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Protecting Solar Projects with Insurance

Solar power generation is rapidly increasing and helping thousands of Americans embrace clean energy technology. According to Solar Energy Industries Association, “more than 4,400 megawatts of PV solar will come online throughout 2013.” The jump in solar development is driven by a dramatic drop in solar panel prices since 2011 along with state and federal incentive programs driving increased tax equity investments.

Despite the industry’s explosive growth in recent years, economic uncertainty and risks in developing, building, operating, owning and investing in solar projects remain daunting. If concerns remain unabated, they could have a chilling effect and prevent investors and bankers from financing more projects. Already fewer than 5 percent of the 6,500 banks in the U.S. finance solar project according to truSolar, an industry consortium of solar’s leading companies.

Risk and uncertainty are present throughout each phase of the solar project lifecycle from construction to operation and through its lifecycle to decommissioning.

Manufacturers struggle to compete in a marketplace where prices are low and profits slim. Project developers and engineering and procurement contractors feel the weight of working with razor thin margins too. Many of these risks are present in conventional construction projects and business operations and require strong due diligence and risk mitigation. Left unchecked such market conditions threaten the quality of projects being built now as participants up and down the value chain look to cut costs that may reduce equipment quality and ongoing operations and maintenance standards.

According to a May 28, 2013 article, “Solar Industry Anxious Over Defective Panels,” published in The New York Times: “Worldwide, testing labs, developers, financiers and insurers are reporting similar problems and say the $77 billion solar industry is facing a quality crisis just as solar panels are on the verge of widespread adoption.”

The quality crisis stems from allegations that some solar manufacturers looking to reduce costs are using cheaper, less reliable materials in order to remain competitive. The totality of those cuts may not be readily evident now but could result in lower energy generation in the future.

Quality issues may manifest themselves as years go by, reflecting ongoing degradation of solar energy output from the equipment. Those problems may reflect poor manufacturing processes, poor due diligence practices during installation or poor operations and maintenance (O&M) standards. It is important not to lose sight that seemingly simple things, like solar panel cleaning, can have a dramatic effect on energy output.  A well-maintained solar installation can perform 10 to 30 percent better than an installation not maintained. However, a good O&M program can’t eliminate every problem embedded into a project.

Methods for Mitigating Risks

In addition to ongoing O&M, solar industry participants are adopting a variety of mitigation strategies to de-risk projects and instill confidence in the solar market. Insurance and specialized protection products are important tools in this effort. These coverages transfer or reduce the financial impact of equipment breakdowns, physical damage from natural perils, theft and liability exposures associated with owning and operating a solar system.

Original Equipment Manufacturers (OEM) warranties are one of the most relied upon methods to reduce risk in the solar industry.

Warranties provide protection against financial and operational risks resulting from defects in design, materials and workmanship. Conventional terms and conditions in a warranty outline the manufacturer’s responsibility to replace, repair or provide financial compensation for  defective equipment. Warranties also provide performance guarantees, stipulating that a product will perform as promised by the manufacturer during a set period of time. If the equipment fails to meet up to the levels promised under the performance guarantee, the manufacturer is required to repair, replace or provide financial compensation. Typical warranties on solar panels extend from 20 to 25 years. Inverter warranties usually are for 10 years. Due to the length of their duration, warranties help alleviate some, but not all, concerns about equipment quality.

Warranties commonly exclude defects caused by failing to properly maintain the product, limit liability for damages and include disclaimers for implied warranties. They also do not cover the cost of labor for repairs or shipping costs. In addition, manufacturers are the ultimate arbitrator of whether a problem with the equipment is deemed defective and covered by the warranty or not. A warranty from a foreign manufacturer also may be difficult to enforce if that company’s provisions are governed by laws and regulations of their home country. A warranty could include a jurisdiction requiring privity of contract, which voids a warranty unless the party seeking to enforce its terms purchased the product directly from the manufacturer. The biggest worry, however, is that the manufacturer will not exist to honor their warranty five or 10 years from now. It may be impossible to make a claim and have it honored once a company is dissolved.

