Most every wind project developer has sat staring at an empty “Insurance” line on a project financial pro-forma, wondering how to come up with a credible number his lender will accept for the annual projected cost of insuring his project. The reason is simple: It’s complicated.
First of all, we’ll assume statutory and discretionary cover-ages such as Workers Compensation, Employer’s Liability, Professional Liability, Commercial Auto, and General Liability, are in force as required for the project company, so we can concentrate on coverages specific to the wind project, and which likely will be required by the developer’s lender.
Secondly, project developers should select a commercial insurance broker to assist them in navigating the insurance coverage mine field. A good broker educates himself on the project exposures and technology, and runs interference with insurance companies competing for the project coverage.
Now, to the insurance: The best description of the coverage package which will be needed for a new wind farm is “cradle-to-grave” property coverage which includes both physical damage exposures and time delay exposures.
The first to be activated is Transit physical-damage coverage, effected when project compo-nents begin their journey to the construction site. Usually at the same time, Construction All Risk coverage is incepted because movement of project equipment generally coincides with commencement of work at the site. This coverage remains in full force as each turbine is erected, tested, and commissioned, and an Operating All Risk policy is activated when commercial operations begin for 100% of the project’s turbines. The ideal coverage eliminates the possibility of coverage gaps during these transitions, so no claim jurisdiction disputes can arise.
The Operating All Risk policy should include full non-warranty Mechanical and Electrical Breakdown coverage eliminating the need for a separate Boiler and Machinery policy.
Time Delay exposure protection is also always required. These coverages insure against lost power-production revenue due to Transit delays (Marine Delay in Start Up), lost revenue due to construction delays (Advance Loss of Profits), and operational revenue losses (Business Interruption), with the lost value of any applicable Federal Production Tax Credits, Renewable Energy Production Incentive payments, or other kilowatt-based governmental incentive payments fully covered by the policy. The new Investment Tax Credit grant of 30% of a project value is NOT insurable because funds once issued, cannot be reclaimed by the government, except under highly unlikely circumstances.
It is always best to have a policy form which has been written specifically for wind (as opposed to a generic energy facility policy form) to meet the specific needs of wind powered generation facilities. When reviewing a policy form for a wind project, you should never be find references to “pressure vessels”, “steam lines”, or “fuel storage”, as is common with many generic policies currently covering wind farms. The insurer should also continually refine the policy terms as practices and technology change.
Having done their homework and chosen to purchase the above property coverages, the next decision for developers is to select deductibles for each loss. Deductibles generally begin at $20,000 for physical damage and 20 days for business interruption. Higher deductibles, up to $1,000,000 and 60 days and more, are available and often preferred by clients and lenders for large projects.
Deductibles most commonly chosen are $50,000 and 20 days, and $100,000 and 30 days. A “rule of thumb” for making this decision is determining the degree to which a project owner’s payment of three or four deductibles in any one year would have on the project’s economics and cash flow. So it follows: larger projects have higher acceptable deductibles.
When required due to a project’s location, such as a “high-risk area” for windstorms (hurricanes), floods, and earthquakes, coverage arranged separately through the catastrophic insurance markets must be obtained by the basic insurance carrier. Deductibles and premiums for these coverages are separate from those described above and are significantly higher than those for projects in low-risk areas. Due to its cost, it is common to place Catastrophic insurance at less than full project replacement value.
Outside these locations, full project value coverage is standard. Commercial General Liability or GL policies cover construction and operation phases of all projects. GL and Umbrella/Excess liability coverages indemnify the insured for property damage and physical injury to a third party resulting from the operation of the wind plant. These two coverages should also seamlessly transition between phases of the project. Wind project Limits of Liability vary widely between projects based on the requirements and perceived exposures of the parties to the project. Limits of $5 million to $25 million are common.
A basic feature of the ideal wind farm insurance policy is flexibility in being able to structure coverages in a variety of ways to meet the needs of the insured. Policies should have the ability to be simply tailored, by policy endorsement, to the coverage requirements of each wind project and its contractually obligated insurance terms.
The insurance company chosen to provide these coverages should also have experts readily available to provide insurance premium estimates for individual projects, and perform reviews of the insurance provisions of project documents and contracts such as lending agreements, land leases, conditional use permits, power-purchase agreements, interconnect agreements, turbine supply and installation agreements, balance-of-plant-construction agreements, and O&M agreements. These experts should look for consistency in coverage requirements and limits, and offer observations relative to common wind industry practices as reflected in the many documents they see.
Lastly, the insurance carrier must have full time Loss Control and Claims Management personnel, in the U.S. and globally. The claims process should be known for efficiency, technical expertise, and rapid claim resolution based on the philosophy that valid claims are quickly investigated and paid, and that clear, unequivocal and compelling evidence of uninsurability must be present before they consider denying a claim.
It’s easy to see why the last line filled in on a project developer’s financial pro forma is almost always the insurance line. Each of the many participants in every wind farm development will have their own, and often divergent, views of the structure of a project’s insurance program. Keeping the information above in mind when facing insurance decisions helps ensure a gap-free, affordable, and thorough set of insurances will protect the project from the many perils it will face throughout its working life. WPE
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