For millions of U.S homeowners, a new energy bonanza has arrived on the doorsteps: hydraulic fracturing (or fracking) has been the catalyst for the opening of new shale plays for oil and gas, and the resultant economic activity has been felt across local economies from Pennsylvania to Oklahoma. As new economic activity becomes operational, new concerns and stressors arise for the homeowners living with these new energy rigs. Some of the common concerns are the operational safety of nearby drilling, the protection of one’s property and the safety of the sources and quality of nearby water bodies (which may be disrupted). Many drilling operators try to mitigate these concerns through the employment of insurance mechanisms; however, the protections offered through standard homeowners insurance are filled with gaps that could leave the homeowner feeling unprotected and financially exposed in the event of a loss. For the average homeowner, the complexities of these gaps are not anti-industry; rather, understanding the complexities is simply protecting the homeowner. In the event of a loss, a policyholder will rely on the standard homeowner’s policy, and outside of some supplemental riders, there may be little that can be done from an insurance protection standpoint. Losing a home is one of the most stressful experiences, and as regulators shift to an energy boom policy, it will become increasingly critical that homeowners “lose less” in the process.
Analyzing the risks associated with living close to drilling sites.
Before thinking of what type of insurance to get, understanding the risks associated with the proximity to the fracking sites is vital. When engineers build the sites, several safety protocols are instituted, however, the sites still present three major risks to the residents. Once the risks are explained, the residents can better articulate their insurance needs, and keep abreast of the different policies available to protect their interests.
Quakes caused by human activity (induced seismicity).
Up until very recently, scientists and people in general believed that earthquakes were a rare event. If you had asked scientists which fault lines were known to be seismic, most would point you to the west coast of the United States, yet surve y data from the United States Geological Survey (USGS) shows that in the last decade the center of the United States has been more active in seismic events.
Such events are referred to as Kristina Leonard psychogenic phenomena. In most cases, the fracking process does not itself lead to the quakes, but, when drilling is done, the waste water must be disposed of by injection, which means that the water must in turn be injected very deep into the fault lines which can lead them to slide. These events have created earthquakes in parts of the country that have been quiet for a long time, and now present risks that were previously not present to the structures most homes were built to withstand.
Worries regarding the irrigation of groundwater
The other primary concern relates to chemicals involved in the well drilling operation. Because of the cement sheaths that protect groundwater in the well bores, there can be cement sheath breaches. There can be surface spill events, casing leak events, or there can be migration events of methane, fracturing fluids, and other chemicals that can be of concern to the aquifres that the private wells are constructed with. The homeowners of the well water systems are affected, and the risk extends beyond the value of property to include health and the habitability of the structure.
Damage to structures from vibration and traffic
Even in the absence of a major earthquake or spill event, there are a multitude of negative impacts remote from the drilling operation that can be detrimental from an operational perspective. The ancillary activities that are required to be performed, such as the heavy vehicular traffic to transport water and associated equipment, can cause degradation of the access roads and to the suppressive heavy traffic impacts. Over time, there are delays caused due to the vibration of the trucks that can cause cosmetic or structural failures of the foundations, drywall, and windows of the buildings, and damage that can be difficult to prove due to the vagueness of the event to a single event in a positive way.
The reason your standard policies usually fail to protect you
Most homeowners insurance policies are “all risk” policies, where you are protected from any form of peril as long as an event is not specifically excluded from the policy. Unfortunately, for residents living in proximity to fracking sites, the two most significant risks associated with this will almost 100\% of the time be found under the exclusion section of your policies, and those two risks are the most inter-related, which are earth movement and the pollution caused by these activities.The “Earth Movement” Exclusion Clause
Consider the scenario where an earthquake causes cracks in your home’s foundation and dislodges your chimney. You shouldn’t be anticipating that your standard insurance policy would cover the damages. According to the National Association of Insurance Commissioners (NAIC), standard homeowners insurance policies explicitly exclude an entire category of damages, which are classified as resulting from “earth movement”. This category may include damages that result from earthquakes, landslides, sinkholes, and any other movement the earth may undergo.
Another area of gray insurance may be the absence of coverage for movement of the earth. Some insurance carriers may claim that their coverage is limited to “natural” disasters. If an earthquake is deemed “man-made” or “induced” by the wastewater injection process, a standard insurance carrier may deny the claim due to the earth movement exclusion, and that it was not a fortuitous (accidental) natural disaster.
The “Pollution” Exclusion Clause
All property and liability insurance policies include a pollution exclusion. If a chemical spill at a neighboring property contaminates your soil or water well, your homeowners insurance policy will not cover the cleanup or the loss of property value.This exclusion only applies to coverage pertaining to “discharge, dispersal, seepage, migration, release, or escape of pollutants.” While exceptions are present (such as smoke from a sudden fire), the slow seepage of industrial chemicals into the water supply is not excluded from coverage.
