Friday, July 13, 2012

Nationwide doesn't cover fracking: How newsworthy? Industrial sized risk not part of standard policy

Nationwide’s recent statement declaring its policy designed for homeowners and business does not cover liability and losses related to fracking is interesting, but not as interesting as the coverage it has generated.

The statement, issued earlier this week, was prompted by the circulation of the company’s underwriting guidelines on the Internet after somebody posted them on Facebook in the context of the fracking debate, said Nancy Smelter, a spokeswoman for the agency. With that, Nationwide felt it necessary to explain why it didn’t cover losses from fracking:

From an underwriting standpoint, we do not have a comfort level with the unique risks associated with the fracking process to provide coverage at a reasonable price. Insurance is a contract and it is designed to cover certain risks. Risks like flooding and mining or drilling are not part of our contracts, and the customer should seek out an insurer that handles these customized types of insurance.

There is nothing all that unusual about Nationwide’s position, except for the company’s need to publically explain it suggests risks associated with mineral extraction -- fracking in particular -- are becoming more of a mainstream concern than a niche. How many people or businesses have a mining or drilling operation in their backyard? Prior to on shore drilling boom spurred by shale gas development and high volume hydraulic fracturing, relatively few. But the implication is that shale gas extraction could potentially affect a significant number of policyholders in Nationwide’s marketplace.

The Nationwide statement points out that its general homeowners policy never covered losses to mineral extraction claims, and it puts fracking into the same category as drilling and mining. But the headlines that this generated made it easy to believe that the company was taking a position against fracking. This from the Associated Press: US Insurer Won't Cover Gas Drill Fracking Exposure. And this from the River Reporter: Nationwide Insurance: No Fracking Way. (In the wake of this type of coverage, Nationwide issued another statement this afternoon emphasizing that it’s policies have not changed regarding fracking, and that the company is not cancelling policies. Click here for full statement)

Because the Nationwide story is rooted in the controversial assessment of fracking risks, it presented an opportunity for anti-fracking activists, and a hook for media serving a public eager to know more. If a company that is expert in assigning and mitigating risks is saying no thanks to fracking, it’s logical to conclude, then the risks must be substantial. But there is more to it than that. What if a company that has never dealt with mineral extraction policy suddenly decided to cover fracking in its policy? Now that would be a surprise, but I doubt it would make headlines.

While the approach to these stories may have been off target, the liability issue is important and problematic. Unlike other industrial activities that operate in designated areas, owned by parties subject to fixed regulatory and commercial jurisdictions, drilling often occurs as a secondary function on other people’s residential land – possibly owned by uninformed third parties --– in a relatively unregulated, piecemeal, and itinerant way. The underlying issues of risk and liability are a critical part of understanding the impacts from shale gas. If the Nationwide story raises awareness and sets up discussion of this, then it’s worthwhile.


  1. Tom,
    You have obviously never lived in a house sitting over a coal mine. You're thinking only in terms of the vertical well. The horizontal mine shaft is also subject to "subsidence" also known as "earth movement". They cave in and have to be refracked. Even though they are deep underground, the surface earth many feet above can shift during a cave-in, causing damage to existing structures, such as homes. When I closed on my house outside of Pittsburgh, I had to sign a "subsidence clause" that said that I understand the risks of buying a home in that region, that my home may suffer structural damage due to "subsidence" and that my homeowner's policy won't cover "subsidence" but I would still owe the balance on the mortgage, even if my house becomes uninhabitable. Before that day, I had never heard of "subsidence". I asked my lawyer, "What if I don't want to sign this?" He answered, "Everyone who buys a house these days has to sign it or they don't buy the house. We walk away."

    Horizontal fracking has the potential to cause "subsidence" which could result in damage to my home. In Ohio, the earthquakes were blamed on hydrofracking. I wrote to my insurer and asked if my home would be covered for structural damage if there is an earthquake (as I have an earthquake rider) and if there is hydrofracking going on in the area. Short answer? Earthquake damage is not covered due to "human factors" which cause an earthquake, including hydrofracking.

  2. Thanks for your thoughts, Patricia. I'm not arguing that homeowners' risks related to fracking and mining are not real, or that they should or should not be covered under a given policy. I'm pointing out (among other things) that Nationwide's lack of coverage for losses due to mineral extraction is not a new development. I think this is important for people to keep in mind when considering or negotiating a lease, or evaluating risks associated with fracking. But given that you have direct experience with this (and I don't), can you offer any other advice to homeowners who might face this dilemma?

    1. Nationwide said it best. This isn't a new twist on old policy rules. No homeowners insurance company will cover damage to a home when the damage is from a man-made cause and not an "Act of God".

      Advice? If you're voluntarily asked to sign a gas lease, don't sign. If you find yourself presented with a Compulsory Integration lease, move to an area that is precluded from fracking, such as Deposit or Syracuse and commute to work, if that's possible. I wouldn't even move to an area that has a ban or moratorium because it can be repealed and you're back in the same predicament. If you can't commute that far, get a new job in a safer area without all of the insurance issues. When I lived outside of Pittsburgh, everybody just lived with the very real issue that their homes would just form cracks and receive structural damage at any time and they'd be on the hook for the repairs themselves. They just learn to live with the risk.

      Your options are: Don't sign; if the government signs for you due to Compulsory Integration, you can move; if you can't move and your property is integrated, learn to live with the risk of subsidence.

  3. While there may indeed be nothing unusual about Nationwide's policy on fracking, I suspect that until this issue was covered in recent news reports, many members of the public probably assumed (incorrectly) that their property would be covered by insurance should the property be damaged by activities related to shale gas extraction.

    I would imagine that there are quite a few people who signed gas leases who would not have done so had they known about this insurance issue. I also imagine that if the public had been fully aware of this insurance issue, there would have been more public resistance to laws in NY and PA that attempt to override zoning so that drilling can occur in residential areas.

    So, while I can appreciate Mr. Wilber's point that the news stories about Nationwide may have given an incorrect impression about Nationwide's position on fracking, I am also glad that the insurance issue is finally receiving the publicity it deserves. The fact that it is standard practice NOT to cover losses from mining and drilling is an excellent argument against allowing these activities in residential areas, and it is also a good counter-argument to the gas industry's assurances about the supposed safety of drilling and fracking.