Solar’s Risk Challenges
Misaligned mirrors at Ivanpah Solar Electric Generating System — the world’s largest solar plant — caused a fire in May that took one of the California facility’s three generators offline for several weeks.
Unlike the much more common photovoltaic (PV) solar installations, which directly convert sunlight into electricity, Ivanpah is a concentrated solar power (CSP) facility, using thousands of mirrors called heliostats to focus intense sunlight on concentrating towers, producing steam to generate electricity.
There are substantial differences between the risk profiles of PV and CSP, and the industry as a whole is dynamic enough that accurately assessing risk is an ongoing challenge.
While vast in size — Ivanpah takes up 3,500 acres — CSP generates more electricity per square foot than PV. And using heat storage technology, CSP can continue generating power after nightfall.
CSP’s drawbacks include multiple bottlenecks or choke points. Whereas PV generally has one point where power enters, CSP has concentrating towers, steam boilers and generators — each vulnerable to outages. CSP towers are also vulnerable to lightning strikes.
“With CSP, it’s such unique equipment. The equipment is going to range much more widely with CSP products versus photovoltaic,” said Sam Walsh, senior vice president, solar PV underwriting at GCube.
“It is important to know your supply chain, and be aware of the delays that can arise.” — Christi Edwards, vice president, clean tech segment, Chubb
That can make replacing equipment a challenge, he said.
“It is important to know your supply chain, and be aware of the delays that can arise,” said Christi Edwards, vice president of the clean tech segment at Chubb.
While CSPs generate power into the night, Ivanpah is slow to start in the morning, requiring natural gas to preheat its boilers.
With moving parts prone to wear and tear, its thermal focus and reliance on combustibles, “CSP really isn’t solar,” said Michael J. Bernay, CEO of PERse, Ryan Specialty Group’s alternative energy group. “To date, pretty much everything that’s been built has been more of a thermal project than it has been a solar project.”
That impacts CSP’s risk profile. “PV is much closer to wind risk when it is modeled for exposure,” Bernay said. “CSP is much closer to a traditional gas-fired thermal project.”
“Photovoltaic is a lot more standard, a lot less moving parts and a lot less difficult to underwrite,” said Ara Agopian, president of SolarInsure, the renewable energy division of Asset One Insurance. “We definitely have a better handle on the photovoltaic side, especially on the large commercial installations.”
PV installations are generally large utility ground mount or distributed rooftop installations ranging from single homes to massive industrial facilities. Both benefit from how ubiquitous PV panels have become; if one breaks, it has little impact and is easily replaced.
Ground-mounted PV installations are more similar to CSP in size and in risks. Both can be hit by wind events — including tornados — as well as flash floods, which can wash out support structures, especially during construction.
“The liability in any solar panel is once they’re activated, they’re generating power” — James Biggins, managing consultant and power generation practice leader, Global Risk Consultants Corp.
Both are generally in remote locations, meaning no liability from adjacent structures, but firefighters and water can be far away. Automatic fire suppression — generally gaseous or water mist types — is extremely important.
Remote facilities also may be very lightly staffed, raising other risk and liability concerns, including trespassers or vandals.
With fewer moving parts to break and little in the way of lubricants or other combustibles, ground-mounted PV installations require even less staff, making security monitoring more important.
“There may be workers during the day doing maintenance, but [not] at night and many times during the day. … There are some PV sites where you’ve got the field of solar panels and the control building, but it’s all remotely operated from another facility,” said James Biggins, Chicago district managing consultant and power generation practice leader with Global Risk Consultants Corp. “There may well be nobody out there.”
Distributed PV solar rooftop installations are different. All PV produces electrical current, so there is always some fire risk.
“For rooftop installations, there is a risk to the structure underneath and there is risk to adjacent structures,” said Edwards.
Probable Maximum Loss
“With any rooftop installation, the entire system has to be viewed as your probable maximum loss, because if you lose the entire building, you’re losing the system with it,” Walsh said.
Rooftop installations can also hamper firefighting efforts.
“If the system isn’t de-energized, you would be dealing with an electrical fire scenario,” Walsh said. “So you don’t want to be pouring water on it. One of the concerns is how project owners and operators work together with local fire authorities to plan accordingly.”
