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Solving the Puzzle: Renewable Energy’s Complex Business Interruption Claims

Having a seasoned adjuster who knows it all - from the equipment to industry regulations - plays a critical part in solving that puzzle.
By: | December 6, 2017 • 6 min read

Keeping renewable energy flowing can be like solving a puzzle when the pieces are always shifting. A myriad of regulations, contractual production obligations, weather fluctuations, and highly specialized equipment all make the renewable energy sector very complex.

The picture gets more complicated when a wind farm suffers a physical loss and subsequent business interruption. Fixing the property damage is one thing, but calculating and recouping business interruption losses is another.

“Calculating the business interruption impact after a loss requires deep industry knowledge and expertise in the renewable energy sector,”said Joe Slane. Slane is the Executive Vice President – Specialty Loss Group and Senior Executive General Adjuster with Engle Martin & Associates, a national independent loss adjusting and claims management firm.

Calculating Lost Income

A wind turbine loss demonstrates the many factors that impact the calculation of lost revenue after equipment failure.

Every day that a wind turbine generator remains out of service translates into decreased production and potential losses in revenue. Calculating the revenue impact is a multi-factor equation that can get complicated fast, making the need for a knowledgeable adjuster all the more imperative.

“Wind speeds and direction can change fast and can be seasonal. Operators are constantly monitoring wind speed and direction so they can facilitate adjustments to maximize power output. You have to consider many dynamics when projecting the production loss,” Slane said.

“An adjuster has to understand power generation to project megawatt hours lost over a certain period of time, during a certain part of the year.”

Joe Slane, Executive Vice President – Specialty Loss Group and Senior Executive General Adjuster

Wind farms generally keep detailed historical data on wind speed seasonality and average power output, so an experienced adjuster could project how much energy would have been produced had the damaged turbine been functioning normally.

Then it’s a matter of determining how much that power is worth.

“Renewable Energy Credits (RECs) and Production Tax Credits (PTCs) may contribute to the farm’s revenue loss, but their value could fluctuate with market demand and the amount of energy that a farm produces,” Slane said.

Properly factoring in these credits requires in-depth knowledge of the renewable energy market’s performance and industry tax regulations.

“Right now, for example, certain areas of the renewable energy market are saturated. Supply is at an all-time high in certain areas, so the value of certain RECs may be low. You have to know what these credits are worth, and how much they would have contributed to the farm’s revenue had there been no loss.”

A skilled adjuster will also understand how a wind farm’s insurance policies work and what exactly is covered.

“How does the policy define business interruption? Is there a time limit on the interruption period? Some policies have a long waiting period deductible. This could mean that if the waiting period is 60 days, any interruption losses incurred before the 60-day mark may be the responsibility of the owner,” Slane said. “A seasoned adjuster in this space should know what to look for within the policy.”

Evaluating the Time Element 

In addition to these factors, understanding the time element claim is critical.

“The time element exposure is dependent on the time it takes to assess and repair the physical damage that’s causing business interruption in the first place,” Slane said. The longer it takes to repair or replace damaged equipment and the more downtime a turbine incurs, the larger the business interruption loss could be.

In an industry like renewable energy that relies on heavy, specialized equipment, repairing damage could be a long and complex process.

“Assessing the damage alone can take up to a week. Sourcing, procuring, and installing new equipment can take several months.”

Without technical knowledge of a plant’s equipment — and the complexities of replacing it — adjusters can’t begin to assess the full scope of a business interruption claim.

“Keep in mind that blades alone are 116 feet long and longer. The blade assembly can weigh 35 tons. The nacelle alone weighs over 55 tons… and all of this sits atop a 70 ton, 200-foot tower,” Slane said. “Transporting these pieces is no easy feat. The logistics of delivery and installation are also complicated because you need cranes to lift the equipment.”

Site access and weather issues can further delay the process.

“Some wind farms are out in the middle of wide fields with no roads leading to them. Others are in the side of a mountain. It’s difficult moving cranes and cargo trucks in and out of these sites,” Slane said.

Even when all the pieces are in place, high winds, extreme cold, rain, or ice can keep a project grounded. The conditions need to be just right for installation to be done correctly and safely. All the while, the farm continues to lose out on revenue from that turbine. Adjusters need to be able to make that connection to arrive at a fair business interruption assessment.

