By Tucker Compton, with Sterling Seacrest Pritchard in Savannah, Georgia

Property insurance premiums are up 15% to 45% across the solar industry and are becoming a major concern for developers, investors and construction contractors.

An increase in manufacturing defect claims is also causing underwriters to compile lists of module manufacturers that they will not insure.

Inflation, reinsurance market changes, a decrease in risk capacity and supply chain disruptions are among the top reasons for a hardened insurance market. While those with significant claims histories and in catastrophic areas will be affected most, a hard market means fewer coverage options and higher premiums for everyone.

Premiums

Policy holders should anticipate property premium increases to vary by renewal date — for example, January 2023 renewals saw an average 37% increase in catastrophic reinsurance rates.

General liability rates remain more closely aligned with inflation, seeing a 5% to 10% increase for ground-mounted solar projects and 10% to 15% for roof-mounted installations.

Umbrella premiums have increased by 10% to 15%, a smaller increase than those seen in recent years.

These figures reflect percentage increases compared to a year ago.

Directors and officers and professional liability coverages are softening across most sectors, meaning premiums are staying the same compared to last year. That being said, premiums are seeing a slight rise in solar due to increased mergers and acquisitions activity and the long tail risks associated with power purchase agreements.

The cost to insure against cyber risks is rising in all industries, but premiums are steadying as a result of increased underwriting measures and advances in cyber security.

Coverage Trends

The increased exposure paired with decreased risk capacity of insurance companies means the property limits being offered in catastrophic and high-hazard zones are shrinking. It will be difficult to find a $10 million or higher limit from a single carrier, as most are capping their aggregate limits at $5 million. This requires brokers to work harder to place risks among a pool of insurers.

High-hazard zones are anything with a greater-than-normal risk for flood, earthquake, windstorm, hail or wildfire damage. These zones are expanding as wind and hailstorms repeatedly cause significant and unforeseen damage in Texas, the Midwest and the forested areas of the west that are suffering from prolonged drought. The flood map continues to broaden, and wildfires are affecting areas beyond past footprints. Actuaries have expanded wildfire exposure areas from three to 18 states in recent years.

Deductibles for these high-hazard zones have risen accordingly. They are now set at 5% of the solar array's replacement cost value with a minimum of $50,000, up from a 2% cap and $10,000 minimum.

With limited insurance markets for solar coverage, there is only so much capacity in high-hazard areas. For example, one insurance company does not want to write $100 million in property in Florida. This would open it up to losing a lot of money from a single hurricane that could have a devastating effect on its financials. Insurance companies try to diversify risk in order to mitigate the risk of having a large hit to their loss ratios.

Liability limits are being compressed, with most insurance companies offering a maximum $10 million limit for umbrella coverage. To secure additional coverage, layered policies from multiple insurance carriers may be necessary to meet the developer's desired threshold. Spreading risk across a group of carriers in this manner typically leads to a higher premium because the premium ends up the level required to persuade the last underwriter to join the pool and to increased risk of a coverage gap.

The industry is seeing a growing number of high-hazard exclusions on liability policies, both midterm and at renewal. With the growing wildfire exposures, several insurance carriers are now excluding wildfire coverage on the liability side. A high-hazard exclusion means damages to others resulting from a wildfire caused by you or your solar array would not be covered. This is a significant exposure for developers and construction contractors. Other exclusions prevent coverage for work performed by a sub-contractor. With many prime contractors handling hybrid duties and offering developer-type services, this can mean more risk exposure when subcontracting the actual construction work on a solar array.

D&O and professional liability policy coverage remains largely the same as prior years.

Cyber insurance carriers continue to see social engineering losses. This type of fraud involves hackers manipulating employees into providing confidential information or sending money to them. A common form of this type of attack is a hacker accessing your email, monitoring conversations between you and a third party, and then contacting your company with a request for money while posing as the third party with whom you have an established relationship.

If money is subsequently sent voluntarily by someone within the company without taking steps to verify the request, then coverage issues may arise. The sub-limits for social engineering coverage typically max out at $250,000. Cyber policy coverage forms vary widely across insurance carriers, so understanding what you are purchasing is essential. Securing a policy has become more involved as cyber carriers now require multi-factor authentication, end-point detection and many other firewall functions for placement.

Key Drivers

General inflation is the most obvious reason for the rise in premiums, and we can expect it to continue into the third quarter of 2023.

Inflation means a price increase in both materials and labor, leading to a higher cost to rebuild after a casualty. This effect was not generally unaccounted for in the prior year's underwriting, but is now being considered in the underwriting process.

Reinsurance markets will also be a considerable cost driver as prime insurers renegotiate their treaties with reinsurers this year. Insurance companies often reinsure all or part of their assumed risks with other carriers, called reinsurers, to hedge potentially catastrophic claims payouts that could bankrupt the primary insurer.

