Should the Drilling Industry Carry Insurance Against Fracking Damages?

By S. Tom Bond, Co-Editor of FrackCheckWV and a resident farmer in Lewis County, WV

At the present the shale drilling industry is not required to carry insurance against any damage it might cause in West Virginia nor most other states. This is consistent with the claim they never do any damage to health, aquifers, livestock, property value, or in fact most anything else. It comes from the story they tell politicians, judges and smaller business men. It results in the hard nose position they adopt in court, and most importantly, helps keep any third party from objective evaluation of their drilling.

An insurance industry article, see below, begins by pointing to a long list of damages that have unequivocally been caused by shale drilling for gas and by similar kinds of contamination. These comprise many of the 27 references. Similar kinds of contamination are used to estimate the cost to the public of remediation damages to be expected from the drilling industry.

The article recognizes these categories of anticipated problems: contaminated aquifers, poor air quality, surface spills and health effects of natural gas production related chemicals. (Disclosure: the author is a member of an environmental group seeking to clean up damages caused by coal mining a century ago, using public funds. That extraction industry simply pawned off its damage on the public.)

Calculation of risk is exceedingly difficult, but the insurance industry is adept, and if brought into the job, has ways to both work out the risk and handle it financially in a way acceptable to the public for minimum cost. They do this by study of activities engaged in by drilling companies and comparison with problems experienced by other industries. For example, aquifer pollution by shale drilling is comparable to aquifer pollution by methyl-t-butyl ether, the gasoline additive which began to be recognized as a pollutant about 1990. Remediation would be very similar, both methods and cost.

Public anticipation of just compensation would go a long way to reduce the argument for moratoriums. Certain kinds of public loss, including Global Warming, would not be compensated by payment of damage to individuals, of course.

Several methods of insurance companies dealing with large potential losses are unfamiliar to most of us. They are prepared for loses beyond those in the historical record. Insurance companies which engage in large risk have other insurance companies to insure them. These are called re-insurers. Beyond this, insurance- linked-securities accept risk of re-insurers. So, insurance companies are able to accept very large, infrequent risks.
Where several companies are drilling in an area, the insurance companies which would insure them can work together, offering similar insurance policies to each and sharing the largest risks. The insurance industry “spreads the risk.” Competition between companies would insure lowest cost to the drillers.

Insurance also would help with a nasty practice engaged in by the drilling industry. They often form a small Limited Liability Corporation or Limited Liability Partnership to drill only one (or a few) well(s) and then flick out of existence after drilling and transfer of ownership to a larger company for maintenance and production. If a large loss occurs, the business simply goes bankrupt and the injured individuals and/or the public is left holding the bag.

Insurance helps not only the injured, but the companies themselves. For example, if they have bad luck, they do not have to go broke by paying damages that cut far into their capital assets.

The authors below also say: “Another benefit of insurance requirements is that energy producers will have additional incentive to employ best practices, because any reduction to their expected insurable losses will allow them to realize savings through premium rate reductions. In situations where there are disagreements or distrust between energy regulators and the energy producers, insurers could play a valuable role as an independent third party known to be focused solely on those safety practices that are most effective and cost-efficient. Insurers may also provide valuable advice based on experience in underwriting similar risks in other regions around the world.”

And finally, “Considering the history of pollution costs associated with energy production, the potential risks of fracking, and the expected expansion over the next several decades, there are compelling reasons for all parties involved to come together, consider all possibilities, and invest the time and effort in order to make sure we have the most effective systems in place to cover the pollution costs now, rather than later.”

It seems that to require insurance coverage of shale drilling would be best for all parties involved including the injured, the companies and also government regulators, because of the risk-management expertise they provide.

Information for this article was taken from “Fracking: Considerations for risk management and financing,” appearing in INSIGHT, published 21 June 2012. It was written by Richard Soulsby, Jason Kurtz and Bhavini Kamarshi. INSIGHT is published by Millman, a company that does insurance analysis. However, the author’s interpretation is from the point of view of the embattled victim trying to get just compensation for the very obvious effects of shale drilling. The article is located at:

 http://insight.milliman.com/article.php?cntid=8107

Tagged as: damages, drilling, fracking, insurange, marcellus shale, natural gas, risks