Innovative warranty programs and insurance products are working to fill the gaps on warranty coverage and reduce the risks associated with equipment quality. These programs transfer the fiscal responsibility for the warranties from the manufacturer to the insurance company if warranty claims are valid.

Warranty management programs provide a critical backstop by honoring the terms and conditions of the guarantee even if the manufacturer goes out of business. These programs provide a one-stop solution for all major solar project components covered by a warranty such as solar panels, inverters and racking systems regardless of the manufacturer. They go beyond traditional warranty coverage to pay for costs associated with testing, de-installation, shipping and re-installation of covered equipment.

In addition, solar project revenue protection products will recover lost revenue, including solar renewable energy credits, due to system equipment defects, degradation of output, operations and maintenance service contractor malpractice and even the lack of sunshine.

These ground-breaking protection products complement more traditional insurance products such as general liability and property insurance, standard coverages for solar projects.

Liability insurance protects against claims of bodily injury or other physical injury or property damage that may occur from business operations. Typically, this coverage will often exclude losses or damages caused by poor quality workmanship. Liability coverage frequently is coupled with property insurance, which coverage provides protection for the physical property and equipment of a business against losses from theft, fire and natural perils.

Specialized policies such as contractor’s equipment, equipment breakdown, delay in start-up and business interruption insurance also are available. These provide additional coverage that can be critical throughout the construction and operation phases of a solar project, protecting developers, owners and investors alike.

Contractor insurance fills in the gaps in traditional liability insurance. It provides coverage for negligence or errors related to the engineering, design and/or installation or poor workmanship project installation that could lead to a loss in energy production. Equipment breakdown provides coverage for electrical or equipment that is used in the generation, transmission or utilization of energy resulting mechanical or electrical failure. As its name implies, delay in start-up coverage protects against the loss of anticipated earnings due to project delays caused by natural perils or equipment failure. Business interruption insurance adds another layer of important protection, replacing business income in the event that there is project disruption due to natural peril or equipment breakdown.

On the cost side, it is sometimes argued that the expense of insurance coverages and protection plans cannot be justified as they eat away at already razor thin margins. The evidence suggests, however, that such risk management strategies are critical to ensuring the long-term viability of individual projects and the industry.

Quality issues are important throughout the process of developing and running a solar project installation whether it is in regards to the design of the system, the installation process or ongoing operations and maintenance. There are risks at all phases of a project. To satisfy lender and investor requirements sound due diligence and risk management strategies which include insurance and specialized protection are essential.

Lead image: Yellow umbrella via Shutterstock

Residential Solar Projects Insured for Success

Demand for solar residential systems is at an all time high. In 2013, residential solar photovoltaic (PV) installations are expected to grow by 40 percent due to lower pricing and alternative solar financing options, according to the U.S. Solar Market Insight: Year-in-Review 2012 research report conducted by Solar Energy Industries and GTM Research.

Growth is being spurred on by third-party ownership models that offer homeowners a strong financial alternative. Instead of paying the cost out-of-pocket, homeowners looking to tap into the sun’s power can sign long-term contracts with leasing companies to buy the electricity generated by systems installed on their roofs. By literally renting their roofs, they can shave 10 to 20 percent off their energy bills.

Homeowners eager to purchase their own system instead can take advantage of the drop in panel prices and a 30 percent federal tax credit. In addition, many states offer their own incentives for residents to adopt “green energy” power. These systems also may increase home values when the property is sold. A 2012 study by the Lawrence Berkeley National Laboratory found that existing homes with solar systems “sold for a premium over comparable homes without PV systems, implying a near full return on investment.” While the study was limited to the California market, the implications are significant as more appraisers adopt methods for evaluating for the financial value of the system.

Despite these benefits and addition of 83,000 homes installing solar energy in 2012, residential solar is not ubiquitous. The next phase of homeowners getting ready to join the solar family are among a select group of early adopters. Their mindset transcends the latest cell phone or smart TV rollout. This unique consumer group is eager to try out and adopt new ideas, technology and tools. They understand that being among the first means dealing with problems or issues that will be resolved or smoothed out over time. While they are willing to be at the forefront of the technology curve and other trends, research conducted by Assurant found they are not adverse to risk.

