No fracking insurance: how long until no pipeline insurance?

What if negative publicity around pipelines gets as big as around fracking? Given the many recent high-profile pipeline accidents, that may already be happening. What happens to pipeline companies’ own insurance then? What happens to your homeowner or farm insurance?

CBS News 13 July 2012, Insurer Won’t Cover Gas Drill Fracking Exposure,

The memo reads: “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 (insurance) coverage.”

It said “prohibited risks” apply to landowners who lease land for shale gas drilling and contractors involved in fracking operations, including those who haul water to and from drill sites; pipe and lumber haulers; and operators of bulldozers, dump trucks and other vehicles used in drill site preparation.

And it’s not just actual claims:

He said one factor that may be driving Nationwide’s decision is that increasing publicity — much of it negative — surrounding fracking makes it possible that any damage claims would go beyond the big oil and gas companies to include the hundreds of supporting businesses such as haulers.

And negative PR isn’t the only problem.

Bhavini Kamarshi, Jason B. Kurtz, Richard C. Soulsby wrote for Milliman 21 June 2012, Fracking: Considerations for risk management and financing,

As with any activity, accidents that are due to equipment malfunction or human error are inevitable. As a result, firms in the energy industry employ risk-transfer mechanisms such as pollution liability insurance to manage these risks. Depending on the size and the nature of operations, pollution liability insurance is purchased with limits that range from approximately $1 million to just over $100 million for the largest gas companies.-12These policies provide coverage for indemnification of pollution damage or injuries, as well as associated defense costs. Considering the large dollar amounts associated with claims on comparable historical pollution events, there could be several scenarios where the indemnity and defense costs for future fracking-related pollution claims amount to several multiples of the largest pollution liability limits that are currently being purchased.

For a company responsible for such an event, if insurance coverage is inadequate then investors are at risk of losing up to the full amount of their investment in the company. If the full net worth of the company (in addition to insurance coverage) is insufficient to cover the costs associated with an event, those costs will be borne by those who have suffered property damage or injuries. With the common practice of using site-specific LLC/LLP corporations that are dissolved after operations are completed, and the hundreds of small companies active in shale gas production with typically minimal pollution liability coverage, this outcome is a very real possibility.

Yes, what would keep an LLC like Sabal Trail Transmission from filing bankruptcy like “Freedom Industries” did in West Virginia after polluting drinking water for 300,000 people?

And if a pipeline company went belly-up and left a mess, what would happen to local property valuations?

That paper came out before the Nationwide memo leaked, but this 37 page white paper came out last year, and it explicitly discusses pipelines. The Fuss Over Fracking: An Examination of the Insurance Issues Associated with Hydro-Fracking A Nelson Levine de Luca & Hamilton White Paper, August 2013.

Other claims related to fracking include ground subsidence or sinkhole claims. In areas with limestone formation, it is easy to understand how such activities could lead to sinkhole allegations. In such areas, underground limestone may naturally dissolve by the circulation of water. Over time, this results in the formation of underground caverns and voids. As these spaces increase, a lack of support for above-ground land may result in sudden and dramatic collapses. Some believe that the voluminous quantity of fracking fluid used in hydraulic fracturing can have a similar effect.

Claims may also result from the pipelines required to transport gas extracted from the fracked wells. Pipeline leaks and other conceivable failures may affect local air, water and soil, damage property, sicken and/or kill livestock and cause bodily injury. The likelihood of such claims will increase as more wells are drilled and demand for pipeline and transportation infrastructure continues to expand.

These claims are particularly likely to arise given a number of recent high-profile incidents involving defective pipelines that caused property damage, significant injury and death. Although none of these incidents involved pipelines used in fracking operations, the media have focused attention upon the harm that may arise from their defects. Media reports have not only addressed the potential risk of such defects, but have also emphasized the lack of meaningful regulations with regard to many pipelines used in fracking activities, including pipelines used in the Marcellus Shale. In light of this media coverage, any accident involving the failure of pipelines used in fracking is likely to be followed by an onslaught of lawsuits filed on behalf of allegedly injured parties.

And while FERC can claim federal law supersedes all state and local safety laws as far as implementing a pipeline, that’s not at all true of liability litigation:

In fracking litigation, causes of action are often asserted under state statutes such as Pennsylvania’s Hazardous Sites Cleanup Act,25 as well as commonlaw theories such as strict liability, negligence, private nuisance, physical trespass (usually based upon allegations that contaminated materials generated by fracking have infiltrated the plaintiff’s property), medical monitoring, emotional distress, “inconvenience and discomfort” and negligence per se. Claims of strict liability have often been based on allegations that the drilling is an “ultra-hazardous” or “abnormally dangerous” activity. As discussed below, additional causes of action may be asserted in litigation regarding the allegedly improper extraction of natural gas pursuant to a lease entered into with the injured party.

Multiple theories of damage have also been claimed, including bodily injury, diminution in property values, breach of quiet enjoyment, loss of business, increased risk of disease and punitive damages. In addition to claims for monetary damages (including punitive damages and attorneys’ fees), plaintiffs frequently seek injunctions to stop drilling activity and mandate remediation of alleged contamination.

While many of the lawsuits filed by purportedly injured property owners and residents have been individual in nature, a significant number of these suits have been presented as putative class actions. At least 10 such actions have been filed in recent years, particularly in the state of Arkansas. One such example of these lawsuits was Tucker v. Southwestern Energy Co.26 The plaintiffs in Tucker claimed that fracking contaminated their water well with alpha methylstyrene, described in the complaint as a “flammable and poisonous component which is a known component of fracking fluids.” The plaintiffs also contended that their soil, groundwater and air were contaminated by the defendants’ fracking activities. In the complaint, the plaintiffs asserted causes of action for strict liability, negligence, nuisance and trespassing. The plaintiffs contended that they sustained damages that include loss of use and enjoyment of their property, “severe diminution” in property value, and “fear, shock, mental distress and physical harm.” The complaint contained demands for $1 million in compensatory damages, $5 million in punitive damages, establishment of an environmental monitoring fund and creation of a medical monitoring fund. The case settled for an undisclosed sum.

And that’s not all:

Private civil litigation will often intersect with administrative proceedings of state government enforcement actions for fracking-related spills and blowouts.

That $15 million EPA fine against Texas Eastern (now Spectra) was “part of a settlement of civil charges brought against the company”.

It might be prudent for a pipeline company with such a history to make a new LLC for a new pipeline, so as to limit potential litigation expenses. I’m just speculating, of course.

Do you want to have to speculate about your property values, your homeowner or farm insurance, or your family’s safety?


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