Don't Let Wind Turbine Claims Blow Over: How To Assess Recovery

According to the 2010 U.S. Wind Industry Monitor, significant growth in the use of wind turbines in the United States is projected over the next several years. Indeed, the U.S. recently surpassed Germany as having the largest usable wind capacity in the world.

As capacity continues to grow and technology behind wind energy continues to improve, more and more insurance underwriters are taking steps to include at least some wind energy business in their portfolios, generally underwriting via dedicated energy units. Experts believe that underwriting opportunities in wind technology will remain a significant growth industry for the next 20 years.

From an underwriting standpoint, commonly available types of coverage include protection for those individuals responsible for the design, construction, erection, commissioning and testing of wind turbines, as well as coverage for all risks of loss including destruction or damage to the turbine or property where the turbine is erected.

Policies also exist for business interruption or loss of revenue should a wind turbine stop working, damage to turbines while in transit, and potential environmental cleanup costs associated with a wind turbine loss.

The expansion of onshore wind technology (as distinguished from offshore wind technology, which is an entirely different kind of animal) is not without some risk for wind energy underwriters. Wind energy technology relies primarily on wind turbines, and despite significant improvement in turbine engineering, fire-related hazards still exist. Accordingly, it is important for underwriters to not only understand the most common risks that a wind energy program presents from a first-party claim standpoint, but to also be cognizant of subrogation opportunities that may arise from such losses.

The wide variety of coverages available to wind programs is a direct reflection of the risks that wind programs present. Wind turbines are a key component of a successful wind program, and because of the complexity of wind turbines, which on average contain roughly 8,000 parts, it is common to experience first-party property damage claims while the turbines are in operation. From installation problems to start-up delays, there are several potential areas which can ultimately lead to first-party claims.

The most common first-party claim involves lightning damage to the turbine itself. More importantly though, lightning strikes can lead to significant fires in or around a turbine if the turbine's lightning protection system is not installed or maintained properly.

In addition to the risk of fire that lightning strikes present, improper installation or grounding of a turbine's electrical system can also present a fire hazard. Other common problems that may also present fire hazards include failure to adequately protect hot surfaces inside the turbines (e.g., the generator and gearbox mountings); work related to the repair, assembling and maintenance of the turbine (e.g., welding, cutting or soldering work); and build-up of internal combustible materials such as foam sound insulation or oil in the turbine gearbox or hydraulic system.

In reviewing a first-party claim involving a wind turbine, underwriters should consider and evaluate subrogation opportunities. For example, simply because a turbine was damaged by lightning does not mean that a viable subrogation opportunity does not exist. Turbines are generally equipped with sophisticated lightning protection systems and the adequacy or functionality of that system must be analyzed–especially considering that third parties are usually responsible for those tasks.

If a first-party claim involves the malfunction of the turbine's electrical or mechanical systems, viable recovery opportunities may still exist. For problems involving electrical systems, it is important to evaluate whether the system complied with applicable code or provided an approved method of controlled shutdown of the turbine's operating system. In addition, it is critical to determine whether the electrical system was initially approved and/or routinely inspected by qualified professionals.

Even if the turbine's electrical and mechanical systems performed as intended, it still may be necessary to evaluate internal materials in the turbine to decide whether the materials used were combustible when either non-combustible or low-flammability materials were available, thus contributing to the rapid spread of what was initially a modest internal fire.

If a recovery opportunity is identified, it is crucial that potentially responsible third parties be provided access to the turbine and all relevant evidence. Key components of the turbine will likely need to be inspected and underwriters could face allegations of spoliation of evidence if the turbine or involved components are not preserved for inspection by third parties.

In addition, it is important to ensure that the first-party claim is adequately documented with respect to repairs and, if necessary, replacement of the turbine itself.

Involvement of potentially responsible third parties during the first-party claim can also assist with ensuring that the first-party claim is adjusted so that underwriters' ultimate payment is not subject to criticism or scrutiny by third parties and their liability carriers. Potentially responsible third parties will generally have intimate knowledge of the costs necessary to repair the damage sustained, and may even have certain warranty obligations depending on the nature of the loss.

There is little doubt that wind energy programs–both onshore and offshore–will continue to proliferate as the United States explores and encourages alternative sources of energy. Underwriting opportunities for wind programs will accompany this growth. Because the typical first-party claim will generally involve damage to a “standalone” wind turbine, it is tempting to dismiss recovery opportunities and attribute the loss to an “act of nature” (e.g., lightning), or an unknown electrical or mechanical failure.

Underwriters should be mindful that recovery opportunities exist and that lightning protection, mechanical and electrical systems must be analyzed in conjunction with fire “spread” issues to rule out viable avenues of recovery.

Early attention to these issues could ultimately lead to a successful recovery and improved profitability for an underwriter's wind energy portfolio.

Jason Schulze is a member of the Subrogation and Recovery department at Cozen O'Connor. Practicing in the law firm's Houston office, he manages complex subrogation matters involving energy and petrochemical losses for both domestic and international insurers. He may be reached at jschulze@cozen.com

For information on emerging subrogation and recovery issues, visit Cozen O'Connor's blog at http://subrogationandrecoverylawblog.com