According to the 2010 U.S. WindIndustry Monitor, significant growth in the use of wind turbines inthe United States is projected over the next several years. Indeed,the U.S. recently surpassed Germany as having the largest usablewind capacity in the world.

As capacity continues to grow and technology behind wind energycontinues to improve, more and more insurance underwriters aretaking steps to include at least some wind energy business in theirportfolios, generally underwriting via dedicated energy units.Experts believe that underwriting opportunities in wind technologywill remain a significant growth industry for the next 20years.

From an underwriting standpoint, commonly available types ofcoverage include protection for those individuals responsible forthe design, construction, erection, commissioning and testing ofwind turbines, as well as coverage for all risks of loss includingdestruction or damage to the turbine or property where the turbineis erected.

Policies also exist for business interruption or loss of revenueshould a wind turbine stop working, damage to turbines while intransit, and potential environmental cleanup costs associated witha wind turbine loss.

The expansion of onshore wind technology (as distinguished fromoffshore wind technology, which is an entirely different kind ofanimal) is not without some risk for wind energy underwriters. Windenergy technology relies primarily on wind turbines, and despitesignificant improvement in turbine engineering, fire-relatedhazards still exist. Accordingly, it is important for underwritersto not only understand the most common risks that a wind energyprogram presents from a first-party claim standpoint, but to alsobe cognizant of subrogation opportunities that may arise from suchlosses.

The wide variety of coverages available to wind programs is adirect reflection of the risks that wind programs present. Windturbines are a key component of a successful wind program, andbecause of the complexity of wind turbines, which on averagecontain roughly 8,000 parts, it is common to experience first-partyproperty damage claims while the turbines are in operation. Frominstallation problems to start-up delays, there are severalpotential areas which can ultimately lead to first-partyclaims.

The most common first-party claim involves lightning damage tothe turbine itself. More importantly though, lightning strikes canlead to significant fires in or around a turbine if the turbine'slightning protection system is not installed or maintainedproperly.

In addition to the risk of fire that lightning strikes present,improper installation or grounding of a turbine's electrical systemcan also present a fire hazard. Other common problems that may alsopresent fire hazards include failure to adequately protect hotsurfaces inside the turbines (e.g., the generator and gearboxmountings); work related to the repair, assembling and maintenanceof the turbine (e.g., welding, cutting or soldering work); andbuild-up of internal combustible materials such as foam soundinsulation or oil in the turbine gearbox or hydraulic system.

In reviewing a first-party claim involving a wind turbine,underwriters should consider and evaluate subrogationopportunities. For example, simply because a turbine was damaged bylightning does not mean that a viable subrogation opportunity doesnot exist. Turbines are generally equipped with sophisticatedlightning protection systems and the adequacy or functionality ofthat system must be analyzed–especially considering that thirdparties are usually responsible for those tasks.

If a first-party claim involves the malfunction of the turbine'selectrical or mechanical systems, viable recovery opportunities maystill exist. For problems involving electrical systems, it isimportant to evaluate whether the system complied with applicablecode or provided an approved method of controlled shutdown of theturbine's operating system. In addition, it is critical todetermine whether the electrical system was initially approvedand/or routinely inspected by qualified professionals.

Even if the turbine's electrical and mechanical systemsperformed as intended, it still may be necessary to evaluateinternal materials in the turbine to decide whether the materialsused were combustible when either non-combustible orlow-flammability materials were available, thus contributing to therapid spread of what was initially a modest internal fire.

If a recovery opportunity is identified, it is crucial thatpotentially responsible third parties be provided access to theturbine and all relevant evidence. Key components of the turbinewill likely need to be inspected and underwriters could faceallegations of spoliation of evidence if the turbine or involvedcomponents are not preserved for inspection by third parties.

In addition, it is important to ensure that the first-partyclaim is adequately documented with respect to repairs and, ifnecessary, replacement of the turbine itself.

Involvement of potentially responsible third parties during thefirst-party claim can also assist with ensuring that thefirst-party claim is adjusted so that underwriters' ultimatepayment is not subject to criticism or scrutiny by third partiesand their liability carriers. Potentially responsible third partieswill generally have intimate knowledge of the costs necessary torepair the damage sustained, and may even have certain warrantyobligations depending on the nature of the loss.

There is little doubt that wind energy programs–both onshore andoffshore–will continue to proliferate as the United States exploresand encourages alternative sources of energy. Underwritingopportunities for wind programs will accompany this growth. Becausethe typical first-party claim will generally involve damage to a“standalone” wind turbine, it is tempting to dismiss recoveryopportunities and attribute the loss to an “act of nature” (e.g.,lightning), or an unknown electrical or mechanical failure.

Underwriters should be mindful that recovery opportunities existand that lightning protection, mechanical and electrical systemsmust be analyzed in conjunction with fire “spread” issues to ruleout viable avenues of recovery.

Early attention to these issues could ultimately lead to asuccessful recovery and improved profitability for an underwriter'swind energy portfolio.

Jason Schulze is a member of the Subrogationand Recovery department at Cozen O'Connor. Practicing in the lawfirm's Houston office, he manages complex subrogation mattersinvolving energy and petrochemical losses for both domestic andinternational insurers. He may be reached at [email protected]

For information on emerging subrogation and recovery issues,visit Cozen O'Connor's blog at http://subrogationandrecoverylawblog.com