Property owners, mortgage lenders and insurance companies need to take another look at earthquake risks near the wastewater disposal wells associated with hydraulic fracturing, Dallas-based S&P credit analyst Andrew Foster says.

With earthquakes dramatically increasing in Oklahoma and Texas, the potential for property damage from these quakes may soon raise some perplexing liability issues, he said.

"Whatever the cause, we believe the potential for property damage from increased incidences of earthquakes may be a liability for the energy and insurance industries, lenders, property owners, and real estate investors," Foster said in an Aug. 5 note. "It's unclear who will be liable in any given circumstance. However, future risks clearly exist."

Oil and gas producers routinely dispose of wastewater and flowback water from shale wells outside Pennsylvania's Marcellus Shale by pumping it into nearby disposal wells. The geology of Pennsylvania does not lend itself to disposal wells, and drillers there recycle most wastewater for use in future fracking operations.

Earthquake insurance is not widely held by homeowners, even in areas where earthquakes are common. Only about 10% of homeowners in California have policies, Foster said, citing the Insurance Information Institute. Therefore, the potential risk to insurers is small but may be greater for owners and lenders uninsured against the earthquakes.

Foster admits that trying to assign a value to earthquake risk is still largely a theoretical exercise complicated by a lack of historical data, but "the risks can't be ignored." The last major U.S. earthquake, in 1994 in Northridge, Calif., caused $44 billion in total losses, Foster said.

"Like the impact of climate change, many effects of increased earthquakes near to fracking are regional, making it difficult to assign a headline number for potential costs for the country," Foster said.

He continued: "Depending on the frequency, scale and location of earthquakes near fracking activity, we expect lender requirements concerning earthquake insurance may shift. Assuming earthquakes continue or increase in size, the composition of earthquake zones could change and thereby cause lenders to alter insurance requirements and coverage."

The U.S. Geological Survey published new maps this year that enlarged the seismic zones in both Texas and Oklahoma as earthquakes increased in both states.

"We believe earthquakes near fracking sites introduce a unique risk for investors that have exposure to real estate in the affected regions," Foster said. "In particular, determining whether or not earthquake coverage is required, how this coverage may be affected by 'man-made earthquakes' and other policy restrictions, and who is responsible for obtaining coverage could affect real estate investor returns."

S&P published its report after Oklahoma recorded 40 small earthquakes in the last week in July and a day after Oklahoma Gov. Mary Fallin blamed her state's increased seismicity on wastewater disposal wells.