The primary insurer's risk is usually shared with a reinsurance carrier in the case of high-limit policies. Reinsurance market rate increases are passed along to the consumer, meaning your rates will rise if theirs do.

Many statisticians have reported this as the toughest reinsurance market since 9/11 or at the very least since the 1992 economy.

Solar developers tend to target states with the highest electricity prices as they offer better profit margins. Ten of the 12 states with the highest average electricity prices (not including Hawaii or Alaska) are considered to be in high-hazard areas for at least one hazard.

The latest catastrophic storms across the country offer actuaries new data on weather trends and will mean changes to policy forms as widespread losses extend the boundaries of high-hazard zones.

Recent history shows new areas being affected that have previously been spared catastrophic hazard losses. The middle of the country has been hit particularly hard by wind and hail. From Texas and Louisiana up to North Dakota and Minnesota, a drastic rise in claims will make it more difficult to secure coverage in the future.

Supply-chain and manufacturing delays also have a significant effect on the insurance industry.

Lengthier timelines for replacement part deliveries to jobsites and solar project outages mean larger business income losses. The industry is seeing six-month and longer lead times for parts necessary to complete repairs . Paired with manufacturing defects, claims are multiplying quickly.

With the majority of modules being manufactured overseas, insurance companies struggle to subrogate the losses to recoup money paid out to cover domestic policy claims. Expired and insufficient part warranties and unreliable manufacturer support mean manufacturing defect claims are often falling on the insurance carrier of the construction contractors or developers who bought them.

As manufacturing defect claims grow, underwriters are compiling lists of module manufacturers that they will not insure. We anticipate the selection of solar modules becoming a much larger part of the underwriting process in the near future.

Manufacturing Defect Claims

Weather-related events, such as lightning, that should normally cause damage only to a small section of an array are turning into mass failures. Investigation has determined a large portion of these scenarios were caused by a manufacturing error that prevented the blocking of the electrical surge throughout the rest of the solar system. This error is leading to larger, avoidable losses that insurance carriers are rarely able to recover from the manufacturers for the reasons already mentioned.

Another claims trend is due to property abandoned or exposed to the elements.

When modules are delivered to sites, they may sit unused, often for months at a time, leading to preventable claims. Substantial losses are reported due to packaging deterioration causing damage to modules, damaged packaging revealing module damage during unboxing, and theft from jobsites. Inventory management is an ongoing concern, with many construction contractors and developers purchasing extra panels to reap tax benefits, but not storing them properly once delivered.

The continued rush to get to market is creating tight timelines for construction contractors, leading to careless behavior that leads, in turn, to claims. This is happening in both the construction and manufacturing segments. Poor grounding, recurring defects and defective installation are causing preventable claims that could have been avoided if protocol and processes were maintained.

Risk Mitigants

Despite all the things working against the solar industry in the insurance market right now, there is some good.

Technology is constantly improving, mitigating and minimizing risks and damage to solar arrays from weather-related events. Keeping up with these trends is something underwriters will be looking for when evaluating a risk.

Standardized safety and loss prevention protocols are also vital to this industry. Lighting, fencing, land maintenance, limited roof access and general solar maintenance are all crucial and required for most solar arrays. Insurance carriers also want to see ballasted arrays, which help to prevent roof leaks leading to large liability claims.

Insurance carriers will continue to require comprehensive equipment procurement and construction contracts from solar developers. Solar, much like any construction project, starts with the contractual risk transfer. These contracts should be state specific and transfer as much liability as possible to the equipment vendor or construction contractor. Strong insurance requirements allow the insurance carrier to subrogate against the liable party's insurance when applicable. In the event of a claim, the claims adjuster will always ask first for the power purchase contract and construction contract. Your lawyer, your insurance agent and your insurance carrier should all be involved in the contract creation and review process.

Vetting your sub-contractors is also critical to a successful project. Underwriters prefer established, lasting sub-contractor relationships. Repeat sub-contractor use across projects indicates reliability and stability in the construction industry. With the Inflation Reduction Act creating incentives for significant growth in solar, there will be more contractors entering the space with little to no experience. It is important to partner with experienced sub-contractors and not base the decision solely on cost.

Underwriters are also looking for inventory management policies with spare parts programs. The rising costs of business income losses due to sourcing replacement parts means underwriters want to know that you are proactively sourcing parts domestically that can be delivered quickly.

Maintaining an inventory of spare parts is quickly becoming the most effective mitigation technique used by larger solar developers. Managed inventory allows the efficient repair of damaged arrays and a quick return to operation. While inventory should ideally be stored in a temperature-controlled space, underwriters also understand the need to keep them on-hand locally at job sites. Use of a temporary shipping container can be a useful way to keep inventory out of the elements and secured from theft.