Helping ensure favorable winds:
Managed Risk for today's large-scale
wind power operators

An industry perspective from Thilman Filippini
(previously published in "North American Wind Power")

By Peter J. Kunz, Partner and Daren F. Gretz, Vice President Energy Division
Thilman Filippini

On a picture-book apple farm in central Wisconsin, alongside the barn, stands a solitary wind tower: a quaint, 22 kW reminder of the industry's idealistic and rural origins. The small turbine generates sufficient electricity to power the farm, with a token surplus to sell to the local utility.

Like many "first-generation" towers installed in the 60's, this one was insured as an outlying structure, similar to a silo, through a simple addition to the homeowner's policy. And the farmer's risk management procedures consist of little more than routine, contracted maintenance and shooing away rambunctious teenagers on Halloween night.

If only it were that simple for today's large-scale wind operators.

After five successive years of near-record new installations (at an average annual growth rate of 30%), and with Congress's recent extension of the production tax credit, wind energy is poised to make a serious move onto the national grid. Some predict that within the next 15 years as much as 20% of domestic demand could be supplied by high-efficiency 100 to 500-MW farms strategically wind-mapped and sited throughout the country.

Driving this development is a favorable alignment of technological, environmental and political factors that have been well-documented in this publication and others. But what doesn't usually make headlines is another element vital to the industry's continued growth -- innovative risk management, of which technical underwriting is a key component.

You may remember that not very long ago, wind energy was anathema in the business insurance community. In the 1970's and 80's, spectacular and serial failures of early turbine and blade designs -- coupled with poorly written policies -- resulted in a number of horrendous losses. One writer refers to this as the industry's "sorrowful early history," during which some insurers in effect underwrote a bruising technological shakeout.

Losses in the billions create long memories. Some promising projects still remain stymied for lack of adequate coverages to proceed from the drawing board. What's more, the commercial insurance industry these days is contending with consolidation and a confluence of untoward market events.

But so remarkable has been the surge of wind power's reliability and performance-efficiency in recent years -- not to mention its enormous untapped potential -- that a number of important insurers have returned to the field (albeit with a wary eye and keener respect for the idiosyncratic risks inherent in this industry.)

In short, wind energy has rapidly evolved from an unproven "green" alternative into a burgeoning industry that faces some of the same risk issues as long-established fossil fuel-based utilities. This was nowhere more evident than with the supreme irony of two environmental groups recently suing wind operators over migrating bird and bat kills. With this more visible public profile and financial-investment exposure come greater expectations: entirely new levels of liability and risk management considerations, far beyond simple property and casualty insurance.

As we often explain to clients, risk management is not simply business insurance-plus. Nor is it an arcane exercise. It's a rigorous process to systematically review your operations for the purpose of ensuring five basics: survival; continuity; earnings stability; growth; and social responsibility.

In other words, a "good night's sleep."

1.  Identify and analyze all loss exposures.

To begin with, take a look at all your potential losses from property damage and equipment. This entails a specially-designed and exhaustive risk management survey, to be completed only by a broker or consultant intimately familiar with the unique technologies and operating requirements of the wind power industry. For wind operators, equipment or infrastructure losses usually will stem from mechanical breakdown or damage from lightning. (Less often, damage may result from fire, storms or earthquake.) Therefore, manufacturers' warranties should be closely scrutinized. Fire safety programs and procedures must be buttoned down. And your consultant's analysis should differentiate between any liability and loss of profit from impairment of service to the distribution grid vs. damage to equipment.

For example, one major concern for underwriters is potential failure of a generation step-up (GSU) transformer - which services the entire project - caused by lightning strike or internal failure. In fact, damaged transformers have resulted in a number of seven-figure losses. But this risk can be greatly mitigated through designed-in redundancy at the facility itself, or by a lease-pool arrangement that assures swift replacement of a failed transformer.

Another critical consideration under this heading is tort liability for persons on the premises -- whether invited or trespassers. "Duty of care" provisions in most state codes hold the owner of a property liable, to some extent, even in cases where trespassing children are injured by equipment or other "hidden" danger that is not in plain view.

(As you can see, true risk management requires you to think around a few corners -- to look beyond the most intuitive, straightforward answer.)

Third-party liability (contractors) is another issue. For example, let's say a blade has been damaged in a freak baseball-size hail storm. Contractors come to replace it. During this process, a crane is used. Bystanders and gapers gather to watch along a nearby road (after all, it's not every day that you see a rotor-blade the length of a basketball court).

