As both the price for and controversy around fossil fuels continue to grow, renewable-energy risks are becoming an increasingly standard part of many insurers’ portfolios—with wind and solar leading the green-power pack, far ahead of biomass production and hydroelectricity.
Wind, in fact, is one of the world’s fastest-growing energy-related industries: 39,404 megawatts (MW) of wind power was added worldwide in 2010, and the total installed wind-generation capacity globally grew by 25 percent from 2009 figures.
But along with the new business opportunities for the insurance sector come some unique risks.
“A wind farm is a school bus on a stick: It’s fraught with peril. Sometimes you get the claims before you get the premiums,” says Mike McMullen, a managing principal with Irvine, Calif.-based PowerGuard Specialty Insurance Services, a managing general agent for Edgewood Partners Insurance Center (EPIC), a regional insurance broker based in San Mateo, Calif.
Wind energy is unique in that production facilities are installed in steps, with different insurance needed at each point: Builder’s Risk while a construction project is in construction and testing, then a separate Operational Property policy that covers exposures when the project is fully operational.
A wind farm with perhaps 100 wind turbines will declare itself “operational” when a few of those turbines are put in place. Placement continues in phases; when the last turbine placement is made, the wind farm is declared “fully operational.”
Chubb Commercial Insurance developed a hybrid policy that covers Builder’s Risk while the project is being built, and it offers an endorsement that allows Operational coverage through the construction and completion. “Then we move the risk to 100 percent Operational,” says Camilo Posada, an assistant vice president and senior underwriting specialist in Chicago for Chubb.
Chubb provides the same type of package for solar power, but it is not used as often as in wind energy.
LISTEN TO THE WIND (AND WATCH OUT FOR THE BLADES)
PowerGuard specializes in the design and underwriting of insurance and risk-management solutions for wind, solar and other alternative-energy companies.
But some 90 percent of PowerGuard’s business is actually with solar-energy firms; it provides about $6 billion in solar-panel warranty-performance guarantees worldwide.
“We saw this solar wave coming,” McMullen says. “Most of the insurance companies around the globe are still not ready to write what is needed.”
Only about 10 percent of its business is related to wind farms—and one reason why is the daunting nature of the risks involved.
“We love to see people jumping into the wind-turbine market to get that extra capacity—and to write those deals that we don’t really want to write,” he adds.
Each of a turbine’s three blades is as long as a football field and is hollow to permit a technician to walk inside for repairs. Winds may blow from zero mph to 200 mph, and the amount of torque hitting the turbines combined with flying bits of sand and soil can wreak havoc.
“Blades fly off. Wind turbines set on fire or go over speed,” McMullen says.
On the Property side of the risk equation, turbines placed far from civilization can be targets for thieves, who strip them of miles of costly copper wire. Another big concern is serial defects, where similar construction problems occur in a large percentage of a turbine shipment. “Historically, the Property insurer would suspend coverage because it’s a warranty issue,” McMullen notes.
Chubb’s Posada says one of the biggest liability exposures in wind energy is noise pollution. “It’s definitely an exposure that has to be considered by an insurance company and a developer as well. There is a potential for lawsuits; Canada has already seen some.”
Tests are being done to measure the effect that the constant “whooshing” noise of those giant blades turning at 100 mph has on the mental health of nearby homeowners.
“There have already been a lot of studies in regard to the noise and the effect of the noise on people from wind turbines, and state regulations have become more explicit as to how far from homes and buildings wind turbines can be placed,” says Russ Birch, senior vice president for the RJ Ahmann Co., an insurance and risk-management agency in Eden Prairie, Minn., that includes among its renewable-energy clients biodiesel producers, ethanol producers, wind-power facilities and solar-energy facilities.
“Look at very large wind installations; you’d be amazed at how much noise they actually make,” Birch says. “It’ll be interesting to see what happens from an insurance standpoint and from a litigation standpoint. The question that will have to be asked is, ‘Is this creating some form of bodily injury or property damage to the surrounding neighbors?’ If so, you may have a legitimate liability issue.”
Adding to the insurance factor is the increasing size of wind turbines. Over the past 10 years they’ve gone from a turbine that produces some 750 kilowatt-hours of electricity to larger, 200 MW turbines, roughly three times the size of the originals.
“What people often object to is sight pollution,” Birch adds.
POPULAR DESPITE THE PERILS
Despite all the potential drawbacks associated with wind farms, the technology continues to appeal.
In New York State, for example, interest in wind power is definitely on the rise, according to Alan Wechsler, a spokesman for the New York State Energy Research and Development Authority, whose “Behind-the-Meter” wind program received 65 applications in 2011 from residents and businesses seeking incentives for installing a wind turbine—the most requests received in one year.
Wind installations already in use have seen an increase in business, adds Wechsler. Meanwhile, the state’s large-scale projects that provide power directly to the power grid, such as wind farms, now have about 1,175 MW in operation, with another 311 MW under construction. That’s a total of 10 wind farms currently in operation, with six more under construction or in development.
NYSERDA requires General Contractor’s Liability insurance for contractors who participate in its statewide solar-electric, solar-thermal or wind-turbine programs.
The market for solar electric in New York State also has grown steadily, and the number of solar-electric installers statewide grew by more than 60 percent between 2010 and 2011, adds Wechsler.