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As the wind industry continues to grow, so do risk management services. By 2020, an increase in annual expenditure on risk management services will rise between $1.5 billion and $2.8 billion in leading wind countries, according to Swiss Re and Bloomberg New Energy Finance. Because wind power is one of the fastest-growing renewable energy technologies in the market, the need to limit risk is crucial.

According to GCube Insurance Services, in 2012 the top three most frequently reported claims for component parts in wind energy were for blade damage (41.4%), gearbox failure (35.1%) and generator damage (10.2%). Other component parts, including transformers and foundations, account for less than 15% of the reported claims.

Although damage to the foundation ranks at the bottom of the list of the most frequently reported claims, it is the most expensive in terms of average claims, at a cost of $1.3 million. The transformer, also at the low end of frequently reported claims, ranks second at an average cost of $400,000. These average costs include business interruption and other costs above the policy’s application retention.

The top three most frequently reported causes of loss/failure mode are fire/impact/storm (25.1%), poor maintenance (24.5%) and lightning (23.4%). Notably, although fire ranks low in frequency, fire-related losses rank No. 1 in total indemnity payments.

A well-planned wind farm risk management program is critical to mitigate the risk of loss. Prior to the expiration of the original equipment manufacturer warranty on the wind energy equipment, a risk manager should decide which type of insurance best reduces the risk of loss. Some options to consider include wind farm insurance, captive insurance and self-insurance.

Wind farm insurance. Apart from the conventional general liability policy and operations and maintenance (O&M) warranty, a wind farm risk management program should also include a stand-alone wind farm policy as part of its arsenal of risk prevention weapons. The limitation of a general liability policy is that it includes property coverage but not complete warranty or business interruption coverage.

However, the buyer should beware. Wind farm insurance – under any policy – does not immunize a wind farm owner or operator from potential insurance coverage litigation. In 2012, a group of wind farm companies commenced an action against Lloyd’s of London in New York State Supreme Court. The action arose from the insurer’s denial of property coverage under a wind farm policy under a design defect exclusion for damages to the wind turbines from failure of blades, generators, gearboxes and bearings. The property damage caused business interruption because the wind farms had to reduce or cease operation while the wind turbines were being repaired.

The wind farms were afforded coverage as additional insureds under the wind farm policy. Although the insurer paid over $2.7 million in property damage loss under the policy, the wind farms sought additional coverage for losses. The wind farms argued that even if the design defect exclusion applied to bar coverage, the insurer was obligated to pay the loss for business interruption. A concurrent action was filed in Pennsylvania state court to determine whether damages to the wind turbine were recoverable under the warranty, or whether there was a claim for a design defect against the manufacturer. The New York State court cases were stayed pending a resolution of the Pennsylvania action and eventually discontinued. The lesson: A risk manager should be cognizant of the potential coverage issues that may arise in order to evaluate and implement the most effective insurance for the risk management program and negotiate the terms of the policy very carefully.

Captive insurance. Captive insurance is an alternative form of insurance. In basic terms, a “pure” captive insurance company is wholly owned by a parent company to insure the parent company’s risk. Similar to a traditional insurance company, the parent company pays a premium in exchange for coverage under the policy. Captive insurance is most effective for low-cost, frequent and predictable claims. The costs of buying insurance from a traditional underwriter – including the costs of premiums for various insurance products (workers’ compensation, property, general liability and wind farm) – may be outweighed by a captive insurance program. The intricacies and specialized nuances associated with the formation of captive insurance – such as tax benefits and re-investment of the reserve fund – are beyond the scope of this article and should be discussed with attorneys, insurance specialists and experts.

Self-insurance. In lieu of purchasing conventional insurance, wind farms and O&M third-party service providers may consider self-insurance. Generally speaking, the wind farm sets aside a certain amount of money to compensate for potential future loss (using actuarial figures).

For instance, with a wind farm, the types of risk can be determined. The risks are damage to blades, gearboxes, generators, transformers and foundations, as well as damage from fires, impacts or storms. The average costs of component damage may be predicted: blade ($240,000), gearbox ($380,000), generator ($310,00), transformer ($200,000) and foundation ($1,300,000).

The insurable loss for wind farms consists of a large number of similar risks that can be quantified because the probability of the risk occurring in the future is extremely likely. Therefore, self-insurance is an option. Although the idea of self-insurance is enticing, it is rare. The expectation of initial cost savings by eliminating the carrying costs that commercial insurers pass on to an insured may not be worth the risk.

Self-insurance is an embryo in the renewable energy space. The effects and shortcomings of the self-insurance option are indeterminable. If a wind farm elects to implement a self-insurance program, it should be considered in combination with some type of commercial insurance. In terms of a risk management technique, self-insurance is extremely hazardous. Therefore, proceed at your own risk. w


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

Marketplace: Insurance

Risky Business: How To Select The Right Coverage Option

By Alba Alessandro

In addition to a general liability policy and warranty, your risk management program should also have a significant insurance component.





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