Archive for the ‘fracking home owners insurance’ Category
Is an oxymororn. It does not exist for homeowners. The way the insurance business works is the insurance companies aggressively market the policies, maximizing revenue, and then do whatever they can to not pay claims, minimizing costs. They invest the “float” (the difference between revenues held/retained and claims paid) and make money on the investments. That summarizes Warren Buffet 101.
Finding out whether they will pay a claim on a fracking related incident is not something most homeowners would want to bet on.
Don’t hold your breath, because they won’t pay the claim. And a few of them have already said as much: “If you get fracked, tough frack. We ain’t paying any fracking claims.” You heard it here last.
Fracking: Friend or Foe For Homeowners?
In an attempt to help the country become less oil dependent on other countries, an increasing number of homeowners are finding out that they can’t always depend on their homeowners insurance when experiencing losses that occur as a result of hydraulic fracturing — aka fracking — on their property. Worst of all though, some homeowners can find themselves liable for any unwanted aftermath of fracking, such as water contamination. What – if any – coverage does homeowners insurance offer that would cover this…
Most homeowners or land owners rely upon their homeowners insurance policies for protection against lawsuits and liability for damage or losses that occur on their property or those that occur as a result of something they did. This is where one of the biggest problems of fracking and insurance coverage is. It’s not news that most policyholders don’t pay careful attention to their insurance policies, and this is just one part of the lack of knowledge that can lead homeowners into troublesome situations if they consent to fracking on their property. Not only do they fail to read the fine print of their insurance policy, they fail to read the fine print of the fracking company.
There are risks homeowners face that could damage just their property from fracking, such as damage to their home from a fracking-induced earthquake, or just a run of the mill accident where a bulldozer runs over a shed or detached garage. But if homeowners need another reason to pay attention to their policies and how much coverage they have, here’s another:
Dimoch, Penn. was able to recoup money in a lawsuit against an oil company after water contamination, but it’s practically a given that a large oil corporation carries some pretty hefty insurance, particularly a lot of liability coverage in the event of a lawsuit. What happens if a homeowner consents to fracking on their property, which leads to an area’s water contamination, and the homeowner is subsequently sued for it though? That’s exactly what can happen, and is exactly why homeowners should be weary if a fracking company comes knocking – even if the average homeowner knew about possible risks or read their insurance policy word for word, it’s unlikely they’d carry enough liability coverage to cover expenses that could result from lawsuits like the one in Penn.
Since the homeowner consents to the fracking operations on the property they own, it’s possible for the property owner to be sued for any negative results that brings harm to others, such as water contamination, property damage to neighboring properties from things like earthquakes or tremors that can occur from fracking, or well blow outs, which can release up to millions of gallons of toxic material.
It’s no surprise that when a property owner is approached about fracking that the fracking company doesn’t inform the homeowner of the possible liability the homeowner can be stuck long after the fracking company is either long gone, or in many situations, dissolved. First of all, many fracking companies will set up what could be called a ‘temporary’ LLC or LLP for each operation and location a company uses. Essentially, a larger corporation could set up one LLC specific to the exact spot the drilling will occur on. These LLCs and LLPs often conveniently dissolve after operations are done, leaving a homeowner with any indemnity and liability. Unfortunately, the property owner usually doesn’t realize they could be left with quite a hefty bill for any unwanted ‘side-effects’ of the operation that just occurred on the property they own and are responsible for maintaining safety on.
Additionally, many drilling companies lease ‘mineral rights’ from the owner, but the ‘lessor’ is rarely told about the risks, dangers, and possible liability they’ll assume once the fracking operation is done with or when the mineral rights lease is over. The technicality legally is that these leases typically just pertain to the area below ground, meaning no matter what, or when, the fracking company could still be indemnified because they’re working underneath the owner’s property. That means the property owner could face liability because they own the ‘subsurface’ – the land they’re responsible for. This is especially true if a lease was in place by a company like an LLC or LLP that’s dissolved once the fracking company got what they needed, meaning the homeowner then has nobody to legally point the finger out and hold liable.
What’s worse is that depending on the state and laws – which are still developing regarding this trend – federal or state government may pay for the cleanup of things like water contamination, but the sting is that the homeowner could then be held liable for the costs their state or the federal government spent doing so. And you thought paying tax time was bad.
What Insurers Say – or Don’t
Since this is a new issue, insurance industries are approaching with caution. So far, most issues have surrounded water contamination, but the main issue has been proving liability, which takes place in court. Currently, homeowner claims are few and far between, but some insurers are taking a stand before the issue even arises, and are trying to take some pre-emptive strikes to inevitable claims – or worse — litigation.
Consider Nationwide Insurance, who recently issued a statement saying, “Nationwide has not changed our policies or guidelines, nor are we cancelling policies. Fracking-related losses have never been a covered loss under personal or commercial lines policies. Nationwide’s personal and commercial lines insurance policies were not designed to provide coverage for any fracking-related risks.”
Not a Nationwide Insurance policyholder? Although Nationwide established an official position, your insurance company may feel the same way and may just be playing the ‘quiet game.’ Additionally, as a new issue, many policyholders don’t even know to ask their insurers about coverage from fracking related losses, meaning insurers may operate under a ‘don’t ask, don’t tell’ policy instead of offering you a policy covering possible losses resulting from fracking.
Insurance Coverage For Fracking
Homeowner policies rarely cover land or property damage related to indirect causes, so it’s really not surprising that fracking is included as an exclusion. But what if fracking provokes an earthquake – just one fracking related loss possibility — that damages your home? Are you covered under earthquake insurance? Do you even have earthquake insurance? It may be offered in all states, but that doesn’t mean policyholders opt for it. People that live in high flood zones often don’t buy flood insurance policies even though their homeowners insurance doesn’t cover flooding, so if you live in New York, how likely would you be to opt for earthquake coverage?
The real coverage deficiency is most likely liability though. Homeowners often mistakenly think that they’re only liable for damages that occur on their property, and that liability is restricted to damage or injury occurring in their home or on their property. In fact, there is not a restriction on where the damage or injury occurs, icing on the cake considering that the amount of liability many homeowners carry is grossly insufficient when up against a huge lawsuit from something like water contamination or environmental clean-ups.
The best thing any property owner could do is buy an umbrella liability insurance policy, extending liability coverage from claims placed against their home or auto insurance policies. At the very least, they should opt for the highest possible liability limits an insurer offers. The other hope is that some homeowners insurance policies don’t have pollution exclusions, which could possibly aid in an environmental cleanup, just one more reason it’s important to look for exclusions.
Unfortunately though, even with all the liability in the world, there’s still a way for insurers to get off the hook from paying out.
Most personal lines of insurance exclude coverage for any claims made due to a business venture. When the fracking salesman shows up at the front door and the homeowner leases what’s underneath their precious ‘sub-surface,’ it becomes classified as either a business venture or voids a homeowners insurance claim because the fracking was done for monetary gain. This is true even if the homeowner hasn’t received payment yet and is only expecting payment.
In any state, whether you’d be covered for fracking related losses really just depends on your policy and insurer. Some exclude man-made earthquakes, although fracking engineers and claim that it’s not the actual process that causes tremors, but rather the settling of wastewater. When structural walls go toppling in your home, it doesn’t really matter which part of the process caused the damage – your walls have literally come tumbling down.
Insurance companies care though, and if you live in an area where fracking often occurs, or live in an area that may seem promising to fracking companies, it’s worth it for you to do the same thing insurers like Nationwide have – take a pre-emptive strike and check your policy for exclusions regarding earthquake damage and water contamination, as well as finding out on your own if there may be some loopholes in a policy that would deny a fracking related loss. That may sound about as exciting as the fracking process itself, and although understanding some insurance policies can be as difficult as it is to drill through layers of the earth, understanding your policy and taking the time to review it may be what puts your crumbled walls back up.
The Future of Fracking: Protecting Health, Home and Business
While controversial, it doesn’t appear the practice of fracking is going anywhere anytime soon, and it’s not just homeowners who should be concerned. Farmers of plants and livestock could potentially be affected. With the westward movement of fracking and the reluctance of insurers – both homeowners insurers and and commercial insurers alike — it seems as though residents are left to their own devices. The real root of the problem lies in a void of knowledge though on behalf of homeowners and property owners.
