Fracking-Related Earthquakes Raise Questions for Insurance Regulators

Considering buying earthquake insurance? Maybe you shouldn’t unless you also have a seismology degree. 

It turns out that more homeowners are buying coverage in earthquake-prone areas but many who think they are covered for earthquake damage get a rude awakening when they file claims. In 2014, only about 8 percent of earthquake damage claims filed in Oklahoma were paid, according to a new report by the Federal Insurance Office.

Hydraulic fracturing site

At issue is whether Mother Nature–or humans—cause a temblor. Most policies only pay out for damage from naturally occurring earthquakes. But quakes that many scientists attribute to oil and gas production activities, including hydraulic fracturing, or fracking, and the underground injection of wastewater, are not typically covered.  The insurance commissioner in Oklahoma, which has seen a surge in earthquakes in recent years with increased oil and gas production, is questioning the scientific underpinning for many denials of earthquake insurance claims. 

 “Increased earthquake activity in the central and eastern United States has led to an increase in the purchase of earthquake insurance in certain states,” the FIO reported this week. “For example, the take-up rate for earthquake insurance by Oklahomans rose from 2 percent in 2011 to 15 percent in 2014, which is even higher than the 10 percent take-up rate by California residents.”

“If an earthquake is induced by human activity, a claim by a consumer for damages under an earthquake endorsement or earthquake policy may be denied,” the report said. “For this reason, some state insurance regulators are addressing whether human activity like fracking and deep injection waste disposal is responsible for a portion of the recent increase in seismic activity.”

The report said that state insurance regulators should require insurers to make their coverage limitations clear in states at risk for human-induced earthquakes.

Oklahoma Insurance Commissioner John D. Doak has questioned the “extraordinary denial rate of earthquake claims,” noting in an October 2015 bulletin to all Oklahoma property-casualty insurers that there currently is “no agreement at a scientific or governmental level concerning any connection between injection wells or fracking and ‘earthquakes.’”

“In light of the unsettled science, I am concerned that insurers could be denying claims based on the unsupported belief that these earthquakes were the result of fracking or injection well activity,” the commissioner said. “If that were the case, companies could expect the Department to take appropriate action to enforce the law.”

Former Texas Insurance Commissioner Robert Hunter, the insurance director for the Consumer Federation of America, told Bloomberg BNA that consumers may be better off putting money into a savings account to protect themselves rather than buy earthquake insurance, which typically has high deductibles in addition to the low rate of claims payments.

If the quake is “man-made, than your only recourse may be to sue the man who made it,” Hunter said.