The Unseen Insurance Risks of the Fracking Industry

Top Level Fracking Industry
Recently the property and casualty insurance industry’s main journal, PropertyCasualty 360, published an article titled “Demystifying Fracking: How Insurers Can Tap into This Next Phase of U.S. Energy Growth”. The article suggests that the insurance industry is missing out on a great opportunity insuring risk in oil and gas industry by allowing itself to me mislead by the media. But, what is fracking, and what are the risks of the fracking industry?

Fracking is the process of injecting salt water, sand, or water with other chemicals into the ground. This is done at locations where shale rock is common. The water follows cracks in the shale underground as a way to force out oil and other natural gasses. Opponents argue that the process releases harmful chemicals that find their way into drinking water and also affect the quality of the air we breathe.

As far as the article was concerned, I read the authors’ biographies first. Brian McCarthy is a veteran industry leader who has developed some amazing programs and companies. His bio understates his achievements in that it barely touches on his management experience. Justin Russo is a safety and loss control engineer. As I once owned a loss control and engineering firm I have great respect for what he does.

The authors argue that the insurance industry can be a powerful force for positive action. Given the nature of the oil and gas industry it would seem a perfect place for an industry that understands mitigation and control of risk. While I agree with their premise, I can’t understand why people with their career backgrounds would write an article laced with improbable oil industry talking points.

Early in my career I was “the” excess and surplus lines underwriter for Northfield Insurance Company. At that time the company was so small that I was their only underwriter. Northfield was open to ancillary oil field risks and we wrote quite a lot of that kind of liability business for our general agents in Oklahoma and Texas. The Williston Basin and Bakken oil patch in North Dakota was not a major factor in the oil industry then.

Holm Farm Tractor

Holm Farm in North Dakota – Early 50’s

Although I make my living now in the Twin Cities my roots are in North Dakota. I was raised there on a family farm and graduated from North Dakota State University. While most of my insurance training occurred in Chicago and Minneapolis, fourteen of the forty-four years I’ve been in the insurance industry were spent living in either Bismarck or Fargo. I first started insuring risks in and around the North Dakota oil patch in the late 1970s.

Over the last several years I’ve worked with agents in North Dakota to place insurance for many businesses. For those with liquor liability accounts, I’ve watched the receipts in bars and strip clubs in that state skyrocket. Additionally, agents in that area have kept us abreast of the pros and cons of the oil boom.

Although I recently sold my general agency, I still have over 100 members of my agency aggregation in North Dakota and am open to new opportunities. I’ve often told the insurance companies I’m contracted with that there are ancillary operations in the oil field that are quite safe, such as pumpers and gaugers, but I was quite unprepared for the sweeping endorsement of over-the-hole risks in McCarthy and Russo’s article.

The Oil Field Is Booming and Represents a Huge Opportunity for the Insurance Industry — Maybe

In summary, the authors of the oil fracking article tried to make the following points.

  • The media has hyped the loss potential due to fracking pollution.
  • The opportunity for insurance companies to take on risk for profit in the oil fields is enormous, with little competition.
  • A lack of ready reinsurance is holding back the appetite for many insurers, which stems from ignorance on the behalf of misinformed reinsurers.

Much to my dismay the article lacked data to support the above statements.

Fracking Is Not a Pollution Risk – Huh?

Antique Chemical SprayerAs mentioned previously, I was raised on a farm. Therefore I don’t fear productive use of chemicals. We considered chemicals to be helpful tools. In the 1950s and 1960s we would spray our cows with DDT while they came into the barn, so they could relax for milking. After a long day in the fields we would first clean the oil and grime off our hands and arms with gasoline before washing with soap and water.

When you’ve lived in the wide open spaces of sparsely populated North Dakota, , the thought of man harming nature is not easily accepted.

While I was growing up in North Dakota I was told that the annual rainfall was 12 to to 14 inches. I became painfully aware of the scarcity of water one summer when we waited fruitlessly for rain. My father had a fifteen-acre oat field adjacent to our farmstead. Contractually, we had to harvest that field even though it had withered. My father drove our 1948 Massey-Harris combine around and around that field. His hopper never got full. In fact, he unloaded everything that field produced into a thirty-gallon oil drum. In a good year that field would have produced 500 to 750 bushels of oats.

