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Fracking and Earthquakes: The Risk Is Clear. Who Pays Is Not

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Fracking and Earthquakes: The Risk Is Clear. Who Pays Is Not
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The energy industry in the U.S. has surged in the past decade thanks to advances in technology that have allowed companies to extract vast quantities of oil and natural gas from sources once deemed too difficult or expensive to exploit. Yet as unconventional drilling methods like hydraulic fracturing have become more common, scientists have noticed a disturbing pattern that seems to follow their use: a sharp rise in the number of earthquakes in areas where fracking is used.

With many shale oil and gas deposits far from the parts of the country where residents usually expect earthquakes, homeowners are becoming increasingly concerned about the threat of fracking-induced temblors damaging their homes -- and also wondering whether they're insured against the danger.

Oklahoma: Not OK for Earthquakes

Until the recent energy boom, few people thought of Oklahoma as being a potential hotbed for earthquakes. No major fault lines run through it, so residents and the government saw little risk. Although the state isn't that far from the New Madrid Fault, which runs along the Mississippi River from St. Louis to Memphis, Oklahoma didn't face nearly the same danger as areas of southeastern Missouri, eastern Arkansas and western Tennessee. In maps produced prior to the fracking boom, the U.S. Geological Survey assessed Oklahoma as having relatively modest seismic hazard risk.

Earthquake risk map
USGS
Now, though, all that has changed. In May, the USGS issued an earthquake warning for Oklahoma, the first time it had ever done so for a state east of the Rocky Mountains. Researchers from the USGS and the Oklahoma Geological Survey specifically mentioned the possibility of hydraulic fracturing contributing to quakes. Extracting oil and natural gas through the fracking process creates some pressure, but scientists believe that reinjecting fluids back into the ground creates even greater amounts of seismic instability. As a result, Oklahoma has gone from having no more than a dozen magnitude 3 earthquakes each year from 1990 to 2008 to suffering hundreds since 2009.

Similar concerns have arisen in other areas of new energy production, including Ohio and Colorado. And while the impact on the energy industry hasn't been substantial yet, residents of states where fracking activity has caused damaging tremors are now learning what residents of California have long known: Typical homeowners insurance doesn't cover foundation and structural damage from earthquakes. Homeowners need to get additional earthquake coverage to protect themselves from potential loss.

As you'd expect, interest in earthquake insurance has spiked. A recent Time article found that, at least according to one insurance producer, earthquake coverage in Oklahoma has soared in popularity from about 1 percent prior to the fracking boom to about 40 percent currently. Broader-based figures show a more modest climb, but the Insurance Information Institute has figures showing that total premiums collected for earthquake insurance in the state rose more than 70 percent between 2010 and 2012. That comes even as premiums for earthquake insurance there have soared, with the institute reporting a doubling in average costs to more than $12,000 in 2013.

Will Energy Companies Foot the Bill -- or Will You?

For consumers, the cost of earthquake insurance has long made it seem optional for homeowners outside areas most at risk. Yet even as premiums climb, greater awareness of earthquake risk will force many homeowners to consider the potential impact of seismic activity on what for many is their most valuable asset.

In the end, the cost of earthquake insurance will turn on the ability of insurance companies to link loss events to specific activities from oil and gas production companies. Insurance industry experts have already looked at research establishing definitive links between wastewater injection practices and resulting seismic activity, but any potential lawsuit by insurance companies on behalf of homeowners against oil and gas producers would need much more specific evidence that a particular operation caused the quake that led to the damage. If insurers can't collect from energy companies, then they'll have to pass through loss costs to policyholders via higher premiums.

Nevertheless, if you live in an area where hydraulic fracturing is taking place, you need to keep a close eye on earthquake activity and consider the benefits of having earthquake coverage.

You can follow Motley Fool contributor Dan Caplinger on Twitter @DanCaplinger or on Google Plus. Check out our free report on high-yielding dividend stocks.

 

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