Adjuster Expertise Is The Key To Solving The Puzzle

Navigating the complexities of a business interruption loss in renewable energy demands an adjuster who knows it all – the equipment, the weather patterns, power generation data, market fluctuations, financial impacts, industry regulations, and insurance.

“Insureds don’t want to waste time talking with an adjuster who doesn’t know their business,” Slane said.

“At Engle Martin, we can speak the lingo. RECs, PTCs, FERC — which is the Federal Energy Regulatory Commission – these acronyms are part of the everyday vocabulary,” Slane said. “If you don’t know or quickly learn the terminology and processes, you could lose credibility.”

Engle Martin’s Energy & Power Group, a subset of the company’s Specialty Loss Group, has the expertise to engage with wind farm operators and evaluate every factor of a business interruption claim. The Specialty Loss Group consists of 40 Executive General Adjusters averaging over 20 years of claims adjusting experience.

Having a true energy expert in the field benefits all parties. Carriers want to know their adjusters are experienced, accurate, and professional so they can properly measure a claim. Insureds want an adjuster who can speak their language and who understands all the components of a loss. Brokers are the go-between; they want the best services for their client, and a fair claim valuation for carriers.

“Keeping communication channels open among those parties is essential in a complex, lengthy loss,” Slane said. “Having a trusted expert at the center of the claim is critical.”

To learn more, visit: http://www.englemartin.com/.

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This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Engle Martin & Associates. The editorial staff of Risk & Insurance had no role in its preparation.




Atlanta-based Engle Martin & Associates is a leading national independent loss adjusting and claims management provider. Privately held and owner operated, the firm delivers a comprehensive line of property and casualty claims service offerings.

Property

Insurers Take to the Skies

This year’s hurricane season sees the use of drones and other aerial intelligence gathering systems as insurers seek to estimate claims costs.
By: | November 1, 2017 • 6 min read

For Southern communities, current recovery efforts in the wake of Hurricane Harvey will recall the painful devastation of 2005, when Katrina and Wilma struck. But those who look skyward will notice one conspicuous difference this time around: drones.

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Much has changed since Katrina and Wilma, both economically and technologically. The insurance industry evolved as well. Drones and other visual intelligence systems (VIS) are set to play an increasing role in loss assessment, claims handling and underwriting.

Farmers Insurance, which announced in August it launched a fleet of drones to enhance weather-related property damage claim assessment, confirmed it deployed its fleet in the aftermath of Harvey.

“The pent-up demand for drones, particularly from a claims-processing standpoint, has been accumulating for almost two years now,” said George Mathew, CEO of Kespry, Farmers’ drone and aerial intelligence platform provider partner.

“The current wind and hail damage season that we are entering is when many of the insurance carriers are switching from proof of concept work to full production rollout.”

 According to Mathew, Farmers’ fleet focused on wind damage in and around Corpus Christi, Texas, at the time of this writing. “Additional work is already underway in the greater Houston area and will expand in the coming weeks and months,” he added.

No doubt other carriers have fleets in the air. AIG, for example, occupied the forefront of VIS since winning its drone operation license in 2015. It deployed drones to inspections sites in the U.S. and abroad, including stadiums, hotels, office buildings, private homes, construction sites and energy plants.

Claims Response

At present, insurers are primarily using VIS for CAT loss assessment. After a catastrophe, access is often prohibited or impossible. Drones allow access for assessing damage over potentially vast areas in a more cost-effective and time-sensitive manner than sending human inspectors with clipboards and cameras.

“Drones improve risk analysis by providing a more efficient alternative to capturing aerial photos from a sky-view. They allow insurers to rapidly assess the scope of damages and provide access that may not otherwise be available,” explained Chris Luck, national practice leader of Advocacy at JLT Specialty USA.

“The pent-up demand for drones, particularly from a claims-processing standpoint, has been accumulating for almost two years now.” — George Mathew, CEO, Kespry

“In our experience, competitive advantage is gained mostly by claims departments and third-party administrators. Having the capability to provide exact measurements and details from photos taken by drones allows insurers to expedite the claim processing time,” he added.