My awareness of the scarcity of water makes me leery of fracking. While I readily accept the oil industry argument that people in many states use more water making their lawns green than the oil industry uses, I don’t agree with the practice of trading scarce water for short-term wealth. My agency insured a water-hauling operation connected to fracking that can’t hire drivers quickly enough to keep up with the ever-increasing demand. To lure drivers they’ve built several large, motel-like dorms exclusively for their employees.

I state my bias about the use of water to be fair, but whether or not that water is prudent is not an insurance issue. At the same time, whether or not a pollution hazard exists is not questionable. The authors’ assertion that groundwater pollution can be “completely” protected is misleading, as I will explain. Further, the practice of flaring off the natural gas is also an immense hazard, as are the injections wells with casing passing through aquifers.

In a way all the concern about fracking misses the main liability exposures. The old infrastructure in the oil fields, most in North Dakota built in the 70s, is creating a tremendous number of polluting spills.

Also the auto traffic in North Dakota has increased causing a horrible impact on traffic fatalities. Since 2005, according to the National Highway Traffic Safety Administration statistics, the number of auto deaths in the United States has gone down 18%. During that same time, the number of annual traffic fatalities in North Dakota has gone up by 73%, per the North Dakota Highway Patrol.

Pipelines have proven to be economical and safe in the shipment of gas, oil, and salt water. Insurance companies would not miss these statistical differences and would reward those insureds using the safest methods.

“groundwater supplies can be completely protected” – Really?

Unseen Insurance Risks of the Fracking IndustryThe article states, “Considerable media attention has been paid to purported groundwater pollution, where fracking fluids or wastewater leaks into aquifers. When done correctly, hydraulic fracturing occurs thousands of feet below aquifers; by properly casing wells and extracting wastewater, groundwater supplies can be completely protected.”

While it is true that fracking often occurs at a depth of up to two miles and aquifers can be at a depth of fifty to six thousand feet, it is a tremendous stretch to state that “groundwater supplies can be completely protected.” The oil has to be brought out of the ground through the “groundwater supplies” so that could mean as much as six thousand feet of pipeline that is surrounded by aquifer. And, since the aquifers in North Dakota are so interconnected, polluting one could create a horrible disaster. Even the dement sleeve around the casing is not capable of “complete protection”.

In North Dakota, potable water aquifers can be as deep as 500 to 600 feet. Other aquifers are in the range of 1,000 to 1,200 feet deep but the water is too saline for human consumption, and often used only for cattle.

Spills on North Dakota Oil Fields

Spills on North Dakota Oil Fields (2000-2013)
Copyright Gage Cartographics

Past incidents would suggest that another spill, unfortunately, is highly probable. There have been hundreds of recorded oil spills in the last twelve years in the North Dakota oil fields. In the fall a 20,000-barrel spill occurred due to a hole in an oil pipeline.  The lack of accurate and prompt reporting of these oil spills, which only became known in the later part of 2013, points to the fallacy of relying on the government to properly regulate the industry.

The article goes on to state, “Public concern has also been building around the chemicals used in the fracking process. More than 99.5 percent of what goes into fracking wells is sand and water. Leading oil and gas drilling companies are required to disclose pollutants on the FracFocus national chemical registry, enabling the public to learn more about the chemicals in use on sites near their communities.”

One half of one percent leaves a lot of room for harmful pollutants. The list includes hydrochloric acid, ethylene glycol (used in antifreeze), glutaraldehyde, potassium chloride, and dimethylformamide.  Some of the chemicals are flammable: people have reported tap water catching on fire.

After these chemicals are used they, and the water used to transport them in and out of the process, are injected into disposal wells located thousands of feet below the surface. The pipes used in this process also carry the chemicals through layers of aquifers. It is this danger of pollution through shoddy workmanship of cheap materials that must be considered by potential insurers.


North Dakota hosts 17,500 miles of pipelines. For weeks, no one knew about a Tesoro Corporation pipeline that broke late 2013, releasing an estimated 20,600 barrels.

The authors state, “As in any field, there will be bad actors, including a handful of companies looking to cut costs and illegally boost profits that will likely cut corners and ignore best practices.”

If a TV show has bad actors I switch to another channel. When you’re allowing bad actors to possibly pollute an aquifer, that provides drinking water to ninety percent of North Dakota rural residents the potential for loss is real.

