This process involves both horizontal and vertical drilling into shale formations, with the wellbore injected with specially engineered fluids at sufficiently high pressure to fracture the deposits and release the natural gas they contain.

WHY THE CONCERN?

The composition of fracking fluids may vary widely. The primary component is water, followed by silica or other similar material. The smallest portion, perhaps as little as 0.5 percent, is comprised of a blend of different chemicals.

Some of these are highly toxic, some are carcinogenic, and some are known pollutants. None of these are additives one would want to see introduced to water supplies or spilled on roadways (because the drilling waste is so salty, some communities are purchasing it to spread on roads as a de-icing substance).

Oil and gas companies insist their processes occur at depths too great to impact aquifers used for drinking water. But local residents respond by taking advantage of the Internet to share videos of their new ability to set their tap water on fire—and livestock drinking the water have died.

As a result, lawsuits are increasing.

At the federal-agency level, the EPA has embarked on a multi-year, seven-site study of the relationship between hydraulic fracturing and drinking-water resources. Meanwhile, the U.S. Forest Service has completed a study providing evidence that fracking-fluid disposal methods can cause severe ecological damage.

State environmental-regulatory agencies are fining both gas producers and their contractors for spilling drilling liquids into wetlands and waterways, resulting in local fish kills.

Additional concerns are that the natural-gas operations also produce smog-forming pollutants.

ARE "FRACCIDENTS" INSURABLE?

Hydraulic fracturing has been used in the United States since 1947. Environmental liability insurance has been available since the late 1970s. So what is all the current fuss about? Isn't it easy to address the pollution exposures of both property owners and contractors in our highly competitive soft market?

Well, it depends…

The variety of loss exposures may include contaminated property, bodily injury, clean-up costs, natural-resource damage or transportation-related pollution. Even if liability is not established, policyholders will be looking for defense against third-party claims. Because general-liability, professional-liability, property and auto policies typically exclude pollution, it is important to work with underwriters who understand the significant pollution risks and can package appropriate terms to fill the gaps that may exist with standard lines.

But do the environmental carriers want to cover fracking and its associated risks?

For some, the answer is an emphatic no. Just as the old truism says you can't insure a burning building, many underwriters are unwilling to offer coverage where the drinking water has already caught fire. In fact, a few insurers are contemplating excluding all fracking operations. Their conservatism may also be due to the regulatory environment being very much in a state of flux. The possibility that new legislation could increase claim activity that was neither foreseen nor priced for has made some very cautious. Prior poor loss experience is also a factor.

For other carriers, the answer is a qualified yes. With a long history of successfully tackling the difficult risks associated with pollution exposures, the excess-and-surplus markets are well-versed in creative methods for structuring coverage. The following are some items to consider:

• Is environmental liability subject to a sublimit under the policy?
• Are terms provided on an occurrence basis or claims-made only?
• Are fines, penalties and punitive damages covered (where insurable by law)?
• Are emergency-response costs included?  If so, are they sublimited?
• Is coverage for natural-resource damage included? 
• Is coverage provided for non-owned disposal sites?  
• Are defense costs inside or outside the limits of liability?
• Does the applicant have driller blow-out policy or well blow-out coverage?

The potential impacts on the insurance industry from the expansion of hydraulic fracturing are numerous. So are the opportunities. For those new to environmental-liability insurance, or who work with it too infrequently to keep up-to-date on the latest developments, it is more important than ever to seek out the assistance of those with broad environmental expertise to ensure their clients' exposures are properly assessed and addressed.