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WIND ENERGY WEBINAR Underwriting And Risk Management Considerations
April 5, 2011
Gerry Finley Senior Vice President Underwriting Services Division Munich Reinsurance America, Inc.
Michael Fusselbaugh Senior Vice President Renewable Energy The Hartford Steam Boiler Inspection & Insurance Company
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Presenters Casualty Issues and Considerations
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Introduction
The Wind Energy Industry – Present and Future
Casualty Exposures
Casualty Underwriting Considerations
Conclusion / Takeaways
Wind Energy Casualty Underwriting Considerations
INTRODUCTION
Industry Status
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Federal Grants and Subsidies
Continuing Growth
Bi-partisan public support based on 2010 poll
AWEA 2009 Market Report • 39% (10,000 MW) increase in wind
capacity to 35,000 MW • 39% of all new power production
capacity in the US is wind
34 states have adopted mandatory renewal
energy requirements
Industry Overview – Small Turbines
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0
5,000
10,000
15,000
20,000
Small Wind Units Sold
Capacity Sold (kW) Sales of Units Sold ($U.S. x 10,000)
U.S. is world’s largest market for small wind
9,800 small wind turbines sold in U.S. in 2009
Two thirds (2/3) were manufactured in U.S.
2,100 3,100 3,200 4,671 4,324 8,329 9,092
10,386 9,800
2,100 3,100 3,200 4,878 3,285 8,565 9,737
17,374 20,300
(not avail.) (not avail.) (not avail.)
$1,489 $990
$3,320 $4,197 $7,266 $8,240
2001 2002 2003 2004 2005 2006 2007 2008 2009
Source: American Wind Energy Association (AWEA)
Year Units kW Sales $U.S.
Growth of U.S. Small Wind Market
Percent of U.S. Electricity from Wind DOE Goal: 20% by 2030 (2009 Capacity: 1.8%)
U.S. Wind Development Looking Ahead
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1.80%
20%
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
2009 2030
8 Note: Numbers within states represent cumulative installed wind capacity and, in parentheses, annual additions in 2009.
2009 Current Capacity and Installations U.S.DOE 2009 Market Report
9 Source: AWEA project database, EIA, Berkeley Lab estimates
2009 Current Capacity and Installations U.S.DOE 2009 Market Report
Where’s the Wind? U.S. Wind Development Estimates 2010
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Why does it matter?
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Why does it matter?
Venues for Legal Action… State Courts
vs. Federal Courts
“Blowin’ in the Wind” - B. Dylan
CASUALTY EXPOSURES
Loss Example
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Small Wind Turbines End Users
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Farms <15kW
Homes, Battery Chargers 15-30 kW
Schools 50-100kW
Communities, Municipalities 50-100kW
Office Buildings 30-50kW
Manufacturing/Processing Facilities 50-100kW
Generally in rural areas
Owned by facility – located on site
Supplements Utility Power / Overall Electrical Needs
Casualty Exposures
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Development Performance
Site Preparation Construction Connection Testing/ Operation
Many Legal Issues
Our Focus
Traditional Liability Insurance Coverage “Bodily Injury” “Property Damage” “Personal Injury” “Advertising Injury”
Land-based Operations
Casualty Exposure - Typical Classes
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Developers/Owners/Investor
Land / Property Owners
Equipment
Turbine manufacturers
Gearbox and component parts
Construction
Site preparation Footing Transportation Erection
Test/Operate
Management Maintenance &
service Grid connection
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Much of this exposure would not typically be covered under traditional CGL policy wording: BI, PD, PI, AI needed Contractual exclusions apply to most contracts Definition of “Insured Contract” is key
Wind Development Contracts
Easements & Covenants Prohibiting Wind
Development
Pre-existing Credit Agreements
Casualty Exposure - Contract Disputes Some Examples
Casualty Exposure - Potential Tort Liability Exposure
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Emotional Distress
Excessive Noise Economic Loss
Damage to Property
Zoning Restrictions
Environmental
Injunctive Relief
Bodily/Personal Injury
Public Nuisance
Case law still at an early stage of evolution. Traditional coverage application will be tested.
New coverage will be developed.
Patent Infringement
Underlying Claim Allegations May Include:
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Injunctive Relief
Casualty Exposure Origin – Nature/Type (1/8)
Suits brought to have objectionable behavior ceased
Pure injunctive relief claims (No BI or PD) - Not likely to be covered under traditional policies (based on several past case law judgments) , but…….
“all sums” language has been found to cover injunctive relief for environmental claims & may result in coverage for wind claims (AIU v. Santa Clara County – CA 1990)
Roes v. Chaiken (NJ 1982) Center for Biological Diversity v.