The article goes on to state, “Many assume the industry is poorly monitored and regulated. Instead, the opposite is true—leading states involved in oil and gas drilling, including Pennsylvania, Ohio, North Dakota and Texas have all instituted stringent regulations to ensure that drilling is safe for the general public. Along with the state regulations, associations such as the American Petroleum Institute (API) have created standards and guidelines that promote best practice implementation.”

In 1985, I stepped forward during an insurance crisis and created the North Dakota Insurance Reserve Fund. I invested my own money and time to develop that self-insurance pool for North Dakota’s political subdivisions and state agencies. That pool was credited with saving the North Dakota Medical School, allowing two zoos to reopen, preventing a resurgence of leafy spurge, and saving the taxpayers of North Dakota over $100,000,000.

During the process I was faced with demands to take part in political corruption involving the investment of the pool’s funds, the awarding of contracts, and other unethical and illegal demands. When I refused to participate, I came under attacks that tried to demean my abilities and character.

Just as there are bad actors in the oil fields there are bad actors in political positions. I found the vast majority of the elected officials I worked with to be extremely good people who worked diligently to fulfill their office requirements, but it only takes a handful of wrong-doers. I eventually sued several of them and received some measure of satisfaction.

Not all politicians are “bad actors”. In fact, one former governor of North Dakota (he also served as attorney general) is a partner in my current business. Further, the Farmers Union, one of the largest political forces in North Dakota, has been my largest client in North Dakota for years. However, imagine how overwhelmed local officials are by the problems presented by this oil boom.  8

Recently there was a bad railroad incident outside Casselton, ND that was caused by unwillingness of the North Dakota politicians to properly regulate the transportation of crude oil from the state.  According to Jim Fuglie in his Prairie Blog, the North Dakota oil industry person, who certified this train’s cargo, is part of the regulatory problem. The train that was involved in a similar accident last July in Quebec, which resulted in forty-seven fatalities, was also loaded with North Dakota crude – a product too volatile to be handled by the kind of rail cars that are carrying it, in most instances.

Other states have had inadequate response from their regulators regarding groundwater pollution from fracking, as people wait for an EPA investigation.

Some Oil Field Workers Are Not “Good” Actors.

Imagine who would work in the open on an oil rig in sub-zero weather with winds continually blowing at twenty to forty miles an hour. In addition to the adverse elements, law enforcement in western North Dakota has become “iffy”. A good friend of mine in North Dakota is an insurance agent who I’ve worked with for forty years. He recently told me he bought Glock pistols for his adult children to protect them in their homes near the oil wells.

Lack of law enforcement can lead to scoffing at authority. It takes little imagination to connect the undisciplined nature of the North Dakota oil patch and the inhuman conditions to an environment that would lead to pollution causing incidents.

As the authors stated best practices are needed, but who will enforce them?

Insurance Companies Can Make Immense Profits in the Oil Fields – and They also Post Record Losses

As an insurance agent and insurance underwriter, the oil field risks I’ve placed with and accepted for companies have posted extremely profitable results. The largest losses I’ve incurred have been to equipment and those were due to perils not specific to oil field risks.

However, things have changed over the years in the oil patch. At one time, a man’s word was his bond. Then came some of the larger oil companies whose lawyers started to pass liability around through a crazy quilt of hold harmless clauses and contractual liability agreements. Suddenly, the person delivering sandwiches to oil field crews could be as culpable in losses, as the over-the-hole driller.

When I created the self-insurance pool for North Dakota political subdivisions, I dedicated four percent of the written premium of the pool to loss control and engineering. I found the best talent in the state to help cities, counties, school districts, and others avoid accidents and incidents that could result in bodily injury and property damage. In addition to a lot of bad maintenance practices we found bad recordkeeping and a lack of knowledge which led to loss. We instituted training programs and developed signage logs.

Our motivation was primarily to preserve the self-insurance pool’s assets. Capitalism is a powerful motivator. There is no doubt that there are “bad actors” within the ranks of insurance company inspectors and underwriters, but the profit motive will soon uncover their personal flaws.

An insurance company will present another pair of eyes to watch the procedures and materials used in the oil patch to safeguard the water. Insurance companies can adapt “best practices” practically overnight, whereas regulators take years and years to accomplish anything. Witness the lack of action surrounding the need to update crude oil transport rail cars.

Knowledgeable insurance agents and underwriters can read and understand contracts to make sure they’re fair, reasonable, and serve a purpose other than allowing “bad actors” a safe-harbor.

