Each stage of a renewables project involves distinct risks requiring an insurance program that is tailored to respond to those risks in each of those stages.
The insurance market for renewables projects has become more challenging and continues to evolve because of the risks associated with new technologies and the increase in claims flowing from natural disasters.
This article explores some of the issues to consider for developers, contractors and landholders across the renewables project life cycle.
Contract works insurance and overcoming delays
The cornerstone of insurance during the construction phase is contract works insurance.
Contract Works insurance is structured around three periods, being:
- construction;
- testing; and
- defects liability.
The construction and testing periods occur before ‘practical completion’. Even if the physical build is completed, the project must pass performance testing within a limited window specified in the contract works policy. When practical completion is not reached issues arise under both the contractual and insurance arrangements.
First, if practical completion is not achieved by the end of nominated construction period, insurance cover will automatically cease. In those circumstances, the insured must arrange an extension of the construction period under its contract works policy. Short extensions may be granted at no extra cost, but material extensions typically attract an additional premium.
Short extensions may be granted at no extra cost, but material extensions typically attract an additional premium.
For those reasons, the insured should not rely solely on the fixed construction period. Instead, it is preferable to negotiate a ‘held covered’ provision in the policy. For example, a 30 day extension that automatically maintains cover beyond the agreed construction period. This is often available for no or minimal additional premium and provides important protection against minor delays.
Second, a critical component for funding many renewables projects is the entry into offtake or power purchase arrangements. If practical completion is delayed, the principal may not be able to meet the contractual commitments under these agreements, giving rise to significant financial exposure that needs to be addressed in the insurance program by, for example, obtaining advance loss of profits insurance cover, discussed below.
Where there are binding power purchase agreements in effect, delay in achieving practical completion due to damage to the works (for example, from fire or a major insured weather event) can directly impact the project’s revenue and its ability to perform under power purchase agreements. Advance loss of profits insurance cover is designed to respond to this risk. If physical damage to the contract works gives rise to a claim under the contract works policy, the advance loss of profits policy can also respond to cover the resulting financial loss. For instance, where the principal has contracted to deliver a certain quantity of electricity equating to a defined monetary value, and is obliged to indemnify the customer if that power cannot be supplied, advance loss of profits insurance can fund those obligations.
Defects liability period and LEG exclusions
During the defects liability period, damage to the works caused by defects might be discovered. Cover for this is heavily influenced by which ‘London Engineering Group’ (LEG) defects exclusion provision is written into the policy. These exclusion provisions are briefly summarised as follows:
- LEG 1: no cover for damage caused by defective workmanship, design or materials.
- LEG 2: covers damage to the contract works caused by the defect, but not the cost of rectifying the defect itself.
- LEG 3: covers both resulting damage and the cost of rectifying the defect (although this level of cover is often difficult to buy).
In short, the choice of LEG wording significantly affects the scope of recovery for defect-related losses and should be considered carefully in negotiations with the insurer.
Serial loss clause in policies for renewables projects
The introduction of serial loss clauses is another measure adopted by the insurance market for narrowing the scope of cover for defects claims, which we discuss below.
Renewable energy projects rely heavily on high volume of identical components such as turbines, blades, cables, inverters and panels. This creates a particular challenge when a defect exists across a series of the same component. Cable protection system failure in wind farms is one example of a defect that has triggered claims for losses across multiple sites constructed using similar designs or methods.
To help manage this exposure, insurers will write a serial loss clause into contract works and industrial special risks policies. These clauses are designed to limit the insurer’s liability exposure when multiple items suffer damage from the same underlying defect by aggregating those connected losses into one claim and applying a sliding indemnity scale (e.g. 100% for the first loss, 75% second loss, 50% third loss and 0% for any subsequent loss).
The operation of the serial loss clause applies to both the property damage and any resulting business interruption and delay‑in‑start‑up losses, to again minimise the total loss exposure particularly for large‑scale renewable projects.
