Fracking: Friend or Foe For Homeowners?

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In an attempt to help the country become less oil dependent on other countries, an increasing number of homeowners are finding out that they can’t always depend on their homeowners insurance when experiencing losses that occur as a result of hydraulic fracturing — aka fracking — on their property. Worst of all though, some homeowners can find themselves liable for any unwanted aftermath of fracking, such as water contamination. What – if any – coverage does homeowners insurance offer that would cover this?

When you turn on the news, open a paper, or scroll through your news feed, it’s hard to get away from the hot button environmental issue of fracking. Familiarity with the term doesn’t necessarily mean that you’re knowledgeable about the issue — we’re all busy. So if you missed a term that may slightly sound like it’s something to do with a new breed of cyber criminals, it’s not surprising, but it’s also not something you want to be uninformed about, especially dependent on where you live and if you’re a homeowner.

For some, it may sound like a curse word, particularly if they feel they’ve fell ‘victim’ to it. No need to consult an urban dictionary though. This ‘dirty word’ – ‘fracking’ fell victim to what is common in the English language today – shortening a term to describe one of those tedious scientific terms, and is short for hydraulic fracturing. Maybe that still doesn’t mean much to you, but sooner or later you would have heard about it, as fracking has been causing quite a stir lately. But what exactly does fracking even mean, and just what is the big deal about it?

What Is Fracking?

Fracking refers to a process in which a combination of water and chemicals are injected into shale formations within the ground to release natural gas. Shale is a rocky substance made by mud or clay, typically running under the ground at a depth of anywhere from 3K to 8K feet. A play by play of fracking’s drilling procedure usually runs something like this:

A drilling rig — a derrick — drills vertically until it’s past the water table. At that point, cement is poured to keep ground water out of the drill shaft. Next, drilling continues until the shale formation is breached. Once the shale has been breached, the drill continues on horizontally for thousands of feet, and a perforating gun is released into the shaft. The gun then sets off mini explosions which break the concrete and shale.

Next the fracking cocktail — a major concern for some — is injected into the well, escaping out of the explosion points and into the shale. The shale fractures grow larger and deeper while the water returns to the surface. That’s when the magic happens. Natural gas, which has been trapped for thousands of years, is released into the pipes and gathered at the surface. Sand grains present in the fracking cocktail ensure shale fractures stay open so gas can continue to leak out.

The Trouble With Fracking Is…

That whole process sounds simple enough, right? However, for such a seemingly simple method, it’s not, and fracking continues to increasingly gather some heat.

Advocates for fracking argue that deposits lying underneath American soil will help lead us to energy independence and produce jobs. Opponents are concerned about ground and water pollution, as well as long term health issues caused by chemicals in fracking cocktails.

Even Hollywood has gotten involved. Documentaries like Gasland and the blockbuster starring Matt Damon, Promised Land, promulgate the idea that fracking is bad.

But what if you were offered thousands of dollars (sometimes even more) so that someone could extract something you didn’t even know was on your property – especially if it’s gas? Before you start singing the Beverly Hillbillies song (“and up through the ground came a bubblin’ crude. Oil that is, black gold, Texas tea.”)the answer isn’t so simple, and homeowner concerns range from moral issues to insurance questions.

A History of Fracking

As early as 1908, the practice of hydraulic fracturing was used in the US. The first time it was used to extract natural gas was in 1947, thanks to Floyd Farris. In Farris’ initial process, only water and sand were used to break the shale apart. This proved costly, and in 1997, chemicals were added to the mix, making it easier and more cost effective to retrieve the trapped gas.

In 1987, the first report of fracking fluid contaminating well water was released by the Environmental Protection Agency (EPA). Jump ahead to 2010, in Dimock, PA, where there’s a long history of fracking thanks to Marcellus Shale, a specific formation that contains almost 500 trillion cubic feet of gas – explaining drilling companies’ eagerness to get into Pennsylvania soil. That amount of gas could power every home in the US for almost 50 years – one reason some homeowners give full, enthusiastic support to fracking companies. Sounds alluring, but when residents of Dimock found gas in their water, they took the once-eager fracking company Cabot Oil & Gas Corporation to court. The court ordered the drilling company to pay the town $4.1 million after state environmental officials discovered a spill by Cabot had injected enough methane to cause a large explosion underneath the ground.

