Renewable Energy: impact of COVID-19 on project specific insurance

16 March 2020- by Poul Hansen

We are certain that everyone involved in renewable energy projects are thinking about the impact Covid-19 will have on your projects being planned, built or operated. The following blog is not to be used as a full guideline, but rather an overview of our perspective on the situation.

PROJECTS UNDER DEVELOPMENT

With the global Covid-19 escalation, it is likely that both the developers and the OEM’s are thinking “what impact will Covid-19 have on the completion of my project” and “can I still meet my PPA deadline?’

The first question to consider is whether a delay caused by a Force Majeure event insurable? The short answer is that no, a delay in this scenario would not be covered. Insurance is about Physical Damage to the subject matter insured, which is the Works. An outbreak of Covid-19 is not a Physical Damage event.

What you can do as a developer is to check how much delta you have in your project timeline and that should also be a consideration when you sign the contract.

From a liability perspective you should consider whether you need to have liability insurance in place for your project and for any land lease you may have in place.

The thought process for any decisions should be, how would I act if I am a prudent uninsured? This means have I taken reasonable steps to minimize the risk for others in respect of what is under my liability?

If you already have appointed insurance advisors/brokers for your project they should be consulted and assist you in these considerations.

PROJECTS BEING BUILT

When you have issued NTP and the project is now in process of being built, the typical insurance coverages in place for the project are marine transit (MAR), construction/erection all risks (CAR), liability (TPL) and delay in start-up (DSU).

What triggers the cover for MAR & CAR is a Physical Damage to the assets. The DSU cover is a delay in reaching production resulting from a damage under the MAR & CAR.

The TPL is there to project you as an investor or contractor from claims being brought to you due to negligence.

MAR

The MAR covers the transit from the production site to the construction site, but only what is part of the normal transportation plan. This includes NORMAL storage as part of the transportation. If you have “unnormal” storage during the transportation the insurance may be void and if storage takes longer than 30 – 60 days depending on what limit is agreed in your policy. Therefore, if you are experiencing “unnormal” storage and/or longer storage than 30 – 60 days then you need to inform your insurance broker to secure that cover remains in force.

The best action to take is for you to inform your broker about any changes to the original shipping schedule you have received around NTP, as well as any changes to the Master Schedule for the project. Insurers may charge an additional premium for this, but early interaction may reduce or remove these additional insurance costs. Most importantly, early interaction will help eliminate the risk of the cover being void.

CAR

The construction all risks cover is placed based on the length of the construction period and the S-Curve (investment curve i.e. how much value at site at any given time). If your project is delayed, you need to extend the construction period. Best practise is to keep insurers informed about the progress of the project. If you experience delays in the project due to, for example, delayed production of equipment or shipping, you need to inform your insurers. If this means that your activities at site change, you need to ensure you act as a prudent uninsured.

The insurers will likely charge an additional premium for any extension to the period, which is typically calculated on a pro rata basis. However, other mechanisms may have been agreed such as a lower rate based on a review of the S-Curve. The S-Curve may demonstrate that there has not been a significant change in the investments coming to site and there is simply a deferral of the risk. If this is the case, the additional premium for the extension should be less.

A delay may mean that you abandon the project for a period of time and before doing so, you need to take reasonable precautionary measures such as ensuring that what is stored at site is reasonable protected against theft and forces of nature like rain and storm. Failing to do so could mean that the insurance does not cover the damages (abandoning the site is a material change in risk).

DSU

A delay in start-up cover for the project covers the consequences of a delayed Commercial Operation Date (COD). The trigger for the cover is a Physical Damage under the MAR or CAR sections, but not just a delay due to Covid-19 or contractors non-performance. The latter is a contractual issue and the owner may or may not get compensated from the liquidated damages agreed under contract.

When a Physical Damage occurs to the project and the project COD is delayed the DSU cover will pay out the lost revenue caused by the Physical Damage. If the repair is delayed because of the Covid-19 situation, this extended repair time will be part of the DSU cover, but only if the original cause is a Physical Damage to the subject matter insured.