“We have had situations where we’ve had a fire, and in the attempt to try to control it, the fire department has inadvertently made it worse,” Bernay said.
Not all fire departments are properly trained to deal with putting out a fire where there’s an energized solar system on the roof, he said.
“There have been instances where a fire department shows up, realizes it’s there and chooses not to fight the fire. … Even if the fire originated in the underlying structure, if the fire department won’t put it out because of the solar system, who’s going to be held responsible for the damage that occurs?” Walsh asked.
That’s why Edwards recommends inviting the local fire department to visit any installation and create a firefighting plan. She also recommends a thorough risk assessment, as well as knowing your state’s fire code — and building to the most stringent requirements available.
The National Electrical Code recommends rapid shutdown capability and disconnecting methods. The National Fire Protection Association’s 2015 fire code stipulates adequate spacing so firefighters can move about the roof and ventilate if need be.
Walsh recommends adequate signage on all sides of a building to alert fire crews to rooftop installations.
“It’s Live Power Up There”
“The liability in any solar panel is once they’re activated, they’re generating power. There’s always power being produced anytime there’s a light source,” said Biggins. “So from a worker safety standpoint … they’ve got to always remember it’s live power up there from those panels.”
“Hurricane Sandy is probably the largest event we’ve paid out losses for in regards to solar in the U.S.,” — Sam Walsh, senior vice president, solar PV underwriting, GCube.
While the decentralized nature of distributed solar installations dilutes the risk, events like hurricanes or seismic incidents can cause widespread losses, although Superstorm Sandy was in some ways encouraging.
“Hurricane Sandy is probably the largest event we’ve paid out losses for in regards to solar in the U.S.,” said GCube’s Walsh. His company paid $7 million to $8 million in losses.
“But what was interesting was that we probably insured 100-plus projects in the area and I think we probably only paid out on six or seven projects in total,” he said.
Those losses were less from wind damage than from the corrosive effects of wind-driven salt water.
Snow piling up on PV installations can also cause damage. It can slide off angled panels, hit cars or people, or drip and cause icy spots, all serious liability issues.
Residential solar installations can be challenging to insure too. In some states, homeowner’s coverage for rooftop solar may be virtually unavailable. Leaseback arrangements where the installer retains ownership and responsibility for insurance can be an attractive option.
“It is important for consumers to be clear about who is responsible for the maintenance of the panels installed on their homes,” said Edwards. “For the operators, it is important to make sure the installer is experienced and reputable especially if they are using subcontractors.”
One potential complication for all solar installations is when errors during installation cause problems down the road, leading to disputes between the installer’s insurer and the operator’s insurer over the cost, timing and liability of the loss.
“The massive growth has really only taken place in the past six or so years,” Walsh said. “Once these systems enter year 10, are we going to start seeing issues crop up that will be pervasive across the industry?”
New technologies like large scale battery systems and insurance products like weather risk transfer products, which pay out for low sunlight or wind, will keep the changes coming.
“It’s a fairly new industry,” Agopian said. “We don’t have enough data on the risk management side just yet. … But it’s increasing and improving. We’ll get better at it.” &
$1 Million Theft Excluded from Coverage
In July 2012, John Moon, one of the owners of Alphacare Services Inc., which performed payroll services for Construction Contractors (Contractors), told Contractors that AlphaCare did not have enough assets to pay payroll, taxes or benefits expenses for Contractors’ subscribers.
Eventually, auditors informed Contractors that Moon (who was charged in May 2016 by the U.S. Attorney’s Office and is awaiting trial for wire fraud) had wire-transferred about $930,000 from Construction Contractors’ funds to use for personal and AlphaCare expenses, leaving the company with substantial unpaid tax liabilities, according to court documents.
On Jan. 10, 2013, Contractors purchased a crime insurance policy, which included coverage for employee theft, from Federal Insurance Co. It advised the insurer there was still about $1 million that was unaccounted for.
Contractors later discovered the missing $1 million was stolen by check, and it submitted a claim for that amount with the carrier, according to court documents.
Federal Insurance denied the claim, saying all of the losses were a single loss under the policy because the insured had already discovered there was a loss prior to taking on the policy.
After a hearing in the U.S. District Court for the Northern District of Ohio at Toledo, the court agreed.
On July 11, the U.S. 6th Circuit Court of Appeals upheld the decision.
