How insurers are beginning to assess the risks of green energy businesses
It is predicted that half of the world's energy will be from renewable sources by 2050 according to research from BloombergNEF while May 2019 saw the UK go seven consecutive days without burning coal to generate power for the first time in more than 130 years. This is a fast-moving sector with wind turbines the size of The Shard in London set to come online within the next decade.
There are plenty of opportunities for insurers wanting to demonstrate their green credentials and increase their book of green business. Potential insureds not only include the contractors, owners or operators of the renewable energy plant but also spin off businesses such as solar panel servicing or wind turbine blade repairs. Inevitably, claims arising from manufacturing defects, negligent installation or weather events will follow.
While the technology for wind turbines and solar panels is rigorously tested, the locations where they are installed can be remote, often with limited historic data of top wind speeds and storm frequency. Accordingly, plants may encounter conditions that were not anticipated, and parts may not operate as designed.
As with all losses, it is necessary for claims handlers to determine the most likely cause of the loss and when this occurred. The leading-edge of wind turbines, for example, are susceptible to corrosion so damage caused by wear and tear would be excluded whereas lightning damage would be covered. For remote onshore and offshore locations, greater use of remotely controlled robotics (such as drones) assists investigators undertaking preliminary inspections of the damage as well as effecting repairs more safely, quickly and cheaply. We recommend an assessment of the condition monitoring systems in place to remotely detect faults at the underwriting stage. These systems vary in sophistication (and cost) with the latest software providing the most detailed data in real time.
COVERAGE AND CLAIMS
The insured may elect, or be required under the terms of the policy, to pursue the manufacturer itself first before making a claim, particularly if the part is still under warranty. In these circumstances, insurers may wish to overlook a late notification point to encourage insureds to take a pro-active approach thereby reducing costs. This needs to be weighed against the advantages of early intervention by claims handlers, loss adjusters and experts which can reduce insurers' outlay in the long-run.
Manufacturers are offering extended warranties to provide increased comfort to purchasers of new products. Where the insured is the manufacturer of the faulty/defective part, an extended warranty is likely to fall outside the scope of its public liability policy. This issue arose in the Supreme Court case of MT HÃ¸jgaard A/S v E.On Climate & Renewables UK Robin Rigg East Limited  where the contractor warranted that the foundations would last for 20 years. The insurance market providing cover for these warranties is growing.
There may also be business interruption issues. In relation to wind farms, where remedial works are being carried out to one turbine, others may need to be shut down to avoid turbine loading. The question for claims handlers is whether the reduced productivity of a non-damaged turbine falls within the scope of cover.
For those insureds that transmit electricity to the grid, penalties can be imposed where a loss has interrupted transmission. Underwriters will need to consider whether these penalties fall within their definition of business interruption. Discussions with the insured (or their broker) will improve underwriters' understanding of the model in place to ensure that there is appropriate cover. Where there are reinsurers, it is important that the reinsurance policy dovetails with the underlying policy particularly in cases where bespoke cover is sought.
Replacement parts may not be readily available and new and existing versions may be incompatible. In these situations, we have seen insurers work creatively with insureds to find an appropriate remedy. Regular surveys by engineers will assist underwriters in understanding the risks that face the renewable energy plant.
The implications for insurers of the growth in renewable energy will be explored further in DAC Beachcroft's thought leadership report, due out in September.
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CONSTRUCTION ALL RISKS
The construction all risks (CAR) policy is likely to include all parties involved in the financing, supply, installation and commissioning of the project to avoid the risk of costly litigation and disruptions to the project. This can therefore limit recovery opportunities unless an entirely separate third party is involved.
Even where the party at fault is a named insured, the contract terms should still be carefully reviewed to assess whether a recovery action is available. Often CAR policies will restrict cover for an insured to its on-site activities enabling claims where the negligence occurs off-site. In Haberdashers' Aske's Federation Trust Ltd v Lakehouse Contracts Ltd , cover extended to 'subcontractors of any tier'. However, there was also an express term in the subcontract requiring the subcontractor to maintain its own insurance. It was therefore determined that the parties had agreed that any loss caused by the subcontractor was to be borne by it and not by the project policy enabling a recovery action against the subcontractor.
Denise Eastlake is a senior associate in the global insurance practice at law firm DAC Beachcroft.