Before an Owner and its Lenders can make a Final Investment Decision (FID) on a renewable project, there exists a seemingly endless list of questions to be answered to determine a project’s viability. This includes everything from the front-end work of securing permits, developing a realistic project schedule, analyzing the current state of the supply chain, forecasting demand, securing PPAs, and the most importantly – calculating the return on investment. What is often ignored while making these other important decisions is the role of insurance, but the best way for Owners and Lenders to best protect their impending asset is to ensure that the Vendors and Contractors supplying the materials and knowhow to construct the project have sufficient coverages in place both during, and after, the project is completed.
Starting a renewable project quite literally from the ground (or sea) up is a daunting task and project Owners need to find effective, but efficient, ways to get started. While nothing is done by a handshake anymore, there is dispute amongst contract drafters on the level of detail needed to initially proceed. Too narrow and the Owner risks that the Contractor is not properly insured, and they must rely on an indemnity to backstop in the event of a claim– never the preference. On the other hand, make the insurance requirements too verbose, too stringent, or set the limits too high, and the Owner risks not finding enough Contractors to qualify for the project, all while incurring expensive financing costs from the Lender and delaying the project schedule– again, never the preference.
Before discussing the different types of contracts to be used for a renewable project, it should be noted that there are different approaches to determining the insurance requirements for Contractors. Some Owners choose to align the insurance requirements with the value of the scope of work and create different tranches of contract prices with different insurance requirements based on the cost of the work to be done. Despite the ease of that approach, it can leave Owners susceptible to claims, so the better approach is for the insurance coverages and limits to parallel the riskiness of the scope of work being completed under that contract. To account for this, Owners develop different contracting forms to be used over the course of the life of the project.
The beauty of an MSA lies in its adaptability and that applies to the insurance requirements as well. In truth, an MSA can be used by renewable project Owners for anything from desktop work such as solar project noise analysis to light field work such as soil testing and onsite consulting. MSAs often include at a minimum the following coverages:
Most MSAs, regardless of scope, will have these base coverages, but because the intent of MSAs is to be evergreen with different scopes of work under them, to maximize the broadness and the usability of the MSA Owners can consider having additional coverage requirements by using the “if applicable” designation. Examples of additional coverages that could be included “if applicable” to the scope include Professional Liability for any engineering, design, or consulting work; Pollution Coverage for onsite work; Inland/Ocean Marine if deliveries will be made to Site; and Equipment/Supplies/Material coverage to cover Contractor’s equipment that will not become part of the permanent facility.
While Owners are determining the renewable project’s viability, they will likely be actively drafting baseline Ts&Cs for their EPC Agreement. Once shovels are ready to go in the ground for new construction, or if work is to be done in an existing and operational facility, the riskiness of the work goes up. While higher level detail may be acceptable in an MSA, the EPC Agreement will be extremely detailed in the coverages and endorsements Owners will require of Contractors.
Some coverages, such as EL and Auto can have the same limits as the MSA, but Owners often seek higher limits on the GL and Umbrella. Depending on the project location and Contractor’s supply chain plan, Owners may need to contemplate using “if applicable” language similar to the MSA to cover Aircrafts, Hull & Machinery, and P&I. Builder’s Risk may also be required of the Contractor to protect the Owner’s and Lender’s interests throughout the course of construction for a new facility. Likewise, Owners may consider requiring Delayed Startup Insurance to help cover themselves against financing costs if the project schedule is delayed.
Whether Owners are utilizing an MSA, an EPC, or any other contracting form, they need to use the contractual language to protect themselves. From an insurance standpoint, this means flowing down coverage requirements to every Contractor or Subcontractor that will be working on the project to avoid any gaps in coverage that leave the Owner and their insurers more susceptible to claims and lawsuits. Lenders will often have insurance requirements as part of the financing documents, so the starting point is to flow these down to the Contractor such that the Contractor is “back-to-back” with the Owner. That is not to say that Owners cannot, or do not, leverage their position and require more robust coverage, but at a minimum they will cover the lending requirements. Additionally, Owners often require the Contractors to flow down the same insurance requirements to their Subcontractors to create as many insurable protection layers as possible.
As technology advances and costs decline, the growth potential for renewables is immense. This is creating opportunities for established companies looking to diversify as well as developers new to the space. Regardless of their position in the market, Owners can reduce their risk by placing appropriate and detailed insurance requirements on those Contractors and Subcontractors performing the actual work and avoid relying on the indemnities for cover.
Willis Towers Watson hopes you found the general information provided in this publication informative and helpful. The information contained herein is not intended to constitute legal or other professional advice and should not be relied upon in lieu of consultation with your own legal advisors. In the event you would like more information regarding your insurance coverage, please do not hesitate to reach out to us. In North America, Willis Towers Watson offers insurance products through licensed entities, including Willis Towers Watson Northeast, Inc. (in the United States) and Willis Canada Inc. (in Canada).
