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Sometimes innovation results from intense research and development. Other times, it occurs because a new market emerges, and the risks associated with that new market don't fit into any pre-existing coverage options.

That is exactly what has happened with the ongoing "greening" of America, as more and more companies enter the world of supplying alternative energy, using renewable resources that have not yet seen widespread adoption. With America's dependence on foreign oil becoming more of an economic and political driver, alternative energy is starting to fly above the radar.

Lexington Insurance Company, a Chartis company, is a big proponent in using product innovation to meet emerging customer needs and demands. In addition, the company is adept at leveraging expertise, such as its specialized knowledge in underwriting investment tax credit coverage into new market sectors. As a result, the company recently launched its Investment Tax Credit (ITC) Energy-48 Insurance Program, a suite of innovative property and professional liability policy coverages. ITC Energy-48SM Mobile Property Insurance protects energy property against physical losses, as well as the resulting loss or recapture of investment tax credits. ITC Energy-48 Professional Liability Insurance responds to a loss or recapture of investment tax credits as a result of non-compliance with the Internal Revenue Code due to an error or omission in the performance of professional services.

Karen O'Reilly, Lexington's Chief Innovation Officer, explains that the nation's emerging focus on expanding alternative energy sources to combat both global warming and the high cost of oil is causing a ripple effect, as alternative energy developers, with unique exposures and ownership structures, are becoming more prevalent in response to the increase in mandated renewable energy generation.

"Alternative energy is being more heavily promoted than ever, with focus on both the supply side and the demand side of the economic equation," says O'Reilly. On the demand side, the U.S. Department of Energy reports that as of October 2010, 29 states plus the District of Columbia and Puerto Rico had mandatory renewable portfolio standard (RPS) policies in place. RPS policies require electricity providers to obtain a specified minimum percentage of their power from renewable energy resources by a target date. To stimulate supply--that is to say, the development of alternative energy projects-- the federal government, and a large number of states provide investment tax credits that offset project development costs and/or production tax credits that apply to every unit of energy production.

"The idea for ITC Energy-48 started with a phone call from an insurance broker who had read an August 2010 press release announcing the introduction of Lexington's new ITC program for low income housing developers, investors, and owners," O'Reilly says. "The broker represented an alternative energy project developer who had similar exposure to a loss of investment tax credits. We researched the exposure, determined we had sufficient expertise, and ITC Energy-48 was created."

Lexington's new suite of products consists of ITC Energy-48 Mobile Property Insurance and ITC Energy-48 Professional Liability Insurance. The program components include:

-- ITC Energy-48 Mobile Property Insurance--This component provides replacement cost coverage for direct physical loss or damage to mobile energy property. It also responds to any resulting loss or recapture of investment tax credits for such property. Additionally, in the event of recapture of investment tax credits, the policy also reimburses the insured for the cost of fines and penalties that may be assessed by the IRS. In addition, ITC Energy-48 Mobile Property Insurance extends coverage for business interruption loss, inclusive of unbundled renewable energy certificates sold to third parties, as well as any production tax credits taken in lieu of investment tax credits. Coverage is also extended for energy property while it is in transit between scheduled locations and while it is in use at those locations. Insureds can elect multi-year policies to cover their exposures during the 5-year tax credit compliance period.

-- ITC Energy-48 Professional Liability Insurance--This component provides defense and indemnity coverage for the errors and omissions of a policyholder who is managing, operating, and maintaining energy property. This coverage is structured to respond to professional liability claims from limited partners seeking recovery for the loss or recapture of investment tax credits as a result of non-compliance with the requirements of Section 48 of the IRC. Policies are issued on an annual basis.

"Investment tax credits are a significant source of return for investors in alternative energy projects," O'Reilly explains. "Our ITC Energy-48 Insurance Program is designed to protect energy property against physical losses as well as the loss of investment tax credits due to the casualty loss or non-compliance."

O'Reilly adds that whether it's the ITC Energy-48 program or any other innovation-fueled Lexington product, the idea is to design the program for the benefit of the customers.

"Creating a product that has real value in the marketplace requires that we listen to our customers and if unmet needs are out there, we do our best to meet them," O'Reilly said. "This program arose from a situation exactly like that. The broker's client had a need but there was no coverage, so we initially built this product for them. That client became our first policyholder."

O'Reilly says after looking at the exposure and the potential market, her department, working with Lexington experts and underwriters, created the ITC Energy-48 program. At least for the near term, she sees some significant growth opportunities, as a high level of investment is being made based on those state-mandated requirements.

"The timing is perfect for this program," she says.

Overall, O'Reilly and her colleagues responsible for innovation at Lexington have one main objective in mind--identifying trends, global or domestic, that present opportunities for new products, or a way to enhance an existing product.

"We need to take a broad view, a very global view, of the property and casualty business. Our job is to find opportunities and react. We spend a lot of time trying to get ahead of the curve, you could say." she says.

Of course, O'Reilly adds, it's always better for Lexington when they are first in the market, which is exactly what happened with the ITC Energy-48 program.

"We anticipate that by the end of the second quarter, we will have four to five new products," she says proudly, mentioning segments including construction, healthcare and higher education. "We devote our energies to support the overall business."

She adds that Lexington is looking to create products from a mix of its own ideas, customer needs and advice from brokers, who really have their fingers on the pulse of what their client needs and concerns might be.

"We can either create a new market, as we did with ITC Energy-48, or move into a new market," she says. "But most of all, we focus on innovation, experience and existing products in order to make the smartest decisions for new programs."

For more information on ITC Energy-48 or any other Lexington Insurance program, contact Karen O'Reilly at (617) 235-8017 or karen.o'reilly@chartisinsurance.com.

(The above piece is part of our continuing Insights series designed to highlight key products and services to our readers. This paid-for Insights was written and edited by Risk & Insurance® on behalf of our marketing partner. Additional Insights can be found on our Web site at www.riskandinsurance.com/.)

May 19, 2011

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