The excessive and essential in the world of risk management

Project development is an incredibly long and frustrating procedure filled with a series of hurry-up-and-wait timelines and 100-plus page contracts. One mistake projects fall victim to is not including their risk management representative in contract negotiations. Within all of these contracts (land lease, TSA, interconnection agreement, BOP/EPC, O&M agreement, PPA, financing agreement, and more) there are insurance language restrictions and requirements that can be both essential and incredibly excessive with respect to the true risks of a wind project.

One of the most excessive insurance requirements in the wind industry pertains to the limits mandated for the umbrella, or excess policy. These limits can range from $4,000,000 to $25,000,000. The umbrella/excess policy stacks above the general liability, auto, and employers’ liability. The risks associated with the auto and employers liability are minimal because most projects do not own autos titled to it and do not have employees paid by the job. There are some exposures associated with the general liability, but these risks do not correlate with the limits required. In essence, general liability protects against negligent acts of bodily injury and property damage to a third party. Based on the location of most wind farms and regulatory set back restrictions placed on the projects, the true exposure for general liability is small.

There is a reason why projects are required to carry high limits and it has to do with contract compliance. When the wind industry broke into the United States utilities used their boiler-plate contract associated with other types of power-generating facilities (coal fired, natural gas, and biomass) which warrant high limits based on their exposure. This boiler-plate approach has been a proverbial thorn in the side of wind projects—requiring them to purchase higher limits than needed and which then eat into their bottom line.

A lack of boiler-plate poses problems as well. For instance, transit coverage is one of the essentials that tends to get overlooked when evaluating a project’s risk-management portfolio. Transit protection all comes down to contract language. Within a project, TSA transportation will be addressed, but the key is deciphering when and where the coverage starts and stops. If the OEM is taking the responsibility of the transit coverage from their facility to the project site, an owner must verify that the transit coverage also includes unloading the equipment. There are numerous examples in which the TSA stated that coverage ceases when the equipment reaches the site. What has happened is that during unloading, a component gets damaged, exposing the owner without protection and possibly a useless piece of equipment.

Another instance where transit coverage is imperative is when the project takes on the logistics of transporting equipment to the site by a third-party carrier. This route can be cost effective, but securing a separate transit policy in excess of the independent carriers’ cargo insurance is vital. The independent carriers normally do not cover loading and unloading of equipment, and typically have insufficiently high limits on their cargo insurance to cover the replacement cost of most major components.

When trying to navigate through project development, endless contract reviews, and negotiations, it is critical to engage your wind risk-management specialist to take a proactive role in the process. They are there to carefully read through and evaluate contracts checking for specifics on umbrella/excess policies and transit coverage. Without this kind of partnership, the project has potential to retain risk and unintended exposure that will pull profit off the project’s bottom line. WPE