Insurance Companies Slow To Cover Drilling Risks

July 25--As gas drilling expands across Pennsylvania and into neighboring states, the insurance industry is trading memos expressing trepidation and uncertainty over how to assess the risk involved in covering the controversial development.

One company has written an exclusion that forces clients working with oil and gas companies to obtain additional coverage. An industry group drafted a memo encouraging brokers to brush up on potential liabilities, even including knowledge of the rare earthquakes said to be a byproduct of some industry practices.

The changes represent another form of growing pains for the far-reaching drilling industry and the ancillary businesses it involves.

Proponents of industry-wide insurance practices say such standards could protect landowners and serve as a watchdog as companies use safety records to jockey for lower rates. Other regions home to Marcellus Shale drilling have seen legislation passed requiring that insurance be secured before any dirt is moved for a rig, rules that aren't found in Pennsylvania.

The issue is cropping up in places like Ohio that are new to the shale development that has already brought thousands of wells to Pennsylvania over the past several years. Experts say shale drilling often moves into more heavily populated regions than other types of industry activity, making millions of homeowners part of the community affected by gas drilling.

Questions around drilling insurance made national news last week, when an internal memo circulated at Columbus, Ohio-based Nationwide Mutual Insurance Co. revealed the company was not covering damage caused by gas drilling in policies signed by contractors and landowners who've leased their land for drilling.

Saying exposures related to drilling are "too great to ignore," Nationwide also said it wouldn't cover the many contractors, such as truck companies or pipeline layers, who help in the drilling process. The memo, which was supposed to stay internal, was posted on the websites of several anti-drilling organizations. Nationwide later confirmed the letter was legitimate.

The Berkley Mid-Atlantic Group, a Virginia-based insurance operation working across a number of Mid-Atlantic states, also announced to brokers last month it would exclude oil and gas operations from policies "due to the large loss potential associated with these operations," according to an email provided to the Post-Gazette.

Berkley provides insurance to commercial operators such as contractors and the hospitality industry, and wants any of those clients venturing into the oil and gas industry to seek coverage from a sister company, said President and CEO Kevin Nattrass. That means if a trucking company covered under Berkley is contracted to haul wastewater for a driller, that company's oil and gas work would be excluded from its original policy.

Subcontractors can be in an especially tricky situation with insurance since they may not be privy to all of the details of the chemical composition of the risky material they're handling, said Michael Conley, a principal at the Philadelphia office of the Offit Kurman law firm and an expert on drilling insurance.

"If you back up and hit a water tank, that's one thing," said Mr. Conley. "If you back up and hit a chemical tank, that's completely different."

From a lease holder's perspective, Mr. Conley said it's become more common to see homeowners added to a company insurance policy as part of the lease agreement.

"You have to have the right type of insurance to protect you," he said. "Because if God forbid there is a claim, they'll come after everybody: the property owner, the drilling company and everyone associated with it."

Proponents of insurance regulation at a state level say making it more common in drilling states will encourage best practices among companies, which can use good safety records to lobby for lower premiums.

"In situations where there are disagreements or distrust between energy regulators and the energy producers, insurers could play a valuable role as an independent third party known to be focused solely on those safety practices that are most effective and cost-efficient," wrote three actuaries at the New York office of the Milliman Inc. actuarial and consulting firm in a report published in June.

Another industry outfit, the Mechanicsburg-based Insurance Agents and Brokers group, circulated an internal letter to members earlier this year suggesting they acquaint themselves with some of the impending insurance land mines associated with gas drilling.

Among those potential hazards: diminished home values, long-term pollution concerns and even earthquake coverage after a state probe in Ohio ruled that wastewater injection wells caused a series of earthquakes there.

"The potential exposures for explosion, pollution, etc., are substantial, and it is likely some of these exposures will not (or in some cases cannot) be covered by the policy," the article said.

Meanwhile, Ohio passed legislation in May that required companies drilling the kind of horizontal wells used in shale development to get at least $5 million in insurance coverage. No similar requirement exists in Pennsylvania, though it has been hinted at in campaign spots.

In a radio ad about Marcellus Shale development produced for his 2010 campaign, Gov. Tom Corbett said the state "must require each driller to purchase sufficient insurance to fully cover any harm they cause."

Erich Schwartzel: eschwartzel@post-gazette.com, 412-263-1455.

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