“Because Construction Contractors discovered the wire fraud prior to the policy’s execution and the check theft and wire fraud constitute a single loss, the check-theft loss is excluded from coverage under the policy,” the court ruled.
Scorecard: The insurance company does not need to pay the $1 million theft claim.
Takeaway: The insured was aware of the loss “even if ‘the exact amount or details … are unknown.’ ”
Ruling Modifies ‘Care, Custody and Control’
In January 2013, Texas Trailer Corp., under the direction of the American Bureau of Shipping (ABS), tested a container designed by EPMP Ltd. and SandCan LLC to store and deliver sand from a mine to a well site.
Applying excess weight to the container deformed the corner castings and subsequent tests deformed the container, eventually causing a crack in the corner casting weld. The crack constituted a failure of the certification test.
EPMP and SandCan sued both Texas Trailer and ABS for damages. Texas Trailer (TTC) sought a defense from National Union Fire Insurance Co., but the insurer said the policy did not cover the damage.
After a jury found that only ABS had been negligent, not Texas Trailer, TTC sued National Union for reimbursement of litigation costs in excess of its $100,000 per occurrence retained limit, and breach of contract. The carrier sought a summary judgment on the trailer company’s claims.
On June 28, the U.S. District Court in the Northern District of Texas ruled in favor of National Union.
At issue was whether an exclusion for damage of property in the “care, custody or control” of the insured excluded coverage of the claim. The insured argued the container was only within its “physical control,” and not its “care, custody or control.”
The insurer “need only show that the property was ‘under the immediate supervision of the insured and [was] a necessary element of the work involved,’ ” the court ruled. “ABS may have designed the tests, but TTC actually performed them.”
Scorecard: National Union was not required to pay Texas Trailer’s litigation costs.
Takeaway: TTC’s argument that it acted under ABS’ guidelines was not sufficient to prevent the court from ruling that TTC had “care, custody or control” of the container.
The Meaning of ‘Collapse’
In 2014, renovations at the Masters Apartments revealed “substantial structural impairment” due to decayed rim joists.
CHL LLC, owner of the Seattle apartment complex, submitted a claim to American Economy Insurance Co., which had issued commercial property insurance from 1999 to 2005. An engineer hired by the insurer said the structural damage occurred between 1999 and 2002, and that a building inspector would classify it as a “dangerous” building.
American Economy denied CHL’s claim, saying the damage did not trigger coverage, as “collapse,” as defined by the policy from 2002 to 2005, required the building to fall down or be in imminent danger of falling down for a claim to be paid. (Prior to 2002, the term “collapse” was undefined.)
The insurance company filed a lawsuit in the U.S. District Court for the Western District of Washington at Seattle seeking a judgment that it did not need to indemnify the claim.
On July 7, the court ruled in favor of the insurance company and dismissed the case.
Given that Masters Apartments remained upright for 12 years after the apparent decay occurred, the court ruled, the building did not reach a state of collapse between 1999 and 2002, when American Economy provided coverage.
Scorecard: The insurance company did not need to pay for renovations to the apartment complex.
Takeaway: Depending on the state, interpretation of “collapse” can range from a building that has a non-imminent substantial impairment of structural integrity to a building that has actually fallen down.
Why Marine Underwriters Should Master Modeling
Better understanding risk requires better exposure data and rigorous application of science and engineering. In addition, catastrophe models have grown in sophistication and become widely utilized by property insurers to assess the potential losses after a major event. Location level modeling also plays a role in helping both underwriters and buyers gain a better understanding of their exposure and sense of preparedness for the worst-case scenario. Yet, many underwriters in the marine sector don’t employ effective models.
“To improve underwriting and better serve customers, we have to ask ourselves if the knowledge around location level modeling is where it needs to be in the marine market space. We as an industry have progress to make,” said John Evans, Head of U.S. Marine, Berkshire Hathaway Specialty Insurance.
CAT Modeling Limitations
The primary reason marine underwriters forgo location level models is because marine risk often fluctuates, making it difficult to develop models that most accurately reflect a project or a location’s true exposure.
Take for example builder’s risk, an inland marine static risk whose value changes throughout the life of the project. The value of a building will increase as it nears completion, so its risk profile will evolve as work progresses. In property underwriting, sophisticated models are developed more easily because the values are fixed.
