Solar Energy: The emerging energy market for insurance coverage and claims

July 2015    |    By Craig Harris

The rapid growth of the solar energy market has created some cloudy issues for insurance coverage and claims. Is the p&c insurance industry taking into account all of the risk factors associated with the proliferation of solar panels?

Michael Guest has a unique perspective on the seemingly ubiquitous array of solar panels popping up on residential and commercial buildings throughout Ontario.

As a former vice president with solar development companies, he now works as a project manager in renewable energy for Giffin Koerth Forensic Engineering and investigates quality assurance issues with solar installations.

“One of my main messages to insurance companies is that the notion these systems are benign and maintenance-free is dangerous,” Guest says. “There are now over 18,000 solar systems connected to the grid in Ontario and the idea that you just put them up on the roof and leave them for 20 years is misguided.”

Guest notes that “I have done several presentations to insurance companies and the main comment that without a doubt comes back is, ‘wow, we did not know the amount of energy created.’ I really think the insurance industry is a little behind the curve on solar,” he adds.

In May 2009, the Ontario government passed the Green Energy Act, which included a series of incentives that ushered in an accelerated take-up rate of renewable energy initiatives. For the solar industry, one key incentive was the Feed-in Tariff (FIT) program, which provides a guaranteed pricing structure for the production of electricity into the grid from renewable sources. The “microFIT” program allows homeowners, farmers and small businesses to develop renewable energy projects that are 10 kilowatts (kW) or less in size.

Although controversial, Ontario’s green energy plan and the FIT program essentially kick-started the widespread use of solar systems in the province. According to the Canadian Solar Industries Association (CanSIA), Canada’s solar market rose by 289 megawatts (MW) in 2011, a 270% increase over the previous year. By 2016, the total installed solar capacity is estimated to be between 3,200 and 4,300 MW – an 11-fold increase.

While the installation of small residential rooftop mounted solar panels represents 100 MW of the Ontario market (with roughly 11,000 installations), larger systems on retail stores, other commercial structures and school/government buildings connected directly into the grid are also becoming more prevalent.

Since 2009, insurers have slowly wrapped their heads around the implications of arrays of solar (also known as photovoltaic, or PV) panels, according to Jen Aitchison, an account executive in renewable energy for Jones Brown Insurance Brokers & Consultants. Many underwriters are offering endorsements or riders for solar panels to the existing standard homeowner policy.

Aitchison explains that most insurers “are now factoring in solar energy panels as part of the homeowners insurance policy; there is typically an additional premium for the replacement costs. The value of the home has increased as a result of the solar panels.”

This is the approach that RSA Canada, a specialist in renewable energy, has taken.

“The cost of solar panels need to be included as part of the personal property coverage limit,” notes Amy Graham, national property leader for personal insurance at RSA Canada. “This ensures that the cost of rebuilding the home includes the additional exposure of the panels.“

Aitchison observes, however, that there is no standardized industry approach to solar panels. “On the residential side, some insurers are still struggling and a little behind on solar energy,” she says. “There are a few insurance companies that I would suggest haven’t really taken the time to understand what a solar installation is, and are charging exorbitant amounts for coverage.”

Some of the early confusion around the microFIT program prompted Insurance Bureau of Canada (IBC) to develop a brochure on the insurance implications of solar energy projects. It lists loss or damage to solar equipment, loss of income and liability as the main insurance scenarios.

IBC’s brochure also notes that insurance needs are contingent on how people participate in energy projects, whether as an individual homeowner, as part of a community initiative or through so-called “aggregators” – energy companies that essentially lease the roof space of multiple buildings and install solar panel arrays.

These aggregator firms, such as Pure Energies, front the cost (often in the range of $20,000 to $30,000, or more) of installing solar panels and allow the individual homeowner to benefit from the electricity provided and the guaranteed feed-in tariff rates to the hydro grid. By selling electricity back to the province, the intent of the program is to provide a steady stream of income to the homeowner (and aggregator).

Who precisely is responsible for the solar panels on the roof and any associated liability (including third party) can be a grey area for aggregators and homeowners, subject to individual contract language. Another issue is whether the “income stream” resulting from solar panel installations is considered business income for the homeowner. The typical homeowner policy excludes coverage related to taxable income for business purposes.

“If the solar panels are also used to share power with the hydro authority (such as Ontario’s microFIT program), additional endorsements that provide the insured with adequate protection are strongly recommended,” Graham notes.

