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Wind turbines have a life expectancy of 20 years, and mechanical breakdowns and factors such as lightning plague the machines’ operation. Therefore, it is critical for wind farm owners and operators to choose the proper type of insurance coverage. Generally, there are two basic coverage options: property insurance and warranty insurance. However, relying exclusively on those two insurance types for a wind turbine is a dangerous prospect. Proceed at your own risk.

 

Property insurance

There are several types of property insurance options, including builder’s risk and property all-risk.

Also referred to as construction all-risk, builder’s risk insurance covers property damage and delay in start-up, including turbines, foundation, transmission, substation and balance of plant. Coverage begins when the wind turbine components are being transported to the site (transit physical damage). Each turbine is covered from the time it is erected, tested and commissioned.

Property all-risk insurance provides coverage for machinery breakdown, short circuit, storm and fire. Damage from machinery breakdown, such as pitting, backlash and breakage, usually happens because of defects in material, fatigue, use of wrong oil or wrong temperature, vibrations and overloading. All-risk insurance can protect against the following:

Time delay coverage. This type of coverage insures against lost power-production revenue due to transit delays, lost revenue due to construction delays and operational revenue losses.

Fire. If a wind turbine catches fire, it can result in months of downtime and loss of income. Although technical fault is a main cause of fires, component failure could also be the culprit. For example, if a bearing starts failing and runs dry, the resulting buildup in the component can lead to fires.

Fire protection insurance is necessary. The cost alone of replacing a blade is in the hundreds of thousands of dollars. Insurance usually pays the entire cost of replacing a turbine destroyed by fire. Even if the insurer or wind operator can prove a fire was caused by failure of a part, the warranty usually only pays for the costs of replacing the faulty part, not the entire turbine.

Fire damage is usually caused by overheated bearings, a strike of lightning or sparks thrown when the turbine is slowing down.

Lightning. Lightning strikes are the most common insurance claims filed by owners and operators. A lightning strike to an unprotected blade will raise the temperature to as high as 54,000° F and result in an explosive expansion of air within the blade that can cause delamination, damage to the blade surface, melted glue and cracking on the blade’s leading and trailing edges.

Lightning can destroy the control panels that include the sensors, actuators, motors for steering the equipment, rotor blades, gearbox, generator and control system.

Wind. High-velocity wind speed, gust and direction changes can damage and destroy the rotors. Risk of damage from a storm can result in a collapse of the tower and the loss of rotor blades and gearbox due to runaway spinning under extreme wind conditions.

Mechanical damage. Damage to gears and bearings often occurs because of breakdown or wear, backlash and tooth breakage; defects in material; fatigue; the use of wrong oil or wrong oil temperature; vibrations; or overloading.

The project owner usually bears the risk and expense of insurance. The risk, however, can pass to the engineering, procurement and construction contractor if the risk is included in the contract.

What happens in a situation when all of the turbines have been erected and the commissioning is under way, but one week before the commercial operation date, the substation transformer is struck by lightning? If the substation transformer needs to be replaced and the lead time for the next available transformer is 10 months away, the expense for the project’s loss of production could be in the millions.

Project owners that procure all-risk construction coverage should also consider negotiating an endorsement for non-production soft costs, such as extended financing charges, interest for the construction loan, and legal and accounting fees related to the delay of the loan closing.

Operating all-risk coverage. This coverage is activated once the commercial operations begin and all the turbines are fully operational. This insurance is provided to the operating company and its financiers to protect against all risks of physical loss or damage to the entire wind farm project. Operating all-risk coverage should include full non-warranty mechanical and electrical breakdown coverage in order to eliminate the need for a separate boiler and machinery policy.

Operating all-risk coverage includes the following: damage to wind turbines, including mechanical and electrical breakdown (with or without warranty protection); full catastrophe coverage for flood, windstorm and earthquake; business interruption to cover loss of gross revenue or gross profit arising from damage to wind farm assets, including wind turbines, ancillary plant, buildings and associated building and civil works; interruption in the supply of electricity to the grid following failure of owned or non-owned substations; terrorism coverage; and public liability insurance.

 

Warranty coverage

A proper insurance program must avoid the gap between property coverage and warranty coverage. A property policy provides coverage for mechanical and electrical breakdowns, subject to the policy’s exclusions and limitations, which may include defects or faults in material, workmanship or design; wear and tear; gradual deterioration; hidden defects in the equipment or material that cause deterioration; latent defects; and serial losses.

Warranty policies, on the other hand, provide coverage for product defects that lead to losses. Warranty policies typically offer coverage for: five years with a “toolbox” approach, product defect, serial defect, noise, power curve and availability; parts and labor “backstop”; self-insured retention/deductible buy-down options; and warranty and loss control. Owners and operators can purchase an extended warranty policy from the original equipment manufacturer (OEM).

OEM warranties are sold on a per-turbine, per-year basis and cover the full value of the turbine with little to no deductible. Or, an owner and operator may opt to purchase a third-party warranty policy that can be wrapped around the turbine supply agreement to continue coverage supplied by the OEM.

The third-party warranty product can cover additional risks or modify the risks covered in the original turbine supply agreement. The third-party warranty covers serial defect, product defect, availability, parts and labor. Optional coverage for power curve and noise are also available and can be added by endorsement. This is usually sold in blocks of limits that are usable for a five-year period. The third-party warranty has an annual deductible structure.

Once a wind turbine warranty expires, the operator has the option to assume responsibility for 100% of the costs and losses resulting from warranty-related incidents (e.g., pay out-of-pocket costs to secure the affected turbine, obtain and ship replacement parts, hire and transport the repair equipment, provide the labor for repairs and assume lost income from the production tax credits).

 

Buyer beware

However, be advised that property and warranty insurance may not provide blanket protection. In fact, relying exclusively on either property or warranty insurance shifts the risk to the policyholder.

In one example, a wind developer was denied insurance coverage based on a policy exclusion.

In the case of Ass Kickin Ranch LLC v. North Star Mutual Insurance Co., two unassembled wind turbines were destroyed in a fire. The landowner erroneously believed its policy would cover the damage. However, the insurance company denied the claim under a policy exclusion.

The South Dakota Supreme Court decided in favor of North Star. The takeaway is that having property coverage is just not enough.

Wind farm insurance is a highly specialized discipline that requires the expertise of a broker that can guide the owner through the nuances of the available insurance products and has a background in the energy industry.

The insurance carrier, in turn, should have experts to provide insurance premium estimates for individual projects and perform reviews of the insurance provisions of project documents.

Unless a wind energy company elects to pay an uninsured loss, a company should consider retaining coverage counsel to evaluate the claim. w

 

Alba Alessandro is partner at law firm Hodgson Russ LLP. She can be reached at (646) 218-7608 or aalessan@hodgsonruss.com.

Marketplace: Insurance

How To Use Insurance To Lessen Wind Farm Risk

By Alba Alessandro

When it comes to insurance, owners and operators would be well advised to consult an experienced broker that can tailor a program to properly insure wind farm assets.

 

 

 

 

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