Fracking Risk and the Nationwide Underwriting Guidelines

by Gilbert LLP
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By Kami Quinn and Michael Hatley

Nationwide Mutual Insurance Co. made headlines in the ongoing debate over hydraulic fracturing earlier this month, declaring that it won’t cover damage related to the controversial drilling process.

Hydraulic fracturing, commonly referred to as “fracking,” is a process in which a mixture of water, sand, and chemicals is injected into a drilling well at high pressure to fracture underground shale formations and release pockets of oil or natural gas.  Recent technological improvements have prompted an explosion in fracking activity, as oil and gas companies rush to develop new wells over major shale formations.

Proponents tout the enormous energy potential this technology represents, while environmental groups insist that fracking poses a number of significant environmental risks, such as the possibility for release of methane or fracking chemicals (which often contain potentially toxic compounds, including formaldehyde) into drinking-water wells.  Lawsuits related to fracking activities are currently being litigated across the United States, including in New York, Pennsylvania, Texas, Colorado, and West Virginia.  The majority of these suits have been filed against energy companies on behalf of individual property owners, primarily for property damage and personal injury resulting from water, soil, or air contamination. 

Nationwide entered the fray this month after an internal memo was posted on the websites of anti-fracking groups stating:  “After months of research and discussion, we have determined that the exposures presented by hydraulic fracturing are too great to ignore.  Risks involved with hydraulic fracturing are now prohibited for General Liability, Commercial Auto, Motor Truck Cargo, Auto Physical Damage and Public Auto coverage.”

Advocates of fracking were quick to criticize the company’s position.  Opponents of drilling, on the other hand, seized on Nationwide’s statement as evidence of the dangers inherent in the process.  Other observers wondered if this marked the start of a trend, with other insurance companies poised to follow suit.

Standing alone, however, Nationwide’s move will have little overall impact on who bears the financial impact of the risks involved in fracking, whether fracking operators or homeowners.  As a consumer-oriented insurance company, Nationwide is unlikely to have provided coverage for any of the oil and gas companies engaged in fracking in the first place. The energy company targets of fracking-related lawsuits typically carry specialty coverage designed for the industry and issued by specialty insurers. 

As for homeowners, Nationwide would most likely deny coverage for costs related to fracking under its homeowners policies even in the absence of these guidelines.  As Nationwide has stated since the underwriting guidelines became public, those policies were never intended to cover fracking-type damages in the first place.  Indeed, standard homeowners’ policies regularly exclude coverage for the types of damage that might be caused by fracking, such as cracked foundations or contaminated drinking-water. 

To the extent that Nationwide’s position has an impact, it will be with respect to “secondary” defendants of fracking-related suits, including transportation companies that haul the potentially toxic materials and other smaller players on the jobsite.  Even these entities, though, are likely to look to the oil and gas companies’ coverage as their first line of defense. 

Litigation between energy companies targeted by fracking-related lawsuits and select insurers over the application of specialty drilling policies to fracking suits is likely, and to be sure, insurers in this industry will be looking closely at such lawsuits as they refine their own underwriting standards.  It is the response of these carriers in paying claims under existing insurance and in underwriting future coverage that will have a real impact on the allocation of fracking-related risks in the marketplace.

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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