Insuring offshore wind growth amid rising risks, defects and claims
The world is teetering on the brink of the greatest oil supply crisis in history. Future energy security dictates that the expansion of power generation based on renewables must be speeded up exponentially. In this region and in so many others, that of course includes offshore wind.
Even before the 2026 Iran war, which has highlighted the world’s alarming vulnerability to oil and gas shortages, the IEA was forecasting that offshore wind was expected to increase by a factor of about four times between 2015 and 2030. Offshore wind farms are a key plank of renewable energy policy in the UK and EU as was already demonstrated by the clean energy pact signed between the UK and EU at Hamburg in January. However, the harsh conditions to which offshore installations are subject, together with the fact that this is an evolving industry with brand new technologies, means the cost of defects, damage and failure present issues for insurers and insureds alike.
It is trite to say that more and bigger wind farms mean more policy claims, but insurers and insureds need to find a balance between insurers’ need to limit accumulated losses and the insureds’ need for a level of cover that allows viability of a rapidly scaling technology.
Wind farms may suffer losses arising from turbine damage, gearbox faults and issues with system controls, amongst other things. However, it has been reported that the greatest number of insurance claims arising from wind farms relate to failure of subsea cables. Common issues include errors made at the time of installation, design and manufacturing faults and damage caused by the environment and by shipping – presenting key issues in terms of insurance coverage.
Policy cover
Different types of cover are most relevant at different points in the lifecycle of the windfarm.
In the construction phase a WINDCAR Policy is common. As is well known, this wording evolved from WELCAR to reflect the fact that it relates to the electricity rather than the oil and gas industry. In particular WINDCAR will generally include one of the London Engineering Group LEG exclusion clauses instead of a defective parts exclusion with a buy back. WINDCAR will typically include cover for loss or damage to the project property (on an all-risks basis), delay in start-up and third-party liability.
After construction, at handover, the Operating cover becomes relevant, in which the principal will usually be insured in respect of property damage (again on an all-risks basis), business interruption (including sometimes contingent business interruption) and third-party liability. Some residual maintenance cover under WINDCAR may continue for a short period of typically 12 – 18 months.
Some problem areas in insurance coverage
Defects v damage
Due to the evolving nature of the wind industry and the technology involved, the liability of insurers for design defects is a key issue. It is common for insurers of wind farm projects and installations to restrict their liability for defects in policies, typically through LEG exclusions.
The LEG design exclusions are notoriously difficult to interpret and apply. LEG 1 is essentially an outright defects exclusion, which provides no cover for damage caused by defects.
The LEG 2 wording, although framed as an exclusion, seeks to put the insured back into the position it was in immediately prior to the loss, covering the damage caused by the defect but excluding the cost of rectifying the defective part itself (and access for repair). In other words, the cost of repairing the defect must be calculated at the point immediately before the damage, and deducted from the indemnity. This limits liability for insurers compared to LEG 3, and in theory provides more cover for insureds compared to LEG 1. However, we say in theory because a common difficulty for insureds in an offshore context, is that the costs of rectifying the defect before the damage are often very high, including the very substantial costs of retrieving the equipment and bringing it onshore, and then taking it back out again and re-installing it – all requiring marine spreads, the significant cost of which often representing the bulk of a repair bill. This means that LEG 2 can in practice cover very little in the context of offshore projects.
LEG 3 is the most expansive cover often referred to as “full defects design cover”. The general scheme is that the cost to remedy the damage caused by the defect and to correct the design is covered (but not the cost to improve the original design – although what this means exactly is open to interpretation). However, the insurance market has not generally been willing to provide LEG 3 in offshore wind.
In all the LEG clauses, damage is required, and mere discovery by the insured of a latent defect will not be enough. Of course, to the extent that insurers provide an indemnity in respect of any faulty components they may look to bring a subrogated claim under any manufacturer warranties, for at least the cost of that component, where possible.
Series (or serial) loss clauses
The developing nature of wind power means that one defect in design, or one error in installation, can have been replicated multiple times across repeat components in the wind farm, such as a common issue with all turbines or gearboxes.
The aggregation language in the policy will be relevant. Whether a defect affecting all replicated components is an aggregating factor (for the purposes of the limit (or sub-limits) and deductible) will of course depend on the language used in the policy, and in particular if it uses event/occurrence-based aggregation or the broader (originating) cause-based aggregation.
Series loss clauses provide for a decreasing indemnity as the number of losses arising from a common cause or defect multiplies.
There are two LMA series loss clauses (LMA5587 and LMA5588) which apply to loss or damage to property and any corresponding delay in business interruption or start up coverage.
These clauses offer protection to insurers, but there are difficulties with applying them in practice. These include the fact that it can be difficult, and take time, to carry out a root cause analysis to determine whether losses arise from the same or similar causes, as well as determining the date(s) on which the losses occurred in order to apply the clause. This may cause considerable delay for the insured in adjusting the claim.
The LMA clauses also make insurers’ liability for series losses contingent on the insured adhering to reasonable precautions/due diligence clauses after discovery of the first loss or damage, but this can cause practical difficulties for insureds where it is not always straightforward to get a vessel out to the turbines.
An updated version of these clauses is expected to be published later this year.
Contingent business interruption
As already noted, damage to subsea cables is the most common cause of wind farm interruption. The cables in the UK and other offshore transmission equipment are owned by different parties to the wind farm owners – known as the Offshore Transmission Owners (OFTOs). This set-up (particular to the UK) presents practical issues.
Wind farm owners have a potential claim for contingent business interruption where there is fortuitous damage to third party property (including the cables but also other non-owned transmission equipment such as substations and grid connection systems) causing interruption to the wind farm. However, there are practical difficulties in such scenarios. This includes the need to obtain evidence that there has been damage to the cables and its cause, in order to prove that the CBI cover is triggered. It is not always easy to obtain this from the OFTOs, who may have different priorities and commercial considerations to the wind farm owner.
The market is developing ways to mitigate the issue, such as contractual arrangements between the OFTO and the wind farm operator covering cooperation in relation to investigation and repair in the event of damage. A simple way round the problem is for cover to be triggered by any machinery breakdown causing interference, regardless of whether there is physical damage, but this obviously carries more risk for insurers.
It is clear that the UK (and the world in general) needs much more offshore wind to contribute to future power generation, and the construction and operation of those installations has to be insured, given the vast capital outlay and financing behind such projects. There is appetite amongst insurers to accept these risks, but capacity is limited, and in order for the insurance industry to be able to service the sector, particularly given the rapidly developing and expensive technologies involved, there have to be limits on what is insurable. It always takes time for wordings insuring newer risks, which are usually adapted from similar but different types of risk (in this case oil and gas), to catch up. There will undoubtedly be more growing pains over the next decade, but the development of market standard wordings which are fit for purpose is now well under way thanks to the innovation of pioneer underwriters willing to support this most necessary of initiatives. It is inevitable however that a lot of claims will be coming their way over the next few years.
A version of this article previously published in Maritime Risk International here: How many offshore wind insurance issues? The answer, my friend, is blowin’ in the wind – Maritime Risk International
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