Leasing a solar installation can help alleviate early adopters’ concerns about the significant expense of buying a system outright and reduce their personal risk if something goes wrong. Purchasing a system can give you more control and ownership rights. Beyond bragging rights to be the first on the block to go solar, is that enough?

Homeowners and lessors must ask: How safe is safe enough? Based on their risk appetite, a sound risk management strategy can be developed. Insurance products and related services are strong tools created to mitigate potential perils and hazards that can protect the PV system owner whether it is a leasing company or homeowner from damage to the system, and reduced energy output.

Property and Liability Coverage

Severe weather and typical perils such as household fires present significant hazards. According to National Fire Protection Association,  between 2007 and 2011 there was $7.2 billion worth of damage caused by an estimated average of 366,600 home structure fires, defined as one or two-family homes, manufactured homes, as well as apartments or other multi-family housing. In addition, windstorm, hail and lightning pose danger. Other weather-related risks include hurricanes, tornados, earthquakes and floods.

Property and liability coverage are basic requirements. Property insurance covers the structure of a home and personal belongings. It will protect a solar project against specific hazards such as fire, theft and vandalism, as well as weather-related risks. General liability insures policyholders for claims of property damage and bodily injury, to third parties should they be injured. For example, if an unsecure solar panel is blown off a rooftop system during a windstorm causing property damage to a neighbors’ home or bodily injury to a passerby.

Lessors of solar installations need to purchase property and liability coverage for each of their projects. Homeowners, on the other hand, may not.  A standard insurance policy for a residence may automatically include property and liability coverage. It is best to check with their agent or insurance company to be sure. If not, some insurance companies will endorse a homeowner’s policy to add the coverage for an additional premium.

Installer Liability Insurance

Homeowners or property insurance may not cover damage to a rooftop during the installation process; liability coverage held by the solar installer will. Instead, home insurance may provide some coverage in the event of a third-party being injured due to the result of installer negligence. For homeowners, it is critical to check with their agent or insurance company. And it always is important for all parties to check their installers’ credentials and insurance coverage before work begins. In some cases, a homeowner also can secure an “Additional Insured” status under a Contractors Liability policy. This will provide the homeowner with limited coverage such as legal costs if they are named in a lawsuit. 

Warranties

Warranties are another important tool to reduce risk. Warranties guarantee that a product lives up to quality claims and will be replaced or repaired by the manufacturer if found defective. Solar panels come with, on average, a 20 to 25-year warranty and solar panel installers may guarantee their work for up to five years.

Recent industry discussions focus on solar projects experiencing a catastrophic failure shortly after start up or defects found in solar panels during installation. In these cases, warranties can help get those projects back on line. Manufacturer design flaws or poor quality are not always immediately apparent. With significant market consolidation and bankruptcies in the industry homeowners without additional protection could come up short. If a company goes out of business, it will be extremely hard for homeowners, lessors or any buyer to collect on a defunct manufacturer’s warranty.

A warranty backstop can help protect against out-of-business setbacks.These warranty management programs provide a single point of contact for all warrantied and covered equipment on a residential solar project. This means if a homeowner or lessor has a claim on warrantied equipment, the warranty management company will authorize and pay the claim, paying for labor and shipping as well.

Operations and Maintenance

Operations and Maintenance (O&M) isn’t what comes to mind when you are thinking about typical insurance. It is self-evident, however, that it is a critical component of a robust strategy to reduce project risk for the long-term. For consistent and ongoing energy production, a strong O&M strategy provides preventative, corrective and condition-based maintenance.

Conclusion

No matter which residential model is followed, homeowners or lessors of residential solar installations need to work to reduce project risk. While it is impossible to safeguard against all hazards and perils, there are common insurance and related services that can be used to mitigate the damage caused by unforeseen events.

Lead image: Solar roof via Shutterstock