Canada’s federal government has promised it will toughen railroad safety standards and demand that railroads carry much higher limits of liability. The railroad involved in the Quebec crude oil explosion has $25 million in total limits, which may prove to be inadequate. This increased demand for coverage is good for the insurance industry, if they have the capacity.

Reinsurers Are Being Misled by Media – Highly Unlikely

The article states, “The biggest issue holding back oil and gas drilling insurance coverage options is a shortage of reinsurance capacity. Much of this is due to a lack of education among the reinsurance community, where much of the capital comes from European reinsurers. Since fracking is a relatively new industry in the European Union, much of these reinsurers’ knowledge of the industry is formulated by the negative perception coming from the U.S.; as a result, the market is tainted. Without reinsurers, insurers who are interested in entering the market will be unable to properly mitigate their risk—preventing fracking from reaching its full potential.”

I agree fully that a lack of ready reinsurance is a problem. In the middle 80s I was able to add the formation of a North Dakota-based reinsurance company to the list of needs created by the North Dakota Legislature for state economic development.

I have been actively involved over the years in placing facultative and treaty reinsurance. Desk underwriters have their hands tied if they can’t find reinsurance support for what they want to accept as risk for their company.

However, it is highly unlikely that European reinsurers are avoiding fracking risks because of misleading media.

I’ve worked with Lloyd’s of London for several decades as a correspondent. In the early 80s I was the North Dakota delegate for Lloyd’s of London.  Lloyd’s representatives travel the U.S. quite frequently. Those European insurance underwriters don’t rely on the United States press to form their underwriting opinions.

My nephew has been with one of the largest risk modelers in the United States for many years. When the large oil spill occurred in the Gulf of Mexico I asked him for his take. Less than ten days after the loss occurred he shared a position paper with me that turned out to be extremely accurate. Part of his job is traveling to Europe to keep the European reinsurers aware of risk potential. Those in the reinsurance business in Europe do not rely on the mass media for their underwriting information.

I have great empathy for the authors’ assumptions regarding the media forming an adverse impression in the companies’ boardrooms.

During 1980, I was putting together a national program for custom harvesters, the independent contractors who follow the small grain harvest from Texas to Canada with their combines and trucks. I was working with John Deere Insurance Company, who had an obvious stake in a program due to the large amount of equipment sold to custom harvesters. My insurance background included underwriting custom harvester risks for several companies for inland marine, liability, and auto exposures.

We were at a point in the negotiations where we had exchanged the contracts and were almost ready for signatures. I was relaxing one Sunday evening and watched a made-for-TV movie called “Amber Waves”  starring Dennis Weaver and Kurt Russell. The movie unfolded with Dennis Weaver as a veteran custom harvester fighting personal poverty and facing death without a penny to leave to his family. He solved his dilemma by torching his trucks and equipment for profit.

Coincidentally, John Deere Insurance Company reversed their decision and pulled out of the program less than a week later. I fought for years against the temptation to believe that fictional arson had cost me that opportunity.

Insurance Agents and Companies Can Play a Healthy Role in The Oil Fields

Oil Insurance AgentI agree entirely with the authors’ summation. “Due to the nature of fracking, insurers must approach the industry with a long-term, strategic mindset. This is not an industry to be exploited and profiteered overnight, but rather the next phase of American energy growth. Insurance will play a crucial role in increasing investment in hydraulic fracturing while protecting public and private interests, benefitting the country as a whole. Together, we can help safely create an energy-independent America.”

No amount of safety concern will impede the oil field operation in North Dakota despite its many adverse impacts on the people who live there.  The economic opportunity is too large for too many powerful people. Many point to the large amount of gas and oil that is being exported and wonder if United States citizens aren’t net losers.

Given the inevitability of oil filed expansion, including fracking, the more insurers convinced to accept oil field risks, the more intense the competition. As coverage becomes commoditized, those companies who are most successful at implementing best practices with their insureds will enjoy the best loss experience and will be able to offer the lowest prices. The safer the practices the better it will be for the common good.

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Jim operates an insurance agent network called Insurance Partners, aggregating agents in the Midwest for over 25 years. He was National Agent of the Year for Metropolitan in 1993 and Midwest Agent of the Year for Travelers in 2011. He served as a founding board member of the Surplus Lines Association of Minnesota.

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