Fracking, or hydraulic fracturing, is a way of releasing naturalgas so that it can be used to produce energy. In recent years ithas become more popular as a way to harvest natural gas. Theprocess creates two byproducts, natural gas and wastewater. Whileit seems straightforward enough, there are countless considerationsand concerns, many of which affect homeowners and possible damageto their property.

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Fracking is conducted by drilling down into a rock formationseveral thousand feet and injecting water and chemicals into therocks; this splits the rocks apart, releasing the natural gas whichis then captured and used for energy production. One of the mainconcerns is the waste water and its disposal. It can be injectedinto the ground or put into a lined pond and allowed to evaporate;there is generally too much water for treatment to remove thechemicals to be a viable option.

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Injecting water into the ground has caused controversy as somepeople claim it contaminates the groundwater from which they drink,although the water is injected far below groundwater levels.Studies have shown that if the casings used to protect groundwaterfrom contamination aren't inserted or cemented correctly,contamination can occur. Contaminated drinking water has been foundnear fracking sites in Pennsylvania and Texas.

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A report showed that in New Mexico, chemicals from waste pitscontaining wastewater from fracking contaminated water sources 421times. This could lead to residents discovering contaminated waterin their wells or groundwater, and then having to deal withcleanup, something not covered under the homeowners policy. Otherconcerns are that the chemicals used are carcinogenic. Testing,monitoring, and cleanup of pollutants in the ground or water arenot covered under the homeowners form. Methane buildup, which couldcause an explosion, is another concern. Any pollution found on ahomeowner's property is not covered for cleanup under thehomeowners policy form. However, an explosion from a methanebuildup would be covered.

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Twenty states have enacted legislation concerning fracking andits byproducts. Some states have gone so far as to prohibit or banfracking altogether. The Environmental Protection Agency (EPA) isconducting a study and hopes to have a draft assessment report forpeer review and comment early this year. A progress report wasreleased in 2012 that highlighted the studies under way, theprimary research questions involved, and where the studies were inprogress. The projects were focused on five different types ofresearch activities: analysis of existing data, scenarioevaluations, laboratory studies, toxicity assessments, and casestudies. Results are pending. Data from 20 states is being reviewedfor the contents of the water and chemicals used in fracking.

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Fracking

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Photo: CalinTatu/Shutterstock

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Creating shaky ground

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Earthquakes are another issue. Injecting water into the groundcan lubricate faults and cause earthquakes. For a while this wasdisputed, however the United States Geological Service (USGS) hasstated that the injection of wastewater from fracking can causesmall quakes. Between 1975 and 2008, one to three magnitude 3.0earthquakes or larger occurred in Oklahoma annually; from 2009 tomid-2013 that number rose to 40 earthquakes per year and the causewas attributed to fracking. Oklahoma is hundreds of times morelikely to sustain earthquakes than it was a few years ago becauseof increased fracking and wastewater disposal. Oklahoma now hasmore earthquakes of magnitude 3.0 or greater than California. Inplaces where the injection of fracking wastewater has stopped,earthquakes have dropped down to near zero. Also of concern is alack of earthquake construction standards in the Midwest wherefracking has been occurring; homes are quite vulnerable to beingdamaged due to quakes.

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Most homeowners policies do not provide coverage forearthquakes, including earth sinking, shifting, rising or othermovement, regardless of how the movement was caused. So anearthquake doesn't necessarily have to be caused by the shifting oftectonic plates; shifting of ground due to manmade endeavors isalso excluded. However if the earthquake causes a fire, say byrupturing a gas line, then there is coverage for damage caused bythat fire.

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Coverage can be purchased by the use of an endorsement, HO 0554, Earthquake. Included in this form is coverage for land shockwaves before, during or after a volcanic eruption, and one or moreshocks occurring within a 72-hour period is considered oneearthquake event. Exclusions are for damage to masonry veneer,damage caused by flood, tidal waves or tsunami caused by, resultingfrom, contributed to or aggravated by an earthquake. Filling landis also not covered. If the earthquake leaves a crack or hole inthe ground, fill dirt is not covered. The earth movement exclusionnaturally does not apply when the endorsement is added to thepolicy. However, most homeowners are not aware of this, and may notpurchase the coverage thinking that they are not in a seismicallyactive area.

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An insured can always file a claim with the oil or gas companyfor damage to their residence. The commercial general liabilitypolicy does provide coverage arising from bodily damage or injuryarising from the exposure to the same generally harmful conditions;fracking could be one of those conditions. An issue that mightarise centers on whether the damage was expected or intended?Intended certainly not, but a carrier might try to say the damageto a dwelling could be expected, especially in light of the recentstudies showing that fracking is causing minor quakes. This wouldlead to a denial of coverage for a homeowner for damages to hishome or water quality.

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While fracking is a good way to obtain natural gas from theground, it also has its risks to people and property. Since manyexpect their insurance policies to protect them from some of thesehazards, many are not covered depending on the nature of the loss.Some states are requiring seismic monitors around fracking sites tomonitor seismic activity. Ohio is one state that has done so and ifthe monitors show a quake over magnitude 1.0, it leads to a wellshutdown and inspection. It will be interesting to see how thisprogresses, and what states and oil companies do from here; thefinal results from the EPA study are due this year.

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Christine G. Barlow, CPCU is an associate editor withFC&S, the premier resource for insurance coverage analysis. Shehas an extensive background in insurance underwriting. She may bereached at [email protected].Additional information about FC&S Online is available atwww.NationalUnderwriter.com.

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Learn more about the possible coverage issues associated withfracking at the Annual America's Claims Event (ACE),where you'll hear about the data, analysis, and solutions to thechallenges your team faces daily, and everything from technology tocustomer service to fraud and litigation. This two-day networkingand educational conference is geared specifically for insuranceprofessionals. Register to attend and save $350.

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