If drilling continues as its current rate of increase, the Energy Information Administration estimates that shale recovered gas could account for half of all natural gas by 2035. It’s abundant throughout the world as well, with the US coming in second for total shale formations. Translation? It’s not going anywhere anytime soon.

So which US residents need to begin brushing up on fracking facts? Homeowners in states like New York, West Virginia, and Pennsylvania have been dealing with this issue for years now. Some states are just now at the forefront of the issue, such as California residents and lawmakers after the discovery of the Monterey Shale formation. The state currently has over 600 wells, but the specific location of this formation has some people concerned. The nature of the rock formation is unique, and the land running atop the formation is protected wilderness. On the other hand, almost 15.4 billion barrels of oil could be extracted from the location, which would add almost 2.8 million jobs and increase tax revenue by billions. Quite simply, California is literally stuck between a rock and a hard place.

Already though, close to one million US citizens have already been affected by fracking, and as always, we can learn from history. So far, it’s taught us that fracking can lead to homeowners suffering major losses, both in property damage, property value, and perhaps most frightening, becoming liable for any negative results that occur from fracking on a homeowner’s property. The list of losses and risks associated with fracking continues growing, and unfortunately, still isn’t complete since it’s still a relatively new trend. That also means most insurance policies – and the law — don’t offer coverage that’s evolved to keep up with this increasingly common trend, so whether or not a homeowner is covered by homeowners insurance for related losses and liability claims against a homeowner is a huge question.

What’s for certain is that with the right knowledge, homeowners can make an informed decision if they ever find themselves in the middle of a fracking situation – but the subsequent results may happen much faster than you’d think, and one way or another, it affects any property homeowner on the receiving end. Although some people have had positive fracking experiences, others definitely didn’t pack up their cars to head to Beverly … Hills, that is.

The Possible Dangers and Risks of Fracking

While new jobs and revenue are generally considered a good thing, many worry that we’re sacrificing future environmental health and natural landscapes for immediate gain. One of the major concerns stems from the chemicals within the fracking cocktail. Nearly 600 chemicals can be used in the cocktail, some of which are considered highly toxic. Lead, uranium, methanol, hydrochloric acid, and formaldehyde are common ingredients pumped into the ground, and there have already been cases of these toxic chemicals contaminating drinking water, but the side effects of fracking don’t stop there.

Water resources and byproducts of increased tanker truck traffic are legitimate environmental concerns, and ignoring the possibility of becoming more oil independent seems wrong, but homeowners are faced with tough questions when fracking negatively affects health or property –and that doesn’t just mean their own health and property.

Most homeowners or land owners rely upon their homeowners insurance policies for protection against lawsuits and liability for damage or losses that occur on their property or those that occur as a result of something they did. This is where one of the biggest problems of fracking and insurance coverage is. It’s not news that most policyholders don’t pay careful attention to their insurance policies, and this is just one part of the lack of knowledge that can lead homeowners into troublesome situations if they consent to fracking on their property. Not only do they fail to read the fine print of their insurance policy, they fail to read the fine print of the fracking company.

There are risks homeowners face that could damage just their property from fracking, such as damage to their home from a fracking-induced earthquake, or just a run of the mill accident where a bulldozer runs over a shed or detached garage. But if homeowners need another reason to pay attention to their policies and how much coverage they have, here’s another:

Dimoch, Penn. was able to recoup money in a lawsuit against an oil company after water contamination, but it’s practically a given that a large oil corporation carries some pretty hefty insurance, particularly a lot of liability coverage in the event of a lawsuit. What happens if a homeowner consents to fracking on their property, which leads to an area’s water contamination, and the homeowner is subsequently sued for it though? That’s exactly what can happen, and is exactly why homeowners should be weary if a fracking company comes knocking – even if the average homeowner knew about possible risks or read their insurance policy word for word, it’s unlikely they’d carry enough liability coverage to cover expenses that could result from lawsuits like the one in Penn.