While the blade is being hoisted, the crane tips and falls -- slightly injuring not only the operator inside, but totaling a new SUV driven of one of those bystanders. What is your contractual liability for the operator's injuries, medical care, lost-time, etc.? What about that SUV? Was it a non-public road?

And speaking of that injured crane operator, Step #1 also should include a review of your workers compensation status -- for contracted workers as well as employees.

2.  Examine and develop risk management techniques and options.

Generally, this heading includes two sub-categories: Loss control and Financing.

Loss control, as you would expect, is a program to systematically minimize exposure with procedures to reduce the frequency or likelihood of an adverse occurrence, and/or its financial impact on your business. We recommend that you retain an independent engineer - not affiliated with the insurance company - to work with your broker/consultant to develop a loss control program that lines up, point by point, with all your risk management objectives.

For example, improved off-station monitoring of operations and the imposition of more rigorous service inspections/maintenance standards are two of myriad loss control techniques.

Financing includes transfer of risk through insurance, non-insurance transfer of risk and retention -- a term meaning that you've chosen to accept a particular operating risk after having assessed its negligible potential.

Let's take insurance first. As we've seen previously, wind energy presents insurers with a host of problematic issues. Chief among these is the industry's youth. The art and actuarial science of underwriting is based largely on experience and trend-patterns in claims. But because of its geographic diversity and relative newness (ignoring for the moment the experience of the late 70's and 80's.), the "modern" wind industry has a scant track record.

So chances are, a request-for-proposal from five different insurers will produce five wildly different quotes, terms and conditions. (Even the forms are not standardized within the industry.)

This is why it's not only important, but absolutely critical for you to employ a broker with 1) experience in the energy field in general and/or wind industry in particular and 2) to develop your request-for-proposal to include ALL possible exposures to loss, with the broadest coverage and highest limit at the most competitive rates.

Non-insurance transfer of risk refers to third-party contractual arrangements. It's vital, whenever possible, to assign potential liability to the hiring firm that employs contractors working at your site.

Retention, as we've mentioned, is always a calculated option. Some risks, from the standpoint of their remote likelihood as well as the economics involved, may be considered simply not worth the cost of insuring. Your broker can advise you further on this.

3.  Select and implement the preferred risk management techniques.

This step is where your insurance broker/consultant enters the underwriting marketplace to negotiate and procure the right combination of plans and coverages to meet your specific needs. Again we should stress that a well-written and comprehensive RFP is critical to ensuring that you obtain the appropriate coverages. Sorting out the differences between insurance quotes in the wind power industry can be like comparing apples to oranges, a process further complicated by insurance-industry jargon. Your broker/consultant should be able to translate all of this into a cost-effective program that you understand in every detail.

Having weighed all your options, in counsel with a veteran energy industry broker/consultant, implementation should become the linchpin of your ongoing risk management program. This is where you establish financial benchmarks, performance standards and a checklist for all appropriate compliance rules.

4.  Monitor the effectiveness of your program.

It's tempting to think that what you pay for insurance premiums is sufficient to gauge the effectiveness of your overall risk management program -- and certainly this is one component. Lower losses generally mean lower premiums. But as wind energy continues to make gains in utility-market share, a wide range of environmental, political and economic forces will come to bear on your individual operation. This is an industry on the move, and your risk management program should be commensurately agile. A periodic review - say, quarterly - is essential. And modifications undoubtedly will become necessary from time to time. A strong rapport with your broker is key. He or she should be as knowledgeable of emerging industry technologies and issues as you are.

Beyond this, a solid risk management program should actually contribute in a tangible way to your bottom line. Better procedures and safer operations do not simply reduce your exposure to loss. Inevitably they should provide you greater operational efficiency and an enhanced profitability profile.

A well-organized, demonstrable risk management program can itself prove an enticement to reluctant insurers with those long memories of past troubles in the wind industry.

Education is another key. Site tours with engineers often go a long way toward assuring risk underwriters that today's wind industry is based on proven, state-of-the-art technologies.

Don't sign a thing until you're sure your broker has thoroughly reviewed: Land lease arrangements; Power purchase agreements; All interconnection agreements; Credit agreements; Operation and maintenance guidelines; Long-term service agreement; Easements.

Also, make sure your policy covers such elements as transit and advance loss of revenue in case of damage to cargo, as well as advance loss provisions during construction.

Above all, find a broker who appreciates a wind tower for what it is -- not an outlying silo on a bucolic farm, as in our opening scenario, but a working power station with all the mechanical risks and potential this entails.