From an insurance standpoint, reputational risk is arguably a greater concern than the equipment or technologies employed in fracking. The process has been used for much longer than some media reports let on—since 1947 in the United States—although environmental-liability coverage was not readily offered until the late 1970s.

Historically, addressing pollution exposures of property owners, businesses, and contractors has been a relatively straightforward endeavor for insurers. Carriers have long established solid methods for structuring coverage and making appropriate underwriting decisions to minimize pollution exposure. It should be noted that general liability, professional liability, property and auto policies typically exclude pollution. Thus, underwriters for environmental or specialty coverage weigh significant pollution risks in order to create suitable terms to fill in gaps that may exist with standard lines.

Well-versed in handling these difficult risks, underwriters might consider the following items:

• 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?

Despite the fact that carriers have reached a certain level of comfort in grasping an array of plausible pollution risks, fracking appears to be another matter, one that may involve added complexities, such as contaminated property, bodily injury, clean-up costs, natural-resource damage, or transportation-related pollution. Moreover, even if liability is not established, policyholders will be looking for defense against third-party claims.

Now let's take a step back to consider the larger picture. If the fracking process has not fundamentally changed, and if the related exposures are similar to that of other energy-extraction techniques, then what is going on?

“Do Not Drink This Water”

It's true the practice holds enormous potential for U.S. economic growth and diminished reliance on foreign energy sources. However, current pockets of litigation foretell an uphill battle for insurers, who are obviously selective in the risks they assume.

“The difficulty is not that drillers are doing something new and dangerous, but that the activity has a higher profile with more energized environmental lobbying,” Willis said of fracking in its 2012 energy market report.

There is certainly no shortage of drama in the ongoing fracking debate, which can make separating fact from fiction all the more problematic. One case in point is a recent confession by Colorado Gov. John Hickenlooper to the Senate Committee on Energy and Natural Resources. A staunch proponent of fracking, Gov. Hickenlooper told the committee that he once drank a glass of fracking fluid produced by Halliburton, adding it wasn't “tasty” but that he “is still alive.”

Finding humor in the governor's odd disclosure, Minnesota Sen. Al Franken then asked if the experience was part of “some bizarre occult practice.”

Iconic images captured in the Academy Award-nominated documentary GasLand have also fueled controversy. One handwritten sign in the 2010 documentary displays the verbiage, “Do Not Drink This Water,” while a Colorado man holds a flame to his kitchen faucet and turns on the water, igniting a fire. Colorado officials later said they determined the gas wells were not to blame. Instead, the homeowner's own water well had reportedly been drilled into a naturally occurring pocket of methane.

In any case, this is not the only report—or visual depiction for that matter—of flammable drinking water, for lack of a better term. Popular Mechanics reports that as much as 50 layers of natural gas can occur between the surface and deep shale formations, and methane from these shallow deposits has intruded on groundwater near fracking sites. In May 2011, Pennsylvania officials issued the largest fine ever to a gas drilling company. The state fined Chesapeake Energy $1 million for contaminating the water supplies of 16 families in Bradford County, Penn. Because Chesapeake had not properly cemented its boreholes, gas spread along the outside of the well, between the rock and steel casings, into aquifers. Engineers have since commented that the problem can be corrected by using stronger cement and processing casings to create a stronger bond, thus ensuring an impermeable seal.

More Transparent Processes

Also fueling public speculation is the fact that many drilling companies have only reluctantly divulged (after some very public prodding) vital information about fracking fluid's composition. In June 2010, Texas became the first state to pass a law requiring full public disclosure of the chemical compounds used in drilling companies' wells. Just as insurance agents and claims adjusters have found—and practiced—over the years, greater transparency to the process creates positive vibes with policyholders and the general public.

In the case of the drilling chemicals, the regulations eventually revealed some interesting (benign) ingredients, such as instant coffee and walnut shells. However, certain fluids contained known and suspected carcinogens, including methanol and benzene. The larger issue for drilling companies and their respective insurers is actually what to do with the fluid after it rises back to the surface. In Texas' Barnett Shale, for example, wastewater is reinjected into impermeable rock more than a mile below the ground.

Looming Legal Disputes

To date, the brunt of fracking-related lawsuits have been confined to contamination to surrounding properties, as well as ground and surface water, as John F. Mullen and Kim Hollaender, attorneys with Nelson Levine de Luca, asserted in “Digging Deep: Fracking Litigation Trends,” which appeared in Claims' February 2012 issue.

“Suspected causes of contamination include faulty well-casings, improper drilling, and/or improper disposal of fracking fluids,” Mullen and Hollaender said. “These plaintiffs tend to live predominantly in rural areas with private water wells said to be contaminated with fracking chemicals. Meanwhile, other plaintiffs allege high quantities of non-fluid substances in their wells as a result of the fracking activity that caused hazardous substances, such as methane, to migrate into the wells.

“[More] recently, plaintiffs and their attorneys have pursued a variety of additional allegations of injury resulting from fracking,” they continued. “Some plaintiffs charge that fracking results in air pollution and excess noise, both with regard to the drilling process itself and the compression stations employed.”

“Not In My Back Yard”

We know that fracking is being used to a greater extent than perhaps ever before, and in more areas, some of which are heavily populated. This means that extraction operations are dangling precariously close—or at least closer—to our backyards, carrying greater potential for disruption, damage, and safety hazards that warrant careful consideration, if not immediate credence.

Insurers may very well see an uptick in claims by homeowners affected by fracking operations. Most homeowners' insurance policies extend coverage for direct physical loss or damage the policyholder's home and structures, but there are notable exceptions. The residents of Youngstown, Ohio, a Midwestern epicenter for fracking controversy, are intimately familiar with certain “exceptions.” Numerous homeowners there have reported settling, cracking, shrinking, or other types of property damage allegedly stemming from nearby fracking site activity. Furthermore, some Youngstown residents allege graver consequences of fracking—tremors and earthquakes. A case involving D&L Energy has seemingly supported such claims. For instance, D&L Energy operated a Class II injection well that was linked to a 4.0-magnitude earthquake in Youngstown in 2011. According to a preliminary report released in March 2012, about 11 other earthquakes in the Youngstown area emanated from within a half mile of that same 9,000-foot-deep injection well.

Subsequent reports that “all of the earthquakes originated from within five miles of local drilling sites” in the area have been proven false.

On the subject of earthquakes, are homeowners in any hurry to purchase additional coverage? Some experts contend that homeowners seeking coverage for incidents supposedly tied to fracking should opt for earthquake insurance. This raises some interesting questions on both sides of the fence. Are already cash-strapped American homeowners and businesses really interested in shelling out more in the way of insurance premiums? Even in California, which is notorious for its devastating rumbles and quakes, earthquake insurance premiums remain a hard sale.