Solar Business Issues: Solar Product Insurance, From Paperwork to Project Reliability

Have you heard the one about the solar array that decided to take a skinny dip in the backyard swimming pool?

Of course not. Despite the fact that solar arrays aren’t being constructed alongside swimming pools, insurers continue to ask solar photovoltaic project developers the question. Why? To ensure property visitors won’t be at risk from drowning, and solar modules refrain from making a splash in the deep end.

Risk management requires solar project developers to understand the true threats to all phases of a project – from inception all the way through ultimate dismantling. From stolen solar modules to property damage, and bodily injury to electrical or mechanical breakdown, to photovoltaic system reliability issues, there are numerous threats to consider and mitigate. Hazards and perils can seemingly come out of nowhere as a project’s risks change over its life.

Power purchase agreements (PPA) often are complex legal deals, requiring different levels of property and liability coverage. Solar project insurance also varies depending on the equipment used for installation. The project is only as good as the sum of its parts, and that makes warranty administration and management a critical part of the solar insurance offering.

Jeanne Schwartz is vice president of new venture commercialization for Assurant, Inc.

Project investors increasingly are insisting on warranty management provisions due to concerns about the long-term viability of solar module equipment manufacturers and other components as the industry consolidates. Investors fear that if a manufacturer is acquired, merges with another company or goes bankrupt, it won’t be able to honor its warranty on their solar equipment 5 or 25 years from now. Such market realities threaten the sustainability of project cash flows and undermine the enthusiasm for solar project development. Warranty backstops now reduce risks by protecting cash flows and address concerns about the viability of solar equipment manufacturers by guaranteeing product warranties for the life of the project.

Investors may worry about a solar project’s reliability and continued ability to generate sufficient energy to fulfill PPA requirements. What will the energy output be in 20 years, or 25 years? Will cash flows remain strong or will they dissipate over the course of 25 to 30 years? Some solar insurance available can alleviate those concerns by guaranteeing energy output and photovoltaic system performance. Business interruption insurance can protect against unexpected loss of revenue from photovoltaic system malfunctions, which can occur in the course of a project’s life.

Lenders also are requesting “non-vitiation clauses” in their solar insurance coverage policy to ensure protection if the project developer breaches or voids the insurance agreement. With this additional layer of protection, lenders can increasingly feel confident in the safety of their long-term investment and commit to financing more projects. This is critical for solar project developers because the biggest risk they see isn’t related to buying insurance, but the potential inability to secure financing necessary to move forward with an installation. Yet, the two are inextricably intertwined.

As for the risk posed by swimming pools, it turns out they aren’t nearly the hazard one might think, considering the question is part of the standard insurance query. Instead, the question itself is symptomatic of a larger issue in the solar insurance industry. The insurance process and products were not developed with solar projects in mind. Often the insurance application forms are filled with irrelevant questions not tailored to the needs of project developers seeking project insurance and what truly needs to be insured in this sector.

David A. Schroeder is vice president of operations and industry relations for the solar industry at Assurant, Inc.

Administrative complexity often gives way to frustration. Understanding the details of what is covered can be difficult and downright challenging to the most astute business people, and sometimes even those in the insurance industry. For a solar project developer, the problem is exacerbated when dealing with multiple solar insurance plans covering an installation. The result can be devastating if the project owner believes something is insured then finds out there were gaps in coverage after catastrophe strikes. Independent solar project developers in the mid-sized commercial solar market typically lack the resources of larger companies with dedicated risk management teams to help sort out the myriad of challenges they face.

While solar technology may be complex, that doesn’t mean the insurance paperwork or understanding the solar insurance coverage needs to be. Specialty insurance provider Assurant, Inc. partnered with GCube Insurance Services, the leading provider of insurance for the renewable energy industry, to offer solar insurance to developers with mid-sized commercial solar projects in the 100-kW to 3-MW range. Together, we looked for ways to improve the standard insurance forms and improve the process for solar project developers. By eliminating questions that were not applicable to solar projects, we were able to cut down on the amount of questions that needed to be answered, and cut in half the time it takes to fill the insurance forms out. By bundling the insurance offering, we were able to consolidate coverage and provide single-source warranty management for claims authorization, payment and management.

Less paperwork and a simplified process does not mean project developers must accept one-size-fits-all insurance coverage. Comprehensive and customizable solar insurance options are still available to provide project developers with flexibility to address multiple risks. In fact, it is a necessity for project developers to ensure proper coverage on the variety of solar projects. It is not surprising the insurance needs for solar projects built on New Jersey rooftops differ from solar farms in Arizona. Nor should it be a shock about how vital a role insurance plays in the development of the solar industry.

Solar project insurance is a critical risk management strategy to help developers address investors’ fears. It is helping provide a stable foundation for investors and encouraging project development even before a claim is ever filed. SPW

By: Jeanne Schwartz and David A. Schroeder