Indeed, as tech becomes more disruptive, insurers will increasingly seek to take advantage of VIS technologies to help them provide faster, more accurate and more efficient insurance solutions.

Duncan Ellis, U.S. property practice leader, Marsh

One way Farmers is differentiating its drone program is by employing its own FAA-licensed drone operators, who are also Farmers-trained claim representatives.

Keith Daly, E.V.P. and chief claims officer for Farmers Insurance, said when launching the program that this sets Farmers apart from most carriers, who typically engage third-party drone pilots to conduct evaluations.

“In the end, it’s all about the experience for the policyholder who has their claim adjudicated in the most expeditious manner possible,” said Mathew.

“The technology should simply work and just melt away into the background. That’s why we don’t just focus on building an industrial-grade drone, but a complete aerial intelligence platform for — in this case — claims management.”

Insurance Applications

Duncan Ellis, U.S. property practice leader at Marsh, believes that, while currently employed primarily to assess catastrophic damage, VIS will increasingly be employed to inspect standard property damage claims.

However, he admitted that at this stage they are better at identifying binary factors such as the area affected by a peril rather than complex assessments, since VIS cannot look inside structures nor assess their structural integrity.

“If a chemical plant suffers an explosion, it might be difficult to say whether the plant is fully or partially out of operation, for example, which would affect a business interruption claim dramatically.

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“But for simpler assessments, such as identifying how many houses or industrial units have been destroyed by a tornado, or how many rental cars in a lot have suffered hail damage from a storm, a VIS drone could do this easily, and the insurer can calculate its estimated losses from there,” he said.

In addition,VIS possess powerful applications for pre-loss risk assessment and underwriting. The high-end drones used by insurers can capture not just visual images, but mapping heat, moisture or 3D topography, among other variables.

This has clear applications in the assessment and completion of claims, but also in potentially mitigating risk before an event happens, and pricing insurance accordingly.

“VIS and drones will play an increasing underwriting support role as they can help underwriters get a better idea of the risk — a picture tells a thousand words and is so much better than a report,” said Ellis.

VIS images allow underwriters to see risks in real time, and to visually spot risk factors that could get overlooked using traditional checks or even mature visual technologies like satellites. For example, VIS could map thermal hotspots that could signal danger or poor maintenance at a chemical plant.

Chris Luck, national practice leader of Advocacy, JLT Specialty USA

“Risk and underwriting are very natural adjacencies, especially when high risk/high value policies are being underwritten,” said Mathew.

“We are in a transformational moment in insurance where claims processing, risk management and underwriting can be reimagined with entirely new sources of data. The drone just happens to be one of most compelling of those sources.”

Ellis added that drones also could be employed to monitor supplies in the marine, agriculture or oil sectors, for example, to ensure shipments, inventories and supply chains are running uninterrupted.

“However, we’re still mainly seeing insurers using VIS drones for loss assessment and estimates, and it’s not even clear how extensively they are using drones for that purpose at this point,” he noted.

“Insurers are experimenting with this technology, but given that some of the laws around drone use are still developing and restrictions are often placed on using drones [after] a CAT event, the extent to which VIS is being used is not made overly public.”

Drone inspections could raise liability risks of their own, particularly if undertaken in busy spaces in which they could cause human injury.

Privacy issues also are a potential stumbling block, so insurers are dipping their toes into the water carefully.

Risk Improvement

There is no doubt, however, that VIS use will increase among insurers.

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“Although our clients do not have tremendous experience utilizing drones, this technology is beneficial in many ways, from providing security monitoring of their perimeter to loss control inspections of areas that would otherwise require more costly inspections using heavy equipment or climbers,” said Luck.

In other words, drones could help insurance buyers spot weaknesses, mitigate risk and ultimately win more favorable coverage from their insurers.

“Some risks will see pricing and coverage improvements because the information and data provided by drones will put underwriters at ease and reduce uncertainty,” said Ellis.

The flip-side, he noted, is that there will be fewer places to hide for companies with poor risk management that may have been benefiting from underwriters not being able to access the full picture.

Either way, drones will increasingly help insurers differentiate good risks from bad. In time, they may also help insurance buyers differentiate between carriers, too. &

Antony Ireland is a London-based financial journalist. He can be reached at [email protected]