Analysis: Insurers find it tough to price fracking risk

Analysis: Insurers find it tough to price fracking risk by Braden Reddall and Ben Berkowitz, May 11, 2012, Reuters
Underwriters now face a politically charged problem in the perceived threats to water supplies of hydraulic fracturing. Amid litigation and federal probes, insurance companies are left scratching their heads over how to price the risk of the oil and gas production technique now better known as fracking. The lawsuits and tests so far provide little help. One much-cited case involved Cabot Oil & Gas Co, which settled in late 2010 for $4.1 million with residents of the small Pennsylvania town of Dimock over methane found in their water. … Insurance broker Willis Group said the market was getting tighter for what is known as “environmental impairment liability” – the coverage that would most directly relate to pollution claims from accidents – and so the cost is going up. “Indeed, some insurers have started to exclude fracking activities from their policies,” Willis said in an energy market review last month, which found that those who do cover it often restrict it for firms in the Marcellus shale, where Dimock is. Willis said policies for blowouts – called Operator’s Extra Expense – exclude pollution from an underground blowout, which it saw as unlikely to change given the risks tied to fracking. … But he expects the ultimate EPA findings on drinking water will sharpen up the debate. ” That whole study is obviously a game changer as far as how the insurance industry will view these risks going forward.” …. “There are many suits being filed and many more everyday, but many haven’t gone to judgment and you haven’t gotten to expert causation issues.” For example, if a trucker hauling fracking wastewater had an accident that led to a spill, a commercial general liability policy would have a pollution exclusion denying coverage; except in some states, the spill would be considered property damage and not environmental, so the exclusions would not apply. Scholz said the lack of clear legal precedents meant lawyers had to draw analogies from other energy-related cases. “Some have settled, some have been dismissed,”