New energy sources fuel insurance claims and coverage lessons

Authored by AXA XL Claims Managers Maureen Myre and Milica Aksic

While petroleum and natural gas remain the most-consumed energy sources in the United States through 2050, renewable energy is the fastest growing, according to the U.S. Energy Information Administration (EIA). From 2010 to 2020, renewable energy increased by 42%. It's up 90 percent from 2000 to 2020. In 2021, renewable energy sources accounted for about 12.2% of total U.S. energy consumption and about 20.1% of electricity generation.

Wind and solar remain the fastest-growing energy sources. Renewables, including biomass, geothermal, hydropower, solar, and wind, produced 27.1% more electricity than coal during the first four months of 2020, according to an EIA analysis.

Given growing interest and demand for renewables, more solar and wind farms, waste-to-energy, and other alternative energy facilities are dotting more of the U.S. landscape. As a result, claims operations like ours are seeing more renewable energy claims activity. In its 2021 Renewable Energy Market Review, Global Broker Willis Towers Watson (WTW) reported renewable energy losses in 2020 ranged from more frequent $1 million to $5 million events to one that could reach $30 million, pinpointing hail, wildfire, construction issues and problems with wind turbine generators as loss contributors.

A solar eye-opener
One particular loss showed how damaging hail could be to solar farms. The massive hailstorm hit Western Texas, passing over a 1,500-acre solar farm near Midland. The farm's 685,000 cell modules were bolted to the ground and pointed to the sky when hail rained down on them. As a result, over 400,000 modules were damaged or destroyed, resulting in $70 million of insured losses, the largest weather-related single-project loss in history.

This event and other solar farm claims drew sharp attention to solar panels susceptibility to micro-fracturing. When hail hits a solar panel, micro-fractures or microcracks, can occur. Like a crack in a car windshield, when exposed to certain conditions, the fracturing can spread over time and impact the panel’s performance or output. Micro-fracturing, however, can also result during manufacturing, while being transported to job sites, or during construction activities.

Although hailstorms are not new to the wide-open spaces of Texas, as interest and demand for solar energy have grown, so has the size of solar projects. Solar fields today are built in all parts of the country and on a massive scale, and therefore, when stormy weather hits, it can result in some significant losses like this one.

This weather event was a real eye-opener for the solar power industry, plus its insurers. It changed how weather risks were modeled. It prompted solar farm operators to look more intensely to find ways to mitigate against potential damages. Insurers also had to look closely at how they modeled for such risk and how they insured such projects against weather risks. Many responded by adding hail sublimits to solar farms' insurance policies. It changed a few things, and it certainly won’t be the only alternative energy claim from which we’ll learn and develop our capabilities and expertise to be better prepared for more alternative energy growth.
Climate change impacts

Another aspect to consider is how green energy is impacted by climate change. What happens when the power source disappears? For example, hydropower is affected by the lack of water and drought we have seen more frequently due to climate change.

The U.S. Bureau of Reclamation plans to hold back about 480K acre-feet of water in Lake Powell to maintain Glen Canyon Dam's ability to produce hydropower. Officials now need to figure out how to operate the dam at lower water levels. Likewise, carriers must assess the risk based on the equipment being potentially nonoperational and then starting up again.

The industry has recently seen a $100M industry-wide California battery claim due to outages (water damage from fire suppression systems that detected smoke in the facility occurred) and while the activities are restarting it may be many more months until they are fully operational. The full extent of what is involved in this process is costly and unknown, with claims history being significant for these types of battery storage facility losses.

Claims experience shapes future protection
Insuring alternative energy risk, of course, does not have the same amount of historical information and actuarial data to rely on to craft appropriate coverage and pricing. Coverage for new exposures evolve over time and our current claims experience with new energy resources is helping.

Given solar power’s continued growth, we're continuing to learn from claims activity to help underwriters improve their underwriting discipline, ask the right questions. Claims data also supports our risk engineers' direct their efforts to help clients with their loss prevention efforts.

During Labor Day weekend in 2013, a 12-alarm fire erupted and destroyed a Dietz and Watson warehouse facility in Delanco, NJ. The facility had 7,000 solar panels on its roof, which, while they did not start the fire, they did hamper firefighters from dousing the fire quickly. Unfamiliar with working around solar panels, the responding fire departments feared electric shock, and structural collapse from the weight of the panels, among others risks, and were ordered not to access the roof to fight the fire. Instead, they changed their tactics which inevitably prolonged the fire. The warehouse was a total loss.

Since then, a lot has been done to educate local fire departments about solar panels and how they work. After the fire, N.J. also passed a law requiring building owners, excluding one- and two-family houses, to notify fire officials of roof-mounted panels so they can be best prepared to address a future fire if needed.

Waste fuel streams also present a range of fire risks due to their combustibility and other hazards and continue to be a significant cause of insurance loss.

Other claim concerns
Weather and fire are not the only risks to alternative energy operations that result in property damage or business interruption claims. Other claims scenarios include:

• Design defects: Again, alternative energy technologies are relatively new and constantly changing. Design issues may result in equipment failure. Both wind and solar projects remain vulnerable to mechanical and electrical breakdown, especially as technologies continue to evolve and improve.
• Increased costs and parts that can be hard to come by: It’s not always easy to find parts for new technologies. Damage to a wind turbine or blade can be costly. Shipping costs can be astronomical, and the size of these components come with some unique challenges.
• Eagerness, paired with inexperience: Construction firms frequently find themselves under pressure to build projects quickly and more efficiently. Like many industries, the construction industry is experiencing a talent shortage that may result in less experienced personnel are being used to handle increasingly complex equipment, resulting in a higher frequency and severity of claims. Hurried build times have resulted in a fair amount of material damage during construction. With many countries and businesses setting net carbon goals, more alternative construction projects could find their way on the fast path to completion and potential claims.
• Poorer performance than promised: Green construction and LEED certification have raised issues and claims too. To acquire or keep LEED certification, building systems must perform according to certain specifications such as energy efficiency and water usage. If they don't, there are potential contractual or warranty issues.

We’re all on a learning curve
When trying something new, there’s always a learning curve. Quite simply, you don’t know what you don’t know. Traditional energy sources like oil and gas have been used for centuries, and we are well very familiar with their associated risks. Alternative energy technologies are still very new and constantly changing.

Companies are still learning how to transition to new energy resources. The insurance industry is still learning how to insure and help its clients minimize potential risks. Claims professionals like us are seeing new loss scenarios every day. From claims lessons learned, we can all get over the learning curve, address the risks associated with alternative energy operations, and be in better positions to transition to a carbon-neutral future.