Everyone knows that COVID-19 has changed the way that businesses operate and how we individually work and socialise. The common questions that people ask today – “when will life return to normal?” and “what is the new normal?” - cannot be easily answered. Maybe an easier question to answer is: “what impact has the risk of COVID-19 had on the Renewable Energy sector and how has the insurance market responded?”
All Renewable Energy projects, whether in the process of being built or already commercially operating, have had to adapt and recognise clear COVID-19 protocols. However, given that renewable energy production involves ‘critical workers’ and have therefore generally been allowed to continue operating in most domiciles, there has been arguably less impact on some parts of the Renewable Energy sector than on other industries. This is particularly the case for operational Wind and Solar, as they feature projects which have a high level of remote and autonomous operation.
There is no doubt that some renewable construction projects have become delayed or put on hold. While we have seen major renewable energy projects’ operations & maintenance and asset management continuing, there has certainly been an impact on claims; for example, COVID-19 has caused extended delays due to interrupted production of replacement equipment and/or delays in the supply chain. These delays will have material consequences and possibly impact the anticipated revenue stream for a number of projects.
While in recent years the insurance market has been ‘soft’ and wordings have become broader due to market competition and strong broker positioning, insurers’ attitudes have dramatically changed over the last 12 months. Clauses allowing for infectious disease, denial of access or others with non-damage triggers are no longer available; indeed, there is now specific exclusionary language being introduced by most insurers excluding direct or indirect loss arising from communicable disease.
An example of an indirect loss might be the failure of a security guard attending site as scheduled due to COVID-19, which ultimately results in a theft from the site. It is thought that insurers would now be able to exclude the theft loss, which would also mean that there is no indemnifiable trigger for Delay-In-Start-Up (DSU) or Business Interruption (BI), as the trigger for Loss of Revenue would normally require a trigger under the Property Damage (PD) section.
It is the non-damage extensions to Property and BI cover which we are now seeing removed, so that if a project is simply delayed due to workers being off sick or delays in materials due to factories being closed down by COVID-19, then there is no policy response. Extended delays in repair, due to COVID-19 and resupply of equipment following physical damage, becomes a matter for loss adjusters to opine to insurers.
There are examples of lost or damaged transformers, inverters and panels at solar parks that required replacement but the search for replacements has been hampered by COVID-19. The loss of revenue has spiralled as a result of the extended downtime impacting the profitability of the project. Buyers should therefore perhaps consider scenarios of how the prolonged BI could impact the project’s profitability - do they have the right indemnity periods? Supply chains for critical components should be reviewed so that should a key supplier fail to deliver, there is always a ready alternative to avoid such extended delays. In the current crisis, this will mean a close watch on main suppliers and how they are dealing with the COVID-19 pandemic.
Most brokers produce bespoke Renewable Energy policy wordings rather than relying on the standard insurance markets wordings on offer. Where possible, brokers seek to include alternative clauses such as the Public Authorities clause that extends cover to include such additional cost of reinstatement of the Property Insured, incurred solely through necessity to comply with regulations of any government (here in the UK, that extends to the requirements of the Health and Safety Executive, which might be enacted due to COVID-19). Denial of Access clauses have also received much attention from insurers and buyers alike. Cessation of Work clauses are also generally available to ensure protection, should work have to be put on hold due to COVID-19 or other communicable diseases. Again, careful consideration of potential scenarios such as having to stop construction activities and what that might mean for the cover, should be considered.
How have Renewable Energy insurers responded to the COVID-19 global pandemic? The insurance market has a reputation for adapting to the environment and issues of the day and this time is no different. However, we are witnessing a hardening market across the globe, so insurers have been quick to recognise the danger. They have therefore been reacting quickly to introduce COVID-19 exclusionary language; the urgency in the market has been compounded by natural catastrophe disasters that often batter insurers towards the end of the year, so COVID-19 has added another layer of caution.
The Lloyd’s Market Association (LMA) exists at the heart of Lloyd’s of London, representing members’ interests to Governments, regulators and the Corporation of Lloyd’s; it also provides technical expertise including wordings. Coronavirus clauses LMA 5391, 5393, 5394, 5396 and 5397 have been introduced from April 2020 onwards and have been evolving as the pandemic continues. The Joint Rig Committee (JRC) has also created Communicable Disease Endorsements such as the JR2020-16.
Many company insurers have also created their own preferred Communicable Disease Endorsements. Naturally, in the first instance they have sought for these to be utilised, although commonality is now being achieved around the LMA offering. However, differing opinions on clauses and their application are leading to a patchwork approach being used on insurance programmes, which potentially leads to confusion in the event of a claim. The Coronavirus exclusion clauses have been considered controversial due to the ‘indirect’ causation. For example, reproduced below is LMA 5397, followed by a test case summary.
Since the beginning of the Coronavirus pandemic, some insurers who provided non-damage business interruption extensions to include notifiable disease, denial of access and loss of attraction wordings have denied claims submitted to them for COVID-19 related incidents under these extensions. However, following expedited proceedings brought by the FCA as a Test case in the High Court, the court rejected many of the causation arguments raised collectively by the insurers but also found in favour of insurers under specific points of their own policy wordings; in particular around denial of access and the vicinity in which COVID-19 existed. Sample wordings had been considered from 8 insurers.
The Test Case judgment handed down by the High Court on 15 September 2020 is very complex and will apply to different wordings, and different policyholder clients in different ways. It is important to note the fact that the Test Case is limited to specific elements of non-damage BI extensions; cover under these extensions is subject to sub-limits. The Test Case does not open up broader coverage for BI losses, so for example if a client’s policy has a clear pandemic exclusion, the findings of the case do not mean the client now has cover.
On November 16th 2020, the UK BI insurance test case appeal was heard over four days by the UK Supreme Court with the focus on whether the High Court was correct in its approach to causation, trends clauses and other key details. Judgment is now awaited.
Going forward, projects and programmes that are seeking renewal terms will face insurer questions around their COVID-19 preparedness. Renewable Energy Developers, Owners and Operators have in the last 12 months typically demonstrated that good protocols are in place to protect their construction and operational activities so these need to be clearly documented and articulated to insurers.
The current state of the global pandemic, together with the hardening insurance market, will likely prevent insurers from providing any meaningful cover for COVID-19 related losses going forward in the short term. Ensuring consistency of the Communicable Disease Exclusion will at least help with clarity of coverage in the event of a claim. Brokers should continue to work closely with insurers to minimise the impact of these exclusionary clauses, as well as welcoming the roll out of global vaccines in 2021 and life returning to some normality.
Adam Piper is Account Director, Renewable Energy, Willis Towers Watson Natural Resources, London. Adam.Piper@WillisTowersWatson.com