Since the homeowner consents to the fracking operations on the property they own, it’s possible for the property owner to be sued for any negative results that brings harm to others, such as water contamination, property damage to neighboring properties from things like earthquakes or tremors that can occur from fracking, or well blow outs, which can release up to millions of gallons of toxic material.

It’s no surprise that when a property owner is approached about fracking that the fracking company doesn’t inform the homeowner of the possible liability the homeowner can be stuck long after the fracking company is either long gone, or in many situations, dissolved. First of all, many fracking companies will set up what could be called a ‘temporary’ LLC or LLP for each operation and location a company uses. Essentially, a larger corporation could set up one LLC specific to the exact spot the drilling will occur on. These LLCs and LLPs often conveniently dissolve after operations are done, leaving a homeowner with any indemnity and liability. Unfortunately, the property owner usually doesn’t realize they could be left with quite a hefty bill for any unwanted ‘side-effects’ of the operation that just occurred on the property they own and are responsible for maintaining safety on.

Additionally, many drilling companies lease ‘mineral rights’ from the owner, but the ‘lessor’ is rarely told about the risks, dangers, and possible liability they’ll assume once the fracking operation is done with or when the mineral rights lease is over. The technicality legally is that these leases typically just pertain to the area below ground, meaning no matter what, or when, the fracking company could still be indemnified because they’re working underneath the owner’s property. That means the property owner could face liability because they own the ‘subsurface’ – the land they’re responsible for. This is especially true if a lease was in place by a company like an LLC or LLP that’s dissolved once the fracking company got what they needed, meaning the homeowner then has nobody to legally point the finger out and hold liable.

What’s worse is that depending on the state and laws – which are still developing regarding this trend – federal or state government may pay for the cleanup of things like water contamination, but the sting is that the homeowner could then be held liable for the costs their state or the federal government spent doing so. And you thought paying tax time was bad.

What Insurers Say – or Don’t

Since this is a new issue, insurance industries are approaching with caution. So far, most issues have surrounded water contamination, but the main issue has been proving liability, which takes place in court. Currently, homeowner claims are few and far between, but some insurers are taking a stand before the issue even arises, and are trying to take some pre-emptive strikes to inevitable claims – or worse — litigation.

Consider Nationwide Insurance, who recently issued a statement saying, “Nationwide has not changed our policies or guidelines, nor are we cancelling policies. Fracking-related losses have never been a covered loss under personal or commercial lines policies. Nationwide’s personal and commercial lines insurance policies were not designed to provide coverage for any fracking-related risks.”

Not a Nationwide Insurance policyholder? Although Nationwide established an official position, your insurance company may feel the same way and may just be playing the ‘quiet game.’ Additionally, as a new issue, many policyholders don’t even know to ask their insurers about coverage from fracking related losses, meaning insurers may operate under a ‘don’t ask, don’t tell’ policy instead of offering you a policy covering possible losses resulting from fracking.

Insurance Coverage For Fracking

Homeowner policies rarely cover land or property damage related to indirect causes, so it’s really not surprising that fracking is included as an exclusion. But what if fracking provokes an earthquake – just one fracking related loss possibility — that damages your home? Are you covered under earthquake insurance? Do you even have earthquake insurance? It may be offered in all states, but that doesn’t mean policyholders opt for it. People that live in high flood zones often don’t buy flood insurance policies even though their homeowners insurance doesn’t cover flooding, so if you live in New York, how likely would you be to opt for earthquake coverage?

The real coverage deficiency is most likely liability though. Homeowners often mistakenly think that they’re only liable for damages that occur on their property, and that liability is restricted to damage or injury occurring in their home or on their property. In fact, there is not a restriction on where the damage or injury occurs, icing on the cake considering that the amount of liability many homeowners carry is grossly insufficient when up against a huge lawsuit from something like water contamination or environmental clean-ups.