FPL Group (CA 2008)
Coastal Habitat Alliance v. Patterson (TX 2008)
Stull v. Gamesa Energy (PA 2008)
Casualty Exposure Origin – Nature/Type (2/8)
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Pure Economic Loss
Suits brought for loss of income or profits, or decreased property value without tangible property damage − Wind shadow − Property value diminution due to wind turbine proximity
Pure economic loss claims - Not likely to be covered under traditional policies
Definition of property damage is key (tend to be more PD than BI)
Giddings v. Industrial Indemnity Co. (CA 1990)
Montrose Chemical Co. v. CA Superior Court (CA 1993)
Casualty Exposure Origin – Nature/Type (3/8)
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Nuisance
Suits brought by those claiming wind turbines are a “nuisance”; interferes with another’s right to enjoy property − Private (individual right) or public (common right of a group or community) − “Attractive” – typically bodily injury related (private) or otherwise (public or
private) − Neighbor suits more common than environmental suits
Coverage may exist under personal injury if “wrongful entry/eviction” or “right of private occupancy” is covered (as in CGL and FO).
General Accident Ins. v. W.Am. Insurance Co. (CA 1992)
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Misrepresentation
Casualty Exposure Origin – Nature/Type (4/8)
Suits claiming failure to deliver on performance (noise, output, energy savings, etc.) − Turbine manufactures and wind farm operators
Traditional policy coverage unlikely but hinges on definitions (or court interpretations) of “bodily injury,” “property damage,” “personal/advertising liability”
USF&G v. Warwick. Development Co. (AL 1984) Frohberg v. Merrimack Mutual Fire Ins. Co. (MA 1193) LaFrance v. Travelers Ins. Co. (MA 1992)
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Bodily Injury or Property Damage
Casualty Exposure Origin – Nature/Type (5/8)
Few suits to date
Major causes – blade or ice throws, tower falling, attractive nuisance, noise
Coverage is likely, depending on policy definition (interpretation) of “bodily injury” or “property damage”. − Is medical monitoring covered as “BI” − Is physical damage to tangible property needed for “PD”? − Extent of “loss of use” coverage for “PD”?
Bomba v. Zoning Board (MA 2005) – Ice throw Case
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Health / Emotional Distress
Casualty Exposure Origin – Nature/Type (6/8)
Suits claiming injury to persons or potential injury (monitoring claims)
Coverage depends of definition of bodily injury and case law: − Bodily injury including sickness, disease, mental anguish and emotional
upset….. (not the case in CGL or FO) − Even a more limited definition may be interpreted by a court to provide
coverage – mixed bag
Yes = Lavanant v. General Accident Ins. Co. (NY 1992) No = Allstate Ins. Co. v. Diamant (MA 1988); Investors Corp. v. Liberty Mutual
(2nd Circuit 1998)
Reported Health Ailment: • Headaches, nausea, insomnia, blurred vision, vertigo, panic attacks
Suspected Cause: • Infrasound – inaudible low frequency sound from wind turbines • 2 Kilometer threshold?
Status: • Currently unsubstantiated • Being studied relative to turbine construction distance requirements • Future Latent, Systemic loss???
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Health / Emotional Distress Example? “Wind Turbine Syndrome”
Casualty Exposure Origin – Nature/Type (7/8)
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Design Defect
Casualty Exposure Origin – Nature/Type (8/8)
Claims that the turbine design is defective resulting in damage, injury, excessive noise, etc.; essentially products liability; actions brought by wind farm operator, land owner or public
Coverage depends on: − Is there an exclusion for “defective design” (“loss or damage caused by a
defect, error or omission in design”)? − CGL and FO - exclusion to impaired property “….arising out of defect,
deficiency ….in “your product“ or “your work”
Laquila Const., Inc. v. Travelers Ins. Co. (NY 1999) Allianz v. Impero (WA 1986) Stull v. Gamesa Energy (PA 2008)…….again
Whoever owns the land……also owns the wind above it
Casualty Exposure
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Need to Determine Risk Appetite
More Complicated / Risky
More Income / Profit Margin
Lease the Land
Contingency / Vicarious Risk
Less Income / Profit Margin
Own/Operate
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Potential Vicarious Liability
Key Issues: Avoid assuming liability Obtain protection (hold harmless/additional insured) from owner/operator of
wind farm
If you have leverage…Use it !!
Land Leasing - Augments Existing Operations
Casualty Exposure
Falling tower (too much wind??) Blade or ice throw Attractive / public nuisance
Noise Environmental Easement contracts
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Wind Operators Dedicated New Business Operation
Potential Direct Liability
Key Issues: Many different contractual arrangements (development through
operation)…….understand extent of risk transfer Some liabilities may not be insurable…..at least in a traditional sense
Wind development contracts (construction, maintenance, utility connection, credit )
Regulatory liability
Stray voltage Wildlife protection Signal interference View obstruction Wind shadow Light obstruction
Electromagnetic fields Failure to supply Re-powering (power
interruption) Carbon or tax credits Misrepresentation
All of the Land Lease Potential Liability ….plus:
Casualty Exposure
CASUALTY UNDERWRITING CONSIDERATIONS
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Location
Equipment
Access conditions Transportation issues Size, number, layout and type of equipment
(related to location)
Equipment safety features Manufacturer warranty and products liability
coverage
General Casualty Underwriting Considerations (1/2)
Who does it and what are their qualifications How are the potential liabilities managed License and regulatory issues
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More
Grid Arrangements
Liability Transfer
Construction and Installation
How is the power transmission risk controlled Who has responsibility for what aspects of the
connection Contracts, Contracts, Contracts
How is it protected and how secure is the protection Contracts, Contracts, Contracts Scope of Coverage
General Casualty Underwriting Considerations (2/2)
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Preferred and Recommended
Casualty Underwriting Considerations Installation/Construction (1/3)
Size, Location & Number of Turbines Manufacturer / Dealer Installation packages Land Owner Capability? Connected to a Grid?
