Fracking and Earthquake liability: a new paradigm?

The recent increase in earthquake activity is being researched in many scientific journals.  There is discussion around the increase in frequency due to the increase in fracking related activity.   Although the science is still being reviewed, what impact will this have on the insurance industry?

I think it will present a new fracking and earthquake liability: a new paradigm where fracking companies or oil and gas exploration companies are responsible for earthquake.    This would be a big change from current landscape, some important info around this idea includes:

The science and Oklahoma

For 2013, an estimated 109 earthquakes occurred according to the Oklahoma Geological Survey, a number substantially higher than in any previous year going back to 1978. The 2014 total of 3.0+ magnitude earthquakes by May 2 was higher than the entire yearly total for 2013, at over 140 earthquakes.  Before 2009, there were, on average, two earthquakes a year in Oklahoma that were magnitude 3 or greater. Last year in 2015, there were 907.

Oklahoma is the most earthquake prone state in the continental US.

What’s more astonishing is that nearly all of Oklahoma’s earthquakes are believed to be man-made. The belief is they are being triggered by the biggest and most important industry in the state: oil and gas production.

Who is believed to cause?

A few experts are drawing the conclusion the increase in fracking activity and increase in earthquake activity are directly correlated.   Even 60 minutes has covered this topic, Bill Whitaker reports on the high incidence of earthquakes in Oklahoma, where oil and gas production is injecting vast amounts of wastewater into the earth.

A recent example of the impact of this coverage can be found by the recent decision by Oklahoma in the following article, Oklahoma orders shut down of 37 wells after earthquake.  

Frequency of earthquakes is concerned that it will also result in increased severity, however, Nate Silver highlights that frequency and severity are somewhat uncorrelated based upon historic results.  The areas with lower frequency are the areas with the highest historic severity as measured by the Richter scale.

Will earthquake become a liability peril? Who can afford to self insure?

If society is looking to blame or affix responsibility to this increase in earthquake activity, in what form will it occur – strict liability, absolute, contributory negligence?

Earthquake becoming a liability peril would obviously be determined by the courts, however, you may want to be ahead of this shift.

The financial impact of an earthquake can be in the billions.  Can you afford to self insure?  Does your insurer specifically exclude earthquake on it’s general liability form?

If you are an insurer do you have an earthquake exclusion for your Oil and gas production insureds? If not, look at the exhibit below how costly that mistake could be…

Modeling capabilities

If earthquake liability becomes a new peril, insurers who cover Oil and gas production companies and specifically Frackers – will have to model this new peril to understand the probability of earthquake, economic loss, and potential to be brought into a liability suit.

Are insurers even considering this shift in Earthquake risk onto 3rd party cover?

Most likely insurers aren’t considering this shift in paradigm for a couple reasons.

  • Difficulty to prove – it is very difficult to prove the cause of an earthquake, especially if it differs from earth plate shift.  The science of earthquakes is behind the science of hurricane prediction, for example we cannot predict earthquake in advance of occurring so it would be difficult to prove Fracking was the proximate cause.
  • Court decisions thus far
  • Insurers are keeping a watchful eye

Impact of paradigm shift will be costly

  • Cost of expenses to defend – lawyers, experts, etc.
  • Cost of 3rd party loss could be huge

Consumers should buy earthquake coverage

The Oil and Gas industry and homeowners both should buy specific earthquake coverage.

As mentioned in previous article, homeowners everywhere face earthquake risk – however, the closer you are to fracking activity it’s a good idea to purchase even if the proximate cause isn’t the fracking.

About the author

Arnold Smith

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