Aitchison, who says she likes the business model of the aggregators, observes that “on the insurance side, it removes a lot of the risk for the home insurer in that the aggregators are carrying liability and property insurance themselves. So homeowners don’t need to incur any extra expense in that regard.”

Solar energy aggregators are viewed as commercial risks for insurance, according to Geoffrey Carter, RSA Canada’s technical manager of construction and renewable energy.

“RSA’s approach to rooftop aggregators is to treat them as a business,” Carter notes. “Our renewable energy underwriters provide solutions that cover physical damage to the solar panels and related equipment, business interruption and commercial public liability.”

No matter how solar panel arrays are installed or provided, several sources say there are risks that could result in surprising claims severity. The exposures typically extend to equipment, installation, weather (severe wind/hail) and fire.

While there is little direct claims experience in Canada on solar energy, Aitchison says that “we have we have taken a lot of the global claims data, and applied it locally to understand where the exposures are. On the commercial side, there are more risks related to roof ballast mounting systems. You want to make sure of the wind-loading and snow-loading,” she notes.

Aitchison cites the well-publicized case of a solar panel installation on a multi-residential high-rise building in Toronto that partially collapsed earlier this year and sent a support beam crashing to the ground. Police were called in to the apartment in the Flemingdon Park area January 31, 2014 to secure the premises and ensure public safety.

However, others say that there are more prominent exposures with solar panels. “Fire is without a doubt the biggest risk,” says Guest, who adds his goal is to educate insurers. “At Giffin Koerth, we have done 17 fire investigations that were caused by solar arrays.”

Guest notes that during a recent small fire investigation at a solar panel system installed four years ago, “we pulled out the infrared camera and we found multiple hotspots, multiple problems just waiting to happen. Let’s assume that is the canary in the coal mine; there are a lot of systems out there of that age. The problems will continue to develop as they are exposed to the elements,” he adds.

There are several risk factors associated with fire and solar energy. One is the fact that solar panels do not “shut down” like a traditional hydro-electric supply.

“Fire presents a unique challenge because solar panels continue to generate power even after a fire has started,” Carter notes. “Depending on how the system is configured and the location of the isolator switches (which stops the panels from generating electricity), this can make it difficult for firefighters whose top priority is saving lives with property protection a secondary concern.”

One area of risk outside of insurers’ control is whether firefighters will actively enter a full blaze in a building equipped with solar panels due to concerns about electrical shock, increased roof loads/structural concerns and toxic emissions. It’s an issue that fire departments from Belleville to Huron County have debated the past three years.

The Ontario Ministry of Labour has issued general health and safety guidelines related to firefighting and solar systems. In the end, however, the onus is on individual fire departments to adopt their own standard operating procedures around fires in buildings with solar panels.

Jeff Edge, an independent adjuster and owner of Leading Edge Claims Services, has done research and conducted presentations on solar panels and fire risks. He observes that “home and building owners, adjusters and restoration contractors will usually have the ‘time’ to ensure a building is safe before entering. What about first responders – particularly fire fighters? The time element is entirely different,” Edge notes.

“Many fire departments are now taking the approach that if there are solar panels on the roof, they will spray it with water, but they are not going up on the roof to vent the fire or send their people inside,” Guest says. “They will basically let it burn, which could lead to significantly more total losses for insurers.”

“The insurers I have spoken to seem to have accepted that if there is a fire in a building with a PV system – it’s a total (loss),” Edge observes. “Typically, insurers rate based on fire hall versus hydrant protected, full-time versus volunteer (fire department). What rating classification will satisfactorily encompass: ‘We’re not going anywhere near it?’”

Sources say that awareness of solar panel systems and risk management strategies are the best ways for insurers to address the exposures of this growing form of renewable energy. The strategies may include quality assurance around solar equipment and installation as well as due diligence regarding building permits and engineering approval for roof load and electrical connections. Maintenance, in the form of regular inspections for weather or other damage, is another key part of reducing losses associated with solar panels.

Risk management and loss prevention strategies could become mission critical as more renewable energy projects are adopted in Ontario, especially large-scale commercial and multi-residential arrays of solar panels. Other provinces, such as Nova Scotia, Alberta and Quebec, are also looking at ways to move forward with their renewable energy plans.

“I believe this is a problem that is about two years away,” Guest concludes. “These systems are on the buildings you insure, whether you know about them or not.”

Please note a version of this trends paper has previously been published in an industry publication.