Lenders are telling frackers to take a hike. Because fracking has a really nasty way of cratering the value of housing. And water wells. And just about every other surface use. Which the mortgage lenders have finally figured out. So they are starting to redline mortgages near fracking.
Catch is, there is no safe area in New York, because there is no setback for shale gas infrastructure from housing in New York. Meaning you could wake up one fine morning with a compressor station, gathering line or gas processing plant behind your fence. Congratulations. You can then proceed to kiss your mortgage and homeowners insurance goodbye.
The proposed set-back of shale gas infrastructure from a 3 bedroom 2 bath single family house in New York is ZERO. The proposed setback of shale gas infrastructure from a rental apartment is ZERO. From a hotel . . . you guessed it. Nada. Which means that all those mortgages are vulnerable.
Read the proposed regs. for yourself:
This is, of course, a textbook reason for applying local land use ordinances to fracking infrastructure. How would Governor Cuomo like it if a bunch of fracking Okies moved in next door to him ?
Roger Drouin gets the scoop on how fracking and mortgages don’t mix.
Lawyers, realtors, public officials, and environmental advocates from Pennsylvania to Arkansas to Colorado are noticing that banks and federal agencies are revisiting their lending policies to account for the potential impact of drilling on property values, and in some cases are refusing to finance property with or even just near drilling activity.
Because they have learned what it does to the homeowner’s equity in the house.
Real estate experts say another problematic trend is that many homeowners insurance policies do not cover residential properties with a gas lease or gas well, yet all mortgage companies require homeowners insurance from their borrowers.“Well, that is a conflict,” says Greg May, vice president of residential mortgage lending at Ithaca, N.Y.-based Tompkins Trust Company.
Last month, a landowner in Madison, N.Y., was surprised when their insurance company refused to renew their homeowners policy because there is a conventional gas well on their property.
While the media and environmental groups have focused on shale drilling’s potential to poison the soil, water, and air, they’ve largely overlooked its potential to poison the real estate market.
“I think we are on the tip of this,” says Steve Hvozdovich, Marcellus Shale coordinator for Clean Water Action in Pennsylvania. “Whether you are the homeowner trying to get homeowners insurance or the neighbor [to a fracking site] who is trying to refinance, there are just so many tentacles to this. I don’t think people are grasping all the impacts of natural gas drilling.”
Benjamin doesn’t often hear property owners talk about the issue. “I don’t think most are concerned about it,” he says. “But I think they may have to be in the future.”
The first denial
Brian and Amy Smith live across the street from a new gas well in Daisytown in Washington County, Pa., an hour south of Pittsburgh. Last year, when they applied for a new mortgage on their $230,000 home and hobby farm, they were denied.
According to ABC affiliate WTAE, this appears to be the first example in western Pennsylvania of a homeowner being denied a mortgage because of gas drilling on a neighbor’s property:
In an email, Quicken Loans told the Smiths, “Unfortunately, we are unable to move forward with this loan. It is located across the street from a gas drilling site.” Two other national lenders also turned down Brian Smith’s application.
“I think a lot of folks nationally are watching this case,” says Rep. Jared Polis (D-Colo.), a congressman who represents areas north and west of Denver. He noted that in his home district fracking leads to a “haircut on a property’s values.”
“I think it is something that the banks would frankly be smart to look at,” Polis says.
Elisabeth N. Radow, a lawyer and chair of the League of Women Voters of New York State’s Committee on Energy, Agriculture and the Environment, says the Smiths’ story shows that property owners are clearly vulnerable to what happens on their neighbors’ land in fracking territory. “A [fracking] gas well brings commercial activity, can pollute drinking water and devalue the property.”
Radow says it’s logical that high-volume horizontal fracturing — an operation in which millions of gallons of water mixed with hundreds of chemicals are pumped horizontally into layers of shale — has lenders worried. “They are trying to protect themselves,” she says.
The Obama administration has so far taken a hands-off approach to regulating fracking, as have many states, so the banks are trying to figure out how to proceed in uncertain territory.