“If you know your building is worth $10 million today, you have a firm baseline to work with,” Evans said. The best way to effectively model builder’s risk, on the other hand, may be to take the worst-case scenario — or when the project is about 99 percent complete and at peak value (although this can overstate the catastrophe exposure early in the project’s lifecycle).
Warehouse storage also poses modeling challenges for similar reasons. For example, the value of stored goods can fluctuate substantially depending on the time of year. Toys and electronics shipped into the U.S. during August and September in preparation for the holiday season, for example, will decrease drastically in value come February and March. So do you model based on the average value or peak value?
“In order to produce useful models of these risks, underwriters need to ask additional questions and gather as much detail about the insured’s location and operations as possible,” Evans said. “That is necessary to determine when exposure is greatest and how large the impact of a catastrophe could be. Improved exposure data is critical.”
To assess warehouse legal liability exposure, this means finding out not only the fluctuations in the values, but what type of goods are being stored, how they’re being stored, whether the warehouse is built to local standards for wind, earthquake and flood, and whether or not the warehouse owner has implemented any other risk mitigation measures, such as alarm or sprinkler systems.
“Since most models treat all warehouses equally, even if a location doesn’t model well initially, specific measures taken to protect stored goods from damage could yield a substantially different expected loss, which then translates into a very different premium,” Evans said.
That extra information gathering requires additional time but the effort is worth it in the long run.
“Better understanding of an exposure is key to strong underwriting — and strong underwriting is key to longevity and stability in the marketplace,” Evans said.
“If a risk is not properly understood and priced, a customer can find themselves non-renewed after a catastrophe results in major losses — or be paying two or three times their original premium,” he said. Brokers have the job of educating clients about the long-term viability of their relationship with their carrier, and the value of thorough underwriting assessment.
The Model to Follow
So the question becomes: How can insurers begin to elevate location level modeling in the marine space? By taking a cue from their property counterparts and better understanding the exposure using better data, science and engineering.
For stored goods coverage, the process starts with an overview of each site’s risk based on location, the construction of the warehouse, and the type of contents stored. After analyzing a location, underwriters ascertain its average values and maximum values, which can be used to create a preliminary model. That model’s output may indicate where additional location specific information could fill in the blanks and produce a more site-specific model.
“We look at factors like the existence of a catastrophe plan, and the damage-ability of both the warehouse and the contents stored inside it,” Evans said. “This is where the expertise of our engineering team comes into play. They can get a much clearer idea of how certain structures and products will stand up to different forces.”
From there, engineers may develop a proprietary model that fits those specific details. The results may determine the exposure to be lower than originally believed — or buyers could potentially end up with higher pricing if the new model shows their risk to be greater. On the other hand, it may also alert the insured that higher limits may be required to better suit their true exposure to catastrophe losses.
Then when the worst does happen, insureds can rest assured that their carrier not only has the capacity to cover the loss, but the ability to both manage the volatility caused by the event and be in a position to offer reasonable terms when renewal rolls around.
For more information about Berkshire Hathaway Specialty Insurance’s Marine services, visit https://bhspecialty.com/us-products/us-marine/.
Berkshire Hathaway Specialty Insurance (www.bhspecialty.com) provides commercial property, casualty, healthcare professional liability, executive and professional lines, surety, travel, programs, medical stop loss and homeowners insurance. The actual and final terms of coverage for all product lines may vary. It underwrites on the paper of Berkshire Hathaway’s National Indemnity group of insurance companies, which hold financial strength ratings of A++ from AM Best and AA+ from Standard & Poor’s. Based in Boston, Berkshire Hathaway Specialty Insurance has offices in Atlanta, Boston, Chicago, Houston, Los Angeles, New York, San Francisco, San Ramon, Stevens Point, Auckland, Brisbane, Hong Kong, Melbourne, Singapore, Sydney and Toronto. For more information, contact [email protected].
The information contained herein is for general informational purposes only and does not constitute an offer to sell or a solicitation of an offer to buy any product or service. Any description set forth herein does not include all policy terms, conditions and exclusions. Please refer to the actual policy for complete details of coverage and exclusions.
This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Berkshire Hathaway Specialty Insurance. The editorial staff of Risk & Insurance had no role in its preparation.