Primary Considerations
Manufacturer / Dealer Installed
Common Simplest approach –
Combines product & completed operations
Generally Not Recommended Self-Installed
Assume GC role/responsibilities
Most complex approach Stand alone completed
operations exposure
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Latent loss scenario: Foundation Failure When did the loss “occur”?
Casualty Underwriting Consideration “Serial” Losses (Special Installation Risk) (2/3)
Systemic Turbine Malfunction
Manufacturing Process (Products Liability)
Design Defect
Material Defect
Faulty Workmanship
Installation (Completed Operations)
Assembly
Foundations
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Contractor Considerations (In addition to the Primary Considerations)
For Qualified Contractors: Check with the Manufacturer or State Agencies such as the DOE
Casualty Underwriting Consideration Contracting Exposures (3/3)
Type of Contractor All-in-one specialist? (may be hard to find) GC and independent subs
Liability Transfer Contractual hold harmless / Additional insured Product vs. completed operations coverage Adequate limits
Contractor Qualifications
Past track record & nature of experience/expertise State qualifications/criteria (licensing and certifications)
(Commerce Dept.; Energy Dept.; manufacturer) References Government financial incentives Warranties
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Using Wind generated power for personal use
Store and Use Grid Integration
Casualty Underwriting Consideration Net Metering (1/2)
Potential systemic exposure for damage caused to the utility from the connection. Systemic Exposure
Additional insured /contractual exposure – utility will seek as much additional coverage or protection as it can get from the customer/supplier.
Liability Transfer
Is it covered under a CGL, HO or FO policy? Business pursuits, pollution, contractual – to what
extent is there coverage? Insurance Coverage
Smaller Scale Owner/Operator Exposures – Three Key Issues:
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Systemic Risk - Standards, Regulations, Responsibilities
Casualty Underwriting Considerations Net Metering (2/2)
Risk Management - Coverage and Transfer of liability
Check and understand state and local regulations.
Understand the technical and legal standards and requirements.
Is coverage for the utility needed? Review the contract.
Avoid sole negligence A/I or contractual transfer – limit to “caused by” rather than “arising out of” and only to the extent required by the contract.
Try to avoid A/I completed ops (if possible).
Be aware how transfer of liability impacts limits and defense coverage.
CONCLUSION / TAKEAWAYS
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Underwriting Issues
Different standards of care…Different exposures
Land Leasing Only – Augments farm operation – vicarious exposure (unless direct liability assumed).
Commercial Wind Farm Owner/Operator – New operation – direct exposure including systemic risk related to the grid connection.
Personal Wind Energy – Net metering – smaller scale owner/operator – direct exposure.
Construction – Not a DIY project…but more typical exposure.
Contractual transfer of liability exposure …. a key focus.
Wind Energy - Casualty Underwriting Conclusions / Takeaways (1/3)
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Coverage Issues
Wind Energy - Casualty Underwriting Conclusions / Takeaways (2/3)
Will standard coverage apply? - Which circumstances & loss scenarios?
Only BI, PD, PI, AI are covered under traditional liability policies…but be alert for broad application of contractual, business pursuits and pollution coverage.
Possible covered scenarios - health related distress, pollution/noise or BI/PD caused by ice throws, turbine malfunction /collapse, attractive nuisance, stray voltage, etc.
Operations that are connected to the grid – Damage to the grid would likely be covered if it is deemed to be BI or PD including power surges.
Contractors – including maintenance - likely traditional operations or completed operations unless wind turbines are specifically excluded.
Understand the coverage completely - If possible develop products where manageable gaps exist, e.g., wind availability; NRD; etc.
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Land-based wind energy - Long-term prospects are for sustained growth.
Just starting to fully emerge in the US.
The related liability issues are also just starting to emerge and may take many years to stabilize.
Many potential liability causes of action and much is unsettled yet.
Challenges Opportunities
Wind Energy - Casualty Underwriting Conclusions / Takeaways (3/3)
Gerry Finley [email protected] 609.243.4527
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More Information
Contact your Munich Re Client Manager or HSB Client Company Manager for additional information.
THANK YOU FOR ATTENDING.
© Copyright 2011 Munich Reinsurance America, Inc. All rights reserved. "Munich Re" and the Munich Re logo are internationally protected registered trademarks. The Hartford Steam Boiler name is a mark owned by The Hartford Steam Boiler Inspection and Insurance Company. The material in this presentation is provided for your information only, and is not permitted to be further distributed without the express written permission of Munich Reinsurance America, Inc., Munich Re or Hartford Steam Boiler. This material is not intended to be legal, underwriting, financial, or any other type of professional advice. Examples given are for illustrative purposes only. Each reader should consult an attorney and other appropriate advisors to determine the applicability of any particular contract language to the reader's specific circumstances.