Ohio’s alternative energy industries are booming. Fracking and offshore wind turbine technologies are some of the most exciting new fields developing right here in Ohio. Businesses involved in these energy projects face traditional and new risks associated with an alternative energy enterprise. Policyholders and their brokers must have an expansive understanding of these risks and the types of insurance available to meet these risks.
Ohio’s Emerging Energy Fields
Fracking. Shale Bed Hydraulic Fracturing, better known as “fracking,” generally involves two technologies: hydraulic fracturing and horizontal drilling. The process starts with a well that is drilled vertically, and encased in steel and/or cement. Once the vertical well reaches the deep layer of rock where the natural gas or oil is, it is curved about 90 degrees to begin horizontal drilling along the rock layer. After the well is fully drilled and encased, fracking fluid is pumped down into the well at extremely high pressure to fracture the surrounding rock, creating fissures and cracks through which oil and gas can flow.
Wind Energy. Wind turbines harness the wind’s kinetic energy through movement of the turbine’s blades. The blades transfer energy through a central hub to a generator, which converts and delivers the energy to the power grid. Initially, wind turbine farms were located on land, with relatively small turbines. As the technology has advanced, however, wind turbines have vastly increased in size and have moved offshore, in both the oceans and fresh waters. The development of offshore wind farms is generally recognized as a costly and difficult enterprise.
Solar Energy. There are several types of solar power, each which use the energy of the sun. Ohio is a national solar hub. It is ranked second nationally in solar manufacturing, with Toledo being considered “Solar Valley.”
Potential Claims and Losses in Emerging Energy Industries
While the solar energy industry is perceived as relatively benign in terms of risk, the risks related to fracking and offshore wind farms are substantial and range from the potential effects on bird and fish populations to subsurface effects, like earthquakes or subsidence, to potential water pollution concerns should a turbine be damaged from a collision or simple wear and tear. Some of the more specific potential risks include:
1. Contamination and pollution (property damage and bodily injury)
2. Subsidence, earthquake and other not so natural disasters
3. Property devaluation and stigma
4. Governmental demands
5. Damage to natural resources, and wildlife
6. Injury to workers
7. First-party property losses and business interruption
Properly insuring these risks, where possible, should be a critical concern of industry participants.
Potentially Applicable Insurance Coverage
First-Party Property Insurance. The starting point is first-party property insurance. A project owner or the general contractor unquestionably will purchase some form of builder’s risk coverage during the construction phase. Engineers, contractors and subcontractors, transporters and others involved in the project will have their own insurance, including professional liability and/or errors and omissions insurance, with all their varied and confusing additional insured endorsements, or all may be covered under a single comprehensive “wrap” policy issued for the particular construction project.
After construction is complete, the owner or operator will purchase “all risk” or “defined peril” property insurance. “All risk” property policies insure against “all risks of direct physical loss or damage to Insured Property, except as excluded.” Both builder’s risk and all risk policies typically provide some limited pollution coverage subject to a relatively small sublimit of coverage, and will contain broad pollution exclusions.
In addition, property policies typically also contain exclusions for damage caused by: “wet or dry rot,” “corrosion,” “erosion,” “settling or cracking of foundations,” “defective workmanship,” “earth movement,” “flood,” and “freezing.” Such policies also do not cover damage to certain types of property, including: “land,” “water,” “growing crops, standing timber, animals,” “docks, piers, wharves and property located offshore,” “underground or underwater piping,” “drilling and producing platforms,” and more.
Policyholders must carefully scrutinize standard insurance policies with the particular risks associated with the project or facility in mind, and consult insurance professionals with particular experience with the energy industry, and in some cases, offshore and marine risks. It is important to understand that typical property policies will contain very limited coverage for pollution cleanup, and will contain broad exclusions for pollution damage. However, even the limited pollution coverage provided may not apply to the property damage that may occur at an offshore wind generation facility.
Liability Insurance. Most, if not all, standard Commercial General Liability (CGL) insurance policies written today will contain broadly written pollution exclusions. Industry-specific “operations insurance” may provide additional specific coverage extensions unique to the industry, for example the power generation industry, but are unlikely to provide broad environmental coverage. The owner and/or operator of any facility in these emerging energy industries faced with environmental claims will need to resort to more specialized pollution liability insurance for coverage, which may be combined with traditional CGL coverage or be written as a stand-alone policy of insurance.
Contractor’s Pollution Liability insurance and Pollution Legal Liability (PLL) insurance are widely available. Contractor’s Pollution Liability insurance covers a contractor’s operations or activities that cause new pollution or that exacerbate previously known contamination. Coverage is provided for cleanup costs, property damage and bodily injury claims brought by third-parties, natural resource damage claims, claims for diminution in property value, mold and, importantly, defense costs. It can be written to cover a particular project or a particular insured contractor.
Pollution Legal Liability insurance covers both unknown pre-existing contamination and new pollution events. It is written to cover liability to perform cleanup at a particular location or locations, including the insured’s property and/or other third-party owned sites. In addition to providing cleanup cost coverage, PLL insurance will provide coverage for toxic tort claims, and claims for natural resource damages, diminution in value, third-party property damage, bodily injury, and importantly, defense costs.
These insurance policies are not without limitations in the form of conditions and exclusions. They typically are claims-made and reported policies, often include large deductibles or self-insured retention requirements, and provide that defense costs are included within limits, and not in addition. Furthermore, the underwriting process can be difficult and time-consuming, as it requires the disclosure of extensive, environmental assessment information regarding the properties or sites to be insured.
PLL insurance policies also contain exclusions that should be carefully reviewed and negotiated. For example, PLL policies may or may not include coverage for transportation-related incidents, which could present a significant gap for many companies in both the fracking and wind energy industries. Moreover, they commonly exclude coverage for damage arising out of the use of watercraft. This exclusion, while unremarkable in a policy issued to a land-based facility, could well be implicated in connection with an offshore incident.
Other types of insurance that may respond to an environmental claim are Professional Liability Insurance, Errors and Omissions (E&O) Insurance, and Directors and Officers liability (D&O) insurance. These policies also may have a form of pollution exclusion, and other potentially applicable exclusions, and must be read carefully. However, there is a great deal of variability in the language of such policies, which are often written on non-standard forms. Like PLL coverage, these policies are most often written on a claims-made basis.
Finally, businesses involved in off-shore wind energy projects should look to the marine industry for insurance solutions that may be able to be tailored to their specialized needs, and should look to the experiences of their European colleagues who have been engaged in building, operating, and insuring offshore wind energy projects for many years.
Fracking, wind energy and other emerging energy industries present exciting opportunities and challenges for a wide array of Ohio businesses and professionals, including those practicing in the environmental and insurance fields.