Oklahoma Insurance Commissioner: Don’t Deny Earthquake Claims as Man-Made by Linking Them to Fracking

The jury is still out on whether hydraulic fracturing or “fracking” causes earthquakes, but carriers whose policies afford coverage for quakes have recently been denying such claims, asserting that they are excluded because they are attributable to a man-made cause – oil and gas production – rather than to a purely natural one.  Early last month, Oklahoma Insurance Commissioner John Doak cautioned against that, issuing a Bulletin warning earthquake insurers that his office would be forced “to take appropriate action to enforce the law” if they continued to deny quake claims on the basis of what he called “unsettled science.”

shutterstock_239934553Oklahoma has experienced a remarkable rise in earthquake activity in recent years.  According to the Oklahoma Geological Survey, the state had 567 quakes of Magnitude 3.0 or greater in 2014.  That was a five-fold increase over 2013, a 14-fold increase over the 2008-2012 average, and a 100-fold increase over earlier years.  The 2014 number exceeded the total number of earthquakes in Oklahoma during the preceding 30 years combined; no state in the lower 48 states, including California, saw more quakes last year.

The culprit is believed by many to be the disposal process associated with fracking.  Fracking itself involves injecting a slurry of water, sand, and chemicals into wells to fracture oil- and gas-bearing rock strata and thereby permit the oil and gas to escape to the surface.  The suspicion is not that fracking itself is the malefactor but rather the subsequent disposal of its principal byproduct – millions and millions of gallons of toxic fluid that travels back to the surface with the extracted oil and gas and is then injected deep underground.

The dramatic rise in earthquakes led many Oklahomans to purchase earthquake insurance.  The take-up rate on such coverage was only 2% in 2011, but it is 15% today, which is a higher percentage than even California.  As the Insurance Commissioner’s recent Bulletin explained, however, earthquake insurance covers only quakes from natural causes; to quote from the notice, “ ‘Man-Made’ earthquakes are excluded” by such policies.

The bulletin was issued on Tuesday, March 3rd, and its principal purpose was to caution carriers against denying coverage for earthquake claims by alleging that they were caused by fracking.  As the Bulletin explained:

Lately there has been heated debate as to whether earthquakes can be caused by water disposal injection wells or hydraulic fracturing (“fracking”).  At present, there is no agreement at a scientific or governmental level concerning any connection between injection wells or fracking and “earthquakes.”

Recent information, collected by my office from the larger earthquake insurance companies, indicates that approximately one hundred Oklahoma earthquake claims were filed in 2014 with only eight having been paid.

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.  If that were the case, companies could expect the Department to take appropriate action to enforce the law.

The Commissioner also cautioned insurers: (1) that if they intended to “deny a claim asserting ‘pre-existing’ damage, I expect that the insurer has inspected the property prior to inception of the coverage and maintained reasonably current information as to the condition of the insured property prior to loss;” and (2) that “I expect the addressees of this bulletin to take steps to insure that claims adjusters receive training as necessary to address the concerns” specific to earthquake insurance.  With regard to the latter, the state mandated an hour of continuing legal education on the topic of earthquake coverage for all adjusters every two years last fall.

In a press conference held at the time, Commissioner Doak stated that “[u]ntil a legal ruling is made, it is generally assumed that the earthquakes are not man-made” and that while “[t]his has to be resolved at some point, . . . we did not want insurers not paying claims until something like that is settled with a court decision.”  Reputable authorities seem to be moving towards the conclusion that fracking is the culprit here, however.  Thus a February report by the United States Geological Survey stated as follows:

This rise in seismic activity, especially in the central United States, is not the result of natural processes. . . . Deep injection of wastewater is the primary cause of the dramatic rise in detected earthquakes and the corresponding increase in seismic hazard in the central U.S.

In addition, the issue of causation is already wending its way through the legal system, though it is unlikely that the question will be definitively disposed of any time soon.  In 2011, one Sandra Ladra sustained injuries when her chimney collapsed in a Magnitude 5.6 quake – the strongest ever in Oklahoma – and she sued two energy companies, alleging that the earthquake was caused by fracking.  The trial court granted the defendants’ motion to dismiss, but she took an appeal, and the case is presently before the Oklahoma Supreme Court.

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About The Property Insurance Law Observer
For more than four decades, Cozen O’Connor has represented all types of property insurers in jurisdictions throughout the United States, and it is dedicated to keeping its clients abreast of developments that impact the insurance industry. The Property Insurance Law Observer will survey court decisions, enacted or proposed legislation, and regulatory activities from all 50 states. We will also include commentary on current issues and developing trends of interest to first-party insurers.
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