August 21 - Who should be in control of insurance policies during the construction of your renewable energy project?
In the last few years, the insurance claims related to renewable energy projects have increased both in numbers and in severity. It has led to both insurers and the insured to revisit their ideas about risks of construction of a renewable energy project.
According to industry experts, the claims have increased in numbers due to several factors. Some of them are:
● The vulnerability of components due to placing them out in the open.
● Defects in experimental designs.
● Limitations and changes in Original Equipment Manufacturer (OEM) warranties
● Extreme shifts in weather conditions
Both asset owners and insurance company risk managers have expressed concerns over the increase in costs of having business insurance related to renewable energy projects. Due to the reasons mentioned above, there have been extensive delays in completing projects.
Both owners and contractors can sustain equipment damages during construction. When contractors are under pressure to complete several projects at the same time, they may hire personnel with less experience and skills. Their inability to handle complex equipment often can result in property damage and increases the duration of construction.
Component failures also add to the cost of construction. Since most of the equipment and their parts are complex and stay out in the open, changing them gets harder and costlier. Sometimes these failures are the result of faulty designs. Sometimes extreme climatic conditions, increasing with every passing year, and sudden weather changes make things worse.
Wildfires, tornadoes, and hailstorms have increased in frequency and intensity. They are also occurring out of season too often.
The question who should control the insurance of the project, whether it should be the developer or the contractor, is an important one.
Most business owners try to push the insurance costs to the Engineering, Procurement, and Construction (EPC) contractors and add to their risks unknowingly. When the EPC contractors purchase the insurance for the period of construction, they become the primary insured, and the developer or owner becomes the additionally insured on the policy. It can create several issues for the developers that they have not foreseen.
Loss of Revenues Due to Delay in Startup
The owner has to incur any loss of revenues due to delays in the completion of the project. Although it is in the interest of the contractors to finish the project as early as possible, they do not have an insurable interest in the revenues earned from the project. Annual revenues from large projects can be in the misllion. The loss from a delay of several months would not get covered in the EPC contractor's policy.
Lack of Limits Specified by the EPC
The language of the EPC contractors might not be broad enough to cover all the risks related to the construction of the project. That means the owner will have no control over what is covered and what is not. Therefore it is in the best interest of the developers to obtain broad coverage with their set of terms and conditions. They can include the risks they can foresee without relying on their EPC to do so.
Claims From Other Projects Under the EPC
When an EPC gets the business insurance policy for the construction, the limits of coverage might get shared with the other projects in their undertaking. The contractors might have placed aggregates in the insurance policy. These aggregates can get consumed by the losses incurred in other projects that the contractor is completing.
The Transition of Policy From the Construction Phase to Operations
There might be grey areas in the policy that the developers might not be aware of when the project transitions from the construction phase to the operations phase. These grey areas could result in losses incurred during the transition period or the maintenance of the project.
Building a Relationship With the Insurer
Getting the insurance themselves helps the developer build a business relationship with the insurer early. Knowing the nitty-gritty of the insurance risks from the construction phase can help the owner negotiate on long term insurance prices.
Developers can save up to 20% on long term policies if they have excellent terms with the insurer from the beginning of the project. The relationship also proves useful if the developer has to make a claim.
Additional Markups by the EPC
When the developers purchase the insurance themselves, they can save on the markups placed by the contractors. The contractors are marked as additionally insured in the policy, so they will not have to face insurance problems. As we can see, the developers can enjoy many advantages if they insure their projects themselves instead of relying on their EPC's. Not every company of insurance provides comprehensive coverage for renewable energy projects. So owners must check with the insurance carrier and research before purchasing a policy.
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Solar installation. Author: Dept of Energy Solar Decathlon.