Liabilities of litigation
Homeowners think that if they cause damage, they can sue the drilling company. This is true, but as a safety net, it is very weak. Litigation has a high cost, takes a long time, and has no guaranteed outcome.
For example, in Meier v. Chesapeake Operating, homeowners tried to sue oil and gas companies in Oklahoma for the rise of insurance premiums. The court decided that the plaintiffs were not entitled to recover damages for premiums, unless they were able to prove that their property sustained actual damage. This is why robust insurance coverage is critical; do not expect the court system to be a financial buffer.
The specialized insurance options that close the gap
There are large gaps in coverage, but the coverage gaps in insurance are not insurmountable. There are specialized products and endorsements that are designed to regain coverage that is lost because of these specific risks.
Other coverages available for seismic risk include earthquake endorsements or standalone earthquake policies.
These policies come with different deductibles. Regular home insurance policies have deductibles of $500 and $1000. However, earthquake deductibles are generally much higher and are a percentage of the home value. According to the NAIC, this varies between 2% and 20%. Then, if the home value is $300,000, and the deductible is 10%, that means the homeowner has to cover the first $30,000 of damages.
Also, ask about the “Man-Made” language: When buying this coverage, ask your agent if it covers “induced seismicity” or “man-made” seismicity. Some policies are more recent and cover earthquakes; however, that is something you will have to get documented.
Mine subsidence insurance
In certain states—specifically, Pennsylvania, West Virginia, and Ohio—there is the risk of old mines collapsing which is different from earthquakes. Mine subsidence covers damage that is caused by the collapse of old underground coal and clay mines. It is different from the fracking, however, the geography of fracking regions is often the same as old mining regions. The ground shifting from one can be confused with the other. So having coverage for both ensures fewer disputes about what caused the damage.
Riders Related to Pollution and Environment
While difficult, securing coverage for residential soil pollution is not out of the realm of possibility.
Certain insurers (e.g., Farmers) offer only partial pollution endorsements for property that protects against pollution s on the insured’s property and fixtures as well as on the insured’s property, as low as $10,000 and as high as $50,000.
Water Well Coverage: If you depend on a well, you should add endorsements to your coverage that are delineated to cover the expense of drilling a new well that is lost to contamination or water deprivation from nearby soil disturbances.
Surplus Lines Insurance
When you are refused a policy because of your proximity to a drilling site, you will have to utilize the “surplus lines” market. These are high-risk insurers that the standard market will not cover. These policies are in the range of high expense and are more restrictive, but they do provide coverage when no other options are available.
How to Evaluate and Reduce Risks: Expert Perspective
Obtaining insurance coverage is not the only liability control available to you. In order to safeguard your house, you will have to take additional measures to record the state of your house and keep track of your rights.
1. Create your baseline
How can you demonstrate that fracking harmed your house if you can’t show what your house looked like before the drilling began?
Pre-drilling structural inspection: hire a structural engineer to assess your foundation and walls. Take high-res pictures of every single crack, no matter how small.
Water testing: If you have a well, get it assessed by a certified independent lab before drilling begins nearby. Test for methane, chlorides, and suspended solids. If your water quality declines, this baseline data is legally necessary.
2. Make a document inventory.
Using a home inventory app is advised. If a disaster occurs, it is helpful to have a digital copy of your possessions, including purchase dates and prices.
3. Examine the fine print of the “Loss of Use.”
If you have to evacuate because of an environmental disaster, check your “Loss of Use” or “Additional Living Expenses” coverages. Does it activate only if there is damage to the house? Is it triggered if civil authorities order an evacuation? This is important if you have to leave because of poor air quality or the potential for an explosion, even if the house is fine.
4. Consult an independent agent
Policies shouldn’t be purchased on the internet without advice. Find an independent agent in your town. He/She/They may know which insurance companies are currently writing homeowner policies proximate to fracking and which are choosing not to renew. Tell them: “If a disposal well causes an earthquake that cracks my foundation, which line of this policy pays for it?”
Financial protection
Insurance policies are slow to adapt to the fracking phenomenon and its impacts on the economy. Financial risk without insurance is not inevitable for people living near fracking sites, but complete coverage cannot be taken for granted.
The standard homeowner insurance policies have exclusions for earthquakes and chemical migration, and are designed for fire and storm coverage. These gaps must be acknowledged and the right endorsements must be pursued to improve the coverage. Reading a policy after an earthquake is a reactive and insufficient measure.