NY's shared concern for the non-leasing landowner, and remain confident that eventually I'll receive comment from their expert.

I also inquired with local agents for Allstate and State Farm, two of several companies I've inquired with in the past on such matters. Their answers haven't changed -- and fell squarely in line with both Hartwig and Driscoll.

Again, Jack Driscoll:

The additional hazards associated with gas well exploration and the use of hydro-fracking techniques used in gas well[s], production and the resultant increase in infrastructure such as well pads, pipelines and roads to service the wells have increased the potential for the frequency and size of liability losses to property owners within the region.

Landowners in the area have experienced land ownership and purchasing issues regarding land that is currently within, adjacent to or simply near a well or proposed well site. Lenders require the borrower to obtain and maintain insurance to protect the lenders' interest in the event of a loss on the property. If insurance cannot be obtained lenders may claim the loan is in default or refuse new loan applications.

Insurance companies are in the business of making money by mitigating financial risks for their policy holders. In order to remain in business, collective policy premiums need to exceed the collective expense of liabilities over time. That's neither good nor bad; it just is. But such a characteristic renders it incompatible with protecting people and the environment when there isn't money to be made. It's a deficiency we rely on government at all levels to address.

But the deficiency isn't getting addressed, and indications from the experts I've talked with suggest it won't be any time soon, if ever.

Here in New York, neither Governor Andrew Cuomo nor the state's Commissioner of the Department of Environmental Conservation, Joseph Martens, has offered any guidance on this crucial concern. And it isn't because they're unaware of it.

Records from testimony presented to New York's DEC last fall document similar insurance related concerns for those not leasing.

As principles so often go, Mr. Cuomo's too are clear, and admirably reflected in his creed: Performance, Integrity, Pride, but if as Governor of the great state of New York he intends to truly embody the words of his creed, he needs to align those principles with practice.

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