COVID-19 Impact On Solar Project Insurance Cost & Coverage: Indian Solar Leaders Speak

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The global outbreak of pandemic novel Coronavirus, COVID 19 has significantly hampered the functioning of all sectors including institutions, commercial establishments, offices & various manufacturing units which are also at standstill. The outbreak of Covid19 has far-reaching impacts ranging from the shutdown of factories, challenging job conditions, and supply chain disruption. Some of the company’s critical suppliers have stopped production and the lack of production is expected to drive up manufacturing costs, says GlobalData.

Due to the current pandemic situation, Both Insurers and top companies are struggling regarding claims arising out of the COVID-19 outbreak. Few companies are scrutinizing for the “loss of profit” clause in their insurance contracts, which covers losses due to factory shutdowns in unforeseen circumstances. 

According to Industry trackers, top corporate have already reached out to insurers, to make a claim, which could also lead to litigation in the future. Most companies are not clear and are asking insurers to give clarity on this immediately as it will impact their financial statements.

Sterling and Wilson, one of the leading players in the power sector, recently stated that the spread of coronavirus in China will have an impact on its business in the short-term.

Two types of insurance policies which are usually taken are material damage policy, the policy under which companies can claim insurance if there is a loss of property due to fire or flood or machine breakdown and Business interruption which comes into force only if a loss of profit has happened due to the clauses mentioned under the material damages policy.

IEA suggests that Large-scale investment to boost the development, deployment, and integration of clean energy technologies – such as solar, wind, hydrogen, batteries and carbon capture (CCUS) – should be a central part of governments’ plans because it will bring the twin benefits of stimulating economies and accelerating clean energy transitions, Governments can make clean energy even more attractive to private investors by providing guarantees and contracts to reduce financial risks.

We also spoke to several Indian Business leaders for their views on short and long term impacts on insurance cost & coverage trends And their expectations for the same. Here’s what they said:

Shyam Sharma, CFO Amp Energy India said, COVID-19 has impacted the RE sector and the immediate impact of this pandemic on Solar project Insurance is as under:

  1. The loss of revenue on account of closure of plant(s) or delay in commissioning due to COVID-19 won’t be covered in the existing policies.
  2. Business Interruption (BI) claim already occurred before lockdown but reinstatement delayed due to COVID-19, will be disputed by the insurer on the ground of uninsured delay and needs to be challenged in courts.
  3. The specific exclusion of epidemic and pandemic clauses in new policies being issued from April 2020.

Future Trends & Expectation:  Cost of future policies with pandemic coverage during the construction and operational phase would be quite high and reinsurers will be reluctant to underwrite this risk. New Insurance Coverage will exclude specifically epidemic and pandemic situations and any loss arising directly or indirectly or is aggravated due to such event will not be covered and claims would be disallowed.

Kapil Aggarwal, Director of Optima Insurance Broker said, The Solar Industry has also been adversely impacted by COVID 19. The impact of this unique event on the insurance of solar projects is discussed below.

ProjectsUnder Construction

These projects are insured under an Erection All Risk (EAR) policy. It covers a wide range of risks like Storm, Flood, Fire, Theft, Collapse, Faulty Design, etc.

The EAR policies impose certain responsibilities (called warranties) that have to be fulfilled. The key warranties are:

 Adequate security at all times

The insurer must be informed if work ceases at the site for more than 30 days. This clause is called the Cessation of Work.

These warranties become important as work comes to a halt at the sites.

As projects get delayed and the project period extends beyond the original policy period, the Insured will also end up paying an additional premium for the extension of the policy.

Operational Projects

Most Operational projects take an Industrial All Risk (IAR) policy, which covers physical damage to the plant and the loss of revenue arising out of physical damage to the plant.

The IAR policy also imposes similar warranties and these must also be complied with.

The unique risks being faced by operational projects due to the lockdown are: Reduced offtake by customers due to decreased demand, Invoking of Force Majeure clause to dishonor PPAs, Delayed payments by customers, Unfortunately, none of these are covered by insurance.

Impact on Pricing

As sites open up for construction, they are expected to report theft and burglary losses. If the cumulative losses are high, an increase in the premium of the EAR policies cannot be ruled out.

Saurabh Verma, Executive Vice-President – Property and Casualty, Willis Towers Watson India Insurance Brokers said, The COVID-19 has touched us all – figuratively at least, in ways that we are still discovering. Individuals and organizations are gearing up to all risk mitigation processes and finding ways in which the losses – lives and livelihood – can be minimized.

Solar projects have been impacted by the pandemic. Here’s how the challenges could grow and what risk managers need to keep an eye on.

Global Supply Chain: While China, which is India’s main supplier of PV panels, is limping back to normalcy, the road is very arduous and time-taking. There will be delays in projects and provisions around “cessation of work” need to be incorporated in on-going projects.

Power Demand: India’s peak power demand crashed to 127.96 GW on 25 Mar from 163.73 GW on 20 March. The lock-down may not be fully rolled back in the near future and there could be business losses. Unfortunately, these losses will have to be absorbed in the absence of a pandemic cover (which is excluded in almost all Indian insurance policies).

Delay in Project Commencement: Material that is stuck on roads may lead to project delay and a carefully worded Marine DSU policy is recommended.

ALOP (Advance Loss of Profit): The above factors will lead to delay in Commercial Operation Date and while project policies exclude pandemics, this could be a new ask from the IPPs.

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