The serial loss clause can significantly influence the financial outcome for both the insured and the insurer on projects containing many replicated assets. Policies may also require project owners to first pursue warranty rights against contractors or suppliers before claiming under the insurance policy, ensuring responsibility sits with the party best placed to rectify the defect wherever possible.
As renewable technologies become more sophisticated but are still relatively new, insurers remain cautious of further claims for defects emerging across entire fleets.
Marine transit cover for imported components
The design and construction of renewables projects require input from various specialists and the supply of key components many of which are sourced overseas. It is therefore essential to have appropriate international marine transit insurance in place, covering transit by sea, air and road.
Although marine transit cover can be embedded within the contract works policy, the alternative approach often adopted is a stand alone transit policy that is nonetheless aligned with, or attached to, the contract works program. This ensures that if items are damaged in transit, they can be reinstated or repaired without compromising the main construction cover and therefore streamlining the claims process.
Insurance post‑completion
Once practical completion is achieved, the operation of the project assets will transfer to the principal or project owner.
At that point, the risk profile changes, and the project should be insured under an industrial special risks policy for property damage (Section 1) and business interruption caused by the property damage (Section 2).
For example, if a storm damages solar panels after practical completion, Section 1 would respond to the physical damage to the panels, while Section 2 would respond to the loss of income and any increased costs of operations incurred to maintain operations or mitigate the loss.
Australian renewables projects situated above the 26th parallel (which is north of towns such as Charleville and Gympie) face heightened exposure to cyclones, floods and other natural catastrophes. Insurers for projects in these regions may seek to apply extensive exclusions or sub limits for these perils. These provisions need to be carefully considered to ensure the project’s key risks remain insurable on acceptable terms.
Public liability insurance for neighbouring landholders
As renewables projects expand across regional Australia, there is growing uncertainty among neighbouring landholders about the adequacy of their existing public liability insurance for any claims connected with renewables projects.
Historically, liability policies for these landholders were written for risk exposure involving agricultural activities and other farming risks, not for separate risks involving the construction and use of assets such as wind turbines, solar panels, batteries or transmission lines in the vicinity of the landholder’s property. In short, there are concerns that those existing policies will not extend cover for claims connected with energy infrastructure.
Ultimately, renewables projects may lead to higher insurance premiums for landholders’ own policies, and those increased costs will likely become part of the negotiations between landholders and developers.
To address these concerns, the Australian Energy Infrastructure Commissioner (AEIC) has recommended a nationally consistent framework to give neighbouring landholders clarity and confidence. A key component of this framework is the introduction of a ‘hold‑harmless model’, under which the developer or operator would contractually assume the liability of any neighbouring landholders for any claims for personal injury or property damage that might arise. The other recommendation is for developers to include ‘neighbours’ in their own insurance policies or negotiate waivers of subrogation clauses into their policies for the benefit of those ‘neighbours’ to remove the risk of insurers seeking recovery from landholders on behalf of the developers.
The recommended model will not replace the necessity for landholders to maintain their own public liability insurance for their own activities. However, temporary access to a landholder’s property creates separate risks, so developers will usually be required to maintain liability insurance for its own liability as well as the landholder’s liability. That insurance arrangement simply ensures that rural and regional communities are not unfairly burdened by new risks created through Australia’s energy transition.
The AEIC also encourages ongoing collaboration between landholders and developers, such as discussing site‑specific risks and sharing mitigation measures, to support clear communication and protect the social licence as projects roll out across regional areas.
While it is important to achieve a commercial outcome with landholders, it is critical for developers to ensure that indemnity and insurance obligations in their contracts are aligned with their insurance program to avoid any uninsured exposure.
Early engagement is key
With several factors continuing to impact the insurance terms offered in the renewables industry, early market engagement strategies are important to secure adequate coverage.
Along with early engagement, we recommend prioritising face to face meetings with the insurers, as this can help to differentiate risk profile and potentially secure more favourable outcomes.