Renewable energy covers a number of different types of energy production. Some use well established technology, such as hydroelectric. Others use much newer technology, such as the wave energy project at Hayle in Cornwall, which will be the first commercial wave energy project to be connected to the grid and is set to begin construction in 2018.
The UK renewable energy market has been challenged by recent cuts to government subsidies, and may be challenged further because of any changes in legislation and subsidies as a result of Brexit. However, offshore wind projects continue to be implemented, as do projects such as the Hayle wave scheme. Many other projects (including onshore and offshore wind, energy from waste and solar) are in the Take Over or operational phase. Some of these projects are revealing defects in their design or construction, which is leading to an increase in the number of claims that Insurers are facing in the sector.
Insurers normally see these claims under CAR or Professional Indemnity policies. Some claims are "traditional" D&C defects (eg in SSE Generation Ltd v Hochtief Solutions AG where a high pressure water tunnel in a hydro-electric scheme collapsed, which led to a preliminary issue regarding Joint Names provisions in a CAR Policy).
Other claims are on projects using relatively new and unproven technology, with Insureds seeking indemnification under Professional Indemnity policies. Such claims can be problematic, with high quantum and complicated coverage issues. The key risks for Insurers are:
Much of the technology is still relatively new. Insureds may therefore "play it safe" and over-design, rather than produce a negligent design. However, over-designing has its own risks, as evidenced in a dispute about a waste to energy plant in Horsham (MW High Tech Projects v Haase Environmental Consulting).
In this case, the contractor submitted a fixed price tender to an employer, which relied on a basic design by its process engineer for an anaerobic digester. The engineer was then to develop its basic design into a detailed design which complied with a "Delivery Plan", whilst also exercising reasonable skill and care. The contractor subsequently claimed against the engineer. The engineer was not negligent; its detailed design worked. However, the detailed design went beyond the parameters set out in the Delivery Plan and was more expensive by over €9million. The contractor could not recover the increased costs from the employer because of its fixed price contract and it therefore sought to recover the costs from the engineer.
The court held that, if compliance with the Delivery Plan was possible with a non-negligent design, then the engineer was required to use reasonable skill and care to design that design. If the engineer failed to do so (ie it over-designed) then that was a breach of contract and it was in principle liable for the contractor's costs (but the engineer was not negligent – which would have interesting consequences for any PI policy).
Reduced operational capacity
If a plant does not produce the operational capacity specified, then operators often bring claims for loss of income.
This may be for the reduction in operational capacity pending completion of remedial works, or for permanent loss of income if the defect cannot be rectified.
Fitness for purpose obligations
PI policies often expressly exclude "fitness for purpose" obligations. However, renewable projects are complex, with bespoke contracts and numerous technical documents. Determining what the Insured has agreed to may not be straightforward.
The design of Scotland's first commercial offshore wind farm (Robin Rigg) provides a good example of this (MT Højgaard s v E.ON Climate and Renewables). The D&C contractor complied with an international standard regarding turbine bases. However, it later transpired that the standard contained an error and the bases required remedial works costing c. €26.25 million. Liability for these works depended on how the contract documents interacted and therefore whether the engineer had agreed to a fitness for purpose obligation.
The first instance decision held the contract did contain a fitness for purpose obligation (so the engineer was liable); the Court of Appeal overturned this and held the contract did not contain a fitness for purpose obligation (so the employer was liable). The employer has appealed to the Supreme Court, with the appeal due to be heard in June 2017. Considering that even the courts cannot decide what the contractor signed up to, it would be very difficult for Insurers or Insureds to decide.
In waste to energy projects (where plants take waste and turn it into a valuable product, usually electricity and heat) there are often issues with the quality of the input waste. Plants will be designed for a particular waste composition and the contractor will require waste of a specific composition in order to comply with its contractual obligations, such as successfully completing Take Over procedures. For example, anaerobic digesters use bacteria which operate only within certain parameters. Operators are normally required to provide the waste, however they often have very little control over the waste composition. This can lead to disputes about where the responsibility lies for the waste composition (and what criteria the plant should have been designed to meet).
Statutory regimes can impose strict requirements, and potentially significant penalties, on operators. Therefore, any liability of a professional (and potentially its PI insurers), for even a minor default, could have far reaching financial consequences.
Insurers are therefore facing significant and complex claims against their Insureds on renewable energy projects, with an upward trend in such claims.
When underwriting these projects, Insurers will want to ensure that Insureds have the appropriate expertise for the work indemnified under the policy. Insurers will of course also need to carefully value the risk of such claims, which can be difficult as limited actuarial data is available.
Finally, when claims arise, Insurers need to carefully manage those claims, including considering whether the PI policy covers the alleged errors.