There’s no doubt that new advancements in the practice of hydraulic fracturing, or fracking, are driving the current production boom in the oil patch. The technique, which is used to retrieve oil and gas reservoirs that previously were inaccessible via traditional vertical drilling methods, has been around for more than 50 years. But technological improvements have propelled oil and gas production into overdrive in recent years.
Executive SummaryOil and gas production has gone into overdrive in recent years, thanks in large part to technological advancements in hydraulic fracturing, or fracking. But the increase in production comes at a cost for insurers, as an increase in commercial auto losses and an uptick in workers comp claims are unfortunate side effects of the oil boom.
The increase in domestic energy production obviously has many benefits—national energy independence among them—but it does come with certain costs. For the insurance industry, an increase in commercial auto losses and an uptick in workers compensation claims are unfortunate side effects of the oil boom.
According to Jim Bolz, chief underwriting officer at specialty insurer Energi, auto liability in the oil patch is having issues not because of insurance pricing but because of the mode of travel.
“It’s where these guys travel. It’s how they travel. It’s the loads that they’re hauling. Most of them or a lot of them are running on private property, unimproved roads. They’re riding at night. It’s a whole litany of different things,” he said.
Thomas Blanquez, an energy specialist with San Antonio-based wholesaler Quirk & Co., said that Texas, particularly, is struggling with increased auto claims, especially in the areas that have seen an influx of activity as a result of the more efficient production techniques.
“We’ve had an insane amount of deaths that have occurred,” Blanquez said.
Over the past 10 years there have been 1,000 more auto-related deaths, he said. “This is just on Texas highways.”
Problems derive not only from the onslaught of 18-wheelers and heavy equipment on farm and country roads in shale-production regions that are not equipped to handle them but also from the simple fact that people who live in these rural areas are unaccustomed to the increased traffic flow.
“You have that, and you have driver fatigue, and you have all sorts of issues that are mixed in there,” Blanquez said. “But the auto-related fatalities and the auto-related injuries are through the roof.”
The Texas Department of Transportation, which has initiated a media campaign to increase awareness of the problem, reported a rise in fatal and serious injury crashes in 2013 in both the Eagle Ford Shale energy sector, a 26-county region that stretches from Laredo to Madisonville, and in the Permian Basin, a 59-county region covering 75,000 square miles.
TXDOT data shows 3,430 fatal and serious injury crashes and 236 traffic fatalities in the Eagle Ford Shale region in 2013—a 7 percent increase in fatal and serious injury crashes over the previous year for the region.
In the Permian Basin in 2013 there were 4,371 traffic crashes that resulted in serious injuries or fatalities, according to TXDOT. The 358 auto-related fatalities last year in the Permian Basin represent an increase of 13 percent over 2012.
Richard Gergasko, CEO of Texas Mutual Insurance Co., said his company certainly is seeing an increase in motor vehicle incidents coming from oil and gas operations.
“What we’re really finding is that there are probably three or four main elements driving some of these motor vehicle incidents. The first one is fatigue driving. These work crews, they’ll put in long hours and then they’ll have to get in their vehicle and drive back to either the company location or the hotel they might be staying at…They’re pretty tired,” he said.
Gergasko said that distracted driving—talking on the cellphone, texting, etc.—is also a problem.
But “the biggest piece,” he said, “is seat belt usage. We still find a lot of individuals refuse to wear their seat belts. Typically, in the motor vehicles incidents we see, if there’s a fatality involved, [in] 60 percent of the fatalities the individual was not wearing a seat belt.”
Both primary insurance carriers and excess carriers are increasingly concerned about auto claims, Blanquez said, partly due to the fact that trial attorneys “are going after the oil companies because they know they have deep pockets…The jury rulings and punitive damages are outrageous.”
He said auto losses “touch all policies in a way. You have the third-party damage that is going to be paid out through the auto carrier and any excess limits…You have the physical damage, work comp for the driver.”
Blanquez said he’s also seen action-over claims being tied to the general liability policy for wrongful death.
“Because the work comp is going to be statutory, it’s going to be limited in the amount of the scope of recovery that you can get,” he said. “The attorneys have figured out that, ‘Well, if I can somehow tie this to a negligent act or a wrongful death suit, I can go over to the GL, and then I can seek my wrongful damages there.’ That’s another avenue, another tower of limits for them to access.”
Randy Bila, an energy division underwriter/broker with Austin-based Specialty Insurance Managers Inc., said the current claims experience for his group has been “unbelievably good,” with few claims related to oil and gas coming in. “The ones that have arisen typically involve contractual liability, pollution or subcontractor issues,” he said.
But, Bila said, action-over or over-action claims also “can be an issue for some oil and gas companies.” Sometimes when there’s an injury to a subcontractor, the allegation arises that there was an unsafe workplace, he said. “And it comes back to haunt the contractor…Many large oil companies want that coverage in place…Some policies exclude it, and some are silent and let the courts decide how to interpret that.”
A shortage of qualified workers in the oil patch may also be contributing to claims.
“There are so many hands that are needed and so few good hands—safe drivers that can pass drug tests, show up to work on time, things of that nature,” Blanquez said. “It’s forced the criteria for drivers and employees to be lowered because there’s so much money at stake. It’s the whole warm body approach, and unfortunately that’s lending itself to poor performance on the loss history side.”
The new technologies that allow close concentration of wells at a single site also complicate the problem of workplace safety. Up to a dozen separate wells may be located at one well pad and “involve scores of moving parts, processes and people in an intensely busy industrial operation,” said Michael Diggin, a vice president and claims expert with Swiss Re.
Participating in a webinar on hydraulic fracturing sponsored by Advisen and Swiss Re, Diggin said at each drilling well, in addition to the drilling contractor, 20 to 100 subcontractors may be involved in “exploration, construction, oil field equipment, fracking fluid, chemicals, sand, tank cleanout, transportation and production.”
And those activities often take place nearly around the clock at a crowded well pad, Diggin said.
“As with any major industrial operation, it is inevitable that the occasional accident may happen at some of the hundreds of thousands of fracked wells,” he said.
Gergasko said Texas Mutual offers workers comp for a variety of oil and gas operations, as well as companies that support the oil and gas industry.
“We’ll see the typical injuries that you would see from that operation—the drilling rigs—with people getting their extremities caught in equipment, falling objects and the like,” he said.