TPL

As an owner and a contractor, you have to exercise due care and diligence. If, for example, you abandon the site, you need to take precautionary measures to protect the site, the land, the surroundings and the environment. It is therefore essential that all precautionary measures are taken before abandoning the project and if you have to maintain certain personnel at the site to secure this, you will have to do so.

The TPL insurance will cover you for Bodily Injury and Property Damages to third parties and only third parties. For many reasons you will want to protect the site, the land, the surroundings and the environment however errors may occur and that is why the insurance is in place. In the same manor the insurance is there to protect you against groundless claims and having performed due care and diligence is the best way to avoid claims.

PROJECTS IN OPERATION

The typical coverages for the owner for operational assets are Operational All Risks (OAR), Business Interruption (BI) and Liability Insurance (TPL).

OAR

On the asset side the cover is to protect the assets against Physical Damage, and from an owners perspective, what is not covered either by warranties, guarantees or service contracts. In the same manner as under MAR and CAR coverages, Covid-19 is not a Physical Damage and as such a stop in operation based on Covid-19 is not a Physical Damage event. A likely scenario could be lack of personnel required to operate the assets. However, if the lack of personnel due to Covid-19 unexpectedly causes a Physical Damage to the subject matter insured, then this will likely be Physical Damage event covered under the OAR. Another situation could be that the personnel are prevented from accessing the site because of the Covid-19 situation.

BUSINESS INTERRUPTION

Loss of income insurance (BI) covers the consequences of lost production due to a Physical Damage event which is covered under the OAR section. The policy does not cover a BI due to Covid-19 or contractors non-performance. The latter is a contractual issue and the owner may or may not get compensated from the liquidated damages agreed under contract.

When a Physical Damage event occurs to the project and the repair is delayed due to consequences of Covid-19 (i.e. lack of spare parts) this extended repair time will be part of the BI cover, but again only if the original cause is a Physical Damage to subject matter insured.

If the owner has taken out Contingent Business Interruption (CBI) and there is a Physical Damage to non-owned assets (could be transmission lines or first non-owned substation), depending on the insurance taken out, any delayed repair of a Physical Damage to these non-owned assets could be covered by the projects BI policy.

For both OAR and BI, any known issue should be reported to your insurance broker who will inform your insurers prior to any Physical Damage event taking place. In the same manner, your OEM or O&M should be able to provide you with information about any potential extended repair time. This is obviously only for critical spare parts and construction equipment.

TPL

As an owner you must excise due care and diligence. It is your obligations to take precautionary measures to protect the site, the land, the surroundings and the environment in the same manner as mention under construction. You must maintain certain personnel at site to secure this. This obligation is an obligation for both you as an owner and O&M contractors.

The TPL insurance will cover you for Bodily Injury and Property Damages to third parties and only third parties. For many reasons you will want to protect the site, the land, the surroundings and the environment however errors may occur and that is why the insurance is in place. In the same manor, the insurance is there to protect you against groundless claims and having performed due care and diligence is the best way to avoid claims.

GENERAL COMMENTS

The above is to answer some of the general concerns surrounding the outbreak of Covid-19, but it does not cover more specific covers being part of MAR, CAR, DSU, TPL, OAR and BI. If you have any questions, our specialist team is more than happy to assist.

This could be in areas such as:

  • Machinery Breakdown
  • Property insured
  • Specific exclusions
  • Property in storage
  • Debris removal
  • Additional costs
  • Permission to occupy and operate
  • Restrictions imposed by public authorities
  • Suppliers, customers and utilities extensions
  • Loss of revenue cover and tax exemptions
  • Loss minimisation costs
  • Pollution and Products Liability

CONTACT US
Poul Bach Hansen
Head of Renewables and Executive Director.

T: +44 (0) 20 7105 3010
M: +44 7384 259072 \ +45 2080 1000
E: PoulHansen@priceforbes.com

 

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