The best thing any property owner could do is buy an umbrella liability insurance policy, extending liability coverage from claims placed against their home or auto insurance policies. At the very least, they should opt for the highest possible liability limits an insurer offers. The other hope is that some homeowners insurance policies don’t have pollution exclusions, which could possibly aid in an environmental cleanup, just one more reason it’s important to look for exclusions.

Unfortunately though, even with all the liability in the world, there’s still a way for insurers to get off the hook from paying out.

Most personal lines of insurance exclude coverage for any claims made due to a business venture. When the fracking salesman shows up at the front door and the homeowner leases what’s underneath their precious ‘sub-surface,’ it becomes classified as either a business venture or voids a homeowners insurance claim because the fracking was done for monetary gain. This is true even if the homeowner hasn’t received payment yet and is only expecting payment.

In any state, whether you’d be covered for fracking related losses really just depends on your policy and insurer. Some exclude man-made earthquakes, although fracking engineers and recent studies claim that it’s not the actual process that causes tremors, but rather the settling of wastewater. When structural walls go toppling in your home, it doesn’t really matter which part of the process caused the damage – your walls have literally come tumbling down.

Insurance companies care though, and if you live in an area where fracking often occurs, or live in an area that may seem promising to fracking companies, it’s worth it for you to do the same thing insurers like Nationwide have – take a pre-emptive strike and check your policy for exclusions regarding earthquake damage and water contamination, as well as finding out on your own if there may be some loopholes in a policy that would deny a fracking related loss. That may sound about as exciting as the fracking process itself, and although understanding some insurance policies can be as difficult as it is to drill through layers of the earth, understanding your policy and taking the time to review it may be what puts your crumbled walls back up.

The Future of Fracking: Protecting Health, Home and Business

While controversial, it doesn’t appear the practice of fracking is going anywhere anytime soon, and it’s not just homeowners who should be concerned. Farmers of plants and livestock could potentially be affected. With the westward movement of fracking and the reluctance of insurers – both homeowners insurers and and commercial insurers alike — it seems as though residents are left to their own devices. The real root of the problem lies in a void of knowledge though on behalf of homeowners and property owners.

Without an adequate way to address specific risks, insurance industries can’t put a price on a policy. Even if you take legal action, insurance won’t cover the legal fees involved. It could also depend on which state you live in. If your state of residence has specific requirements of fracking companies to protect surrounding property and mitigate any damage, your basis for a claim might be recognized. And then again, it may not.

The current administration has voiced support for natural gas extraction, and individual states are taking action to regulate the industry. For example, as of June 1st, 2013, Illinois passed what are now the strictest fracking regulations in the country. Legislation sponsor Mike Frerichs led the fight for the regulations that other states may want to mirror and attempted to address the problem before it grew larger.

“These are tough regulations that are going to protect and preserve out most valuable resources in our state,” said Frerichs. “We are going to increase home produced energy in our state in one of the most environmentally friendly ways possible.”

On the other hand, certain countries in Europe have completely banned fracking, but yet continue using coal as a major source of energy. If practices can be developed that promote clean extraction of natural gas while still maintaining the quality of surrounding land, fracking could lead the US into an era of energy leadership. However, others argue that without long term studies and funded research, the consequences of our action may not be discovered until it’s too late.

As a homeowner, the first step to protection is always purchasing the right coverage amounts. When it comes to fracking and potential damages, be aware of exclusions. Talk to your insurer and do some drilling of your own to find out what you’re covered for and what you aren’t covered for. Ask specific questions and voice your concerns: If your well water is contaminated and you go to court, does insurance pay for anything? If your breeding bull dies as a result of toxic poisoning, can you collect damages? Addressing potential problems before there are any is much easier — just ask Erin Brockovich. Similarly, if you’re ever approached by a fracking company, drill them before they start drilling you.

Only time will tell will whether the fracking-related losses some homeowners and businesses have experienced will eventually pay off with an improved economy and lower gas prices. But if the process of fracking continues to pose serious threats, when will insurance industries recognize the risk and how will it be quantified? If the dangers aren’t recognized, it’s hard to provide coverage for. The question of how much we’re risking still remains, and when homeowners answer the door and find a fracking rep on their doorsteps, they need to ask themselves just how much risk is worth.

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