“What is the federal government doing to protect the Smiths of the world?” asks John R. Nolon, a land-use and property professor at Pace Law School. “Banks are out there on the frontier of this regulatory chaos saying, ‘We can’t assure ourselves this is a safe technology because there is this fragmented regulatory process.’”
A very clear stance
Radow advises people looking to purchase a home anywhere with drilling to do their homework before buying.
She predicts that homeowners will start seeing mortgage provisions prohibiting gas drilling. She saw one earlier this month from New Jersey, where the gas industry is lobbying Gov. Chris Christie (R) to open the Delaware River basin to fracking. The “Mineral, Oil and Gas Rights Rider” [PDF] on loan paperwork from Sovereign Bank says the mortgage will be automatically recalled if the property owner transfers any oil or gas rights or allows any surface drilling activity. It also specifies that owners must “take affirmative steps to prevent the renewal or expansion” of a current gas lease.
A spokesperson for Sovereign Bank said the company would not comment for this story.
May, the lending firm vice president from Ithaca, says he is neither pro- nor anti-fracking, but he thinks property owners and prospective buyers need to be aware of these kinds of mortgage issues.
“That is one of the top lenders that has taken a very clear stance,” May says of the Sovereign Bank document. “We need to pay attention to this.”
Another big unknown is how homeowners might be affected by horizontal drilling happening underneath their property, May said. “Horizontal drill bores radiate out from the vertical bore up to one mile in each direction, which could potentially impact other owners’ fee-simple real estate ownership,” May says.
The problems are here
Twelve hundred miles southwest of Bradford County, Connee Robertson and her husband run an animal rescue center on 1.6 acres overlooking Little Red River in Heber Springs, Ark..
Robertson moved to the area in 1993 because she fell in love with this part of the Ozarks known for its pristine rivers and lakes. That was before gas companies such as Chesapeake Energy discovered the Fayetteville shale formation in the early 2000s.
Once that happened, the majority of property owners in Heber Springs leased their gas rights. “Everyone saw dollar signs,” Robertson says. “Everyone ends up regretting it. The problems are here now.”
Over the past few years, those problems have included earthquakes and drilling crews pulling water out of the Little Red River. One of Robertson’s horses died for unknown reasons, and her neighbors’ wells have been polluted.
More recently, Robertson has heard about buyers unable to purchase homes in the area because they can’t secure financing.
In the Laurel Highlands area of Pennsylvania’s Allegheny Mountains, traditionally known for tourism and recreation, drilling is scaring off prospective second-home buyers before they even start thinking about mortgages, says Melissa Troutman of the Mountain Watershed Association. She knows of one buyer who left the market after they learned that there was drilling three and a half miles from a home they were looking at.
In technical default
Many of the largest mortgage institutions have already enacted policies that bar lending to certain properties near gas drilling and gas lines.
The Federal Housing Administration’s lending guidelines prohibit financing for homes within 300 feet of a property with “an active or planned drilling site.” In an email response to a question from Grist, FHA spokesman Lemar Wooley explained the reasoning behind the guidelines:
FHA is primarily concerned with the health and safety of the occupants of the dwelling. If the property is subject to smoke, fumes, offensive noise and odors, etc. to the extent they would endanger the health of the occupants then the property is ineligible. FHA is also concerned with the risk to the insurance fund. So if the property is subject to those same items and the health of the occupants is not endangered, but the marketability of the property is compromised, the property may not be eligible for FHA insurance.
Fannie Mae and Freddie Mac also prohibit property owners from signing a gas lease.
May said many owners are now in “technical default” under the terms of their mortgage if they signed a gas lease without first getting consent from their lender.
Another clause in Fannie Mae and Freddie Mac mortgages prohibits hazardous materials on a residential property. “It comes as a surprise to a lot of people. They weren’t aware that their mortgage came with those restrictions,” May said.
Back in Bradford County, Benjamin, who plans to retire in 10 or so years, hasn’t decided whether he wants to keep his family in the area, where there are “good and bad points” to the drilling boom. But he knows one thing for sure: Fracking “changed everything” in the region’s real estate market.