Don’t Let Contractor Risks Knock the Wind Out of Your Project
A revolution in renewable energy production is coming — specifically, in wind. By 2050, the US Department of Energy projects total wind capacity nationally will grow to more than 400 GW — more than triple its estimated capacity in 2020.
As wind energy investments continue, however, risk professionals must be mindful of potential risks at every step. Managing contractor risk during construction is especially crucial, as one wrong step can result in a multimillion-dollar loss — and affect a project’s insurability.
A Focus on Construction and Design Risks
A number of risks can emerge during the construction and design phase. These include catastrophic weather events, potential design defects, and errors in contractor installation procedures — all of which can have longer-term implications for insurance coverage.
For example, losses related to locking pins not disengaging properly prior to turning rotors — which can cause damage to the bedframe of nacelles — are increasing in frequency. As a result, insurers have raised premiums, imposed higher deductibles and retentions, and in some cases added outright exclusions for known issues associated with certain turbine models.
Design concerns can present risks during the operational stage as well, and thus could contribute to higher property insurance pricing and less favorable terms and conditions. Such concerns could also have implications for compliance with lender contracts.
Contractor Experience Is Crucial
With new players entering the renewable energy marketplace, insurers are scrutinizing not just project owners but their choice of contractors, focusing on their experience level and ability to proactively identify and manage risks during construction.
The growing frequency of losses stemming from contractor negligence has affected insurers’ view on construction. That’s important because an insurer’s comfort level with the contractors on a project can influence how much coverage it is willing to offer — and how that coverage is priced.
The bottom line: Contractor experience really matters. To help limit your design risk and increase the likelihood of securing suitable insurance coverage, it’s vital that you select contractors that have the right expertise — and the ability to anticipate potential risks and effectively address them if and when they arise. You should also explore ways to require contractors to mitigate their losses and shift some of the accountability for their potential negligence.
Contract Risk Allocation Is Key
The growing scrutiny by insurers and the possibility of construction and design risks make it imperative for project owners to carefully manage contractual risk allocation. Before construction commences, project owners must have a clear understanding of specific risks associated with a project, how risk is allocated in contracts, and where insurance fits in.
Before you sign any contracts, ask your advisors — including insurance brokers and in-house and outside legal advisors — to review them, with an eye toward identifying any language in contracts that could give rise to hidden risks. These advisors can help ensure that risk is appropriately transferred — according to industry accepted practices your insurers can support — and that insurance provisions are reasonable and available commercially for a specific project and/or turbine technology.
Lender agreements are also important to review. Involving brokers and legal advisors early and allowing them to weigh in on contracts can help you to understand potential issues before those contracts are executed. It can also help limit the likelihood of a breach or noncompliance — which could have significant repercussions.
Learn from Others’ Experience
It’s important to consider the views and appetites of insurers as you make decisions. Among other things, you should think about:
- Choice of contractors.
- OEM responsibilities.
- Availability of engineering.
- Lender obligations.
Your broker can share lessons learned from working on similar projects, including how insurers have reacted to certain decisions made by your peers. An example is the choice of OEM and turbine model; in making such a choice, weigh a number of criteria, including cost and insurance availability.
Rather than making a decision on which type or brand of turbine to use and then hoping coverage will be available, talk to your risk advisors early in the process. Work with them to understand how insurers perceive your options and whether coverage will be difficult to obtain or more costly if you go with a certain brand or type of turbine.
Ultimately, it may still make sense — for various reasons — to choose a certain turbine even if it is viewed less favorably by insurers than other models. But it’s still better to make that decision with as much information as possible in hand and to not be surprised by insurers’ reactions.