Does alternative energy have an exact definition?

According to Richard Kern, Manager – Energy Division at James River Insurance Company, the major common alternative energy businesses are wind, solar and biofuels—such as ethanol and biodiesel. He says, “We are seeing the resurrection of alternative energy sources emphasized in the 1980’s such as waste-to-energy. We are seeing an increase in hydro projects and methane capture at landfills and farms. There is also an increase in R&D operations, especially in cellulosic ethanol and next generation batteries.”

David Price, Executive Vice President and Chief Underwriting Officer at Burns & Wilcox agrees and adds, “Most recently, liquid petroleum and gas is gaining in popularity. This is where oil companies have a system to extract oil from coal shale.” Karen Harris, Marketing Director at Quadrant Insurance Managers, adds hydroelectric generation to the list.

The type of energy supplied determines the appetite in the marketplace. As an example, according to Mr. Price, “If it’s something like biofuel, most standard companies with an oil and gas underwriting department will entertain it.” Ms. Harris says that Quadrant Insurance Managers writes both wind and hydro projects through Century Surety for developers, risks in construction, equity owners, and operational risks. According to Mr. Kern, James River Insurance is committed to providing coverage for all phases of alternative energy operations.

Both admitted and non-admitted markets are available. Coverage is available for all phases of operations, including start up and planning, design, construction, installation and actual facility operations. Markets are available even if a company is shut down or in bankruptcy proceedings.

The number of carriers interested in this particular market has fluctuated over the years for the same reasons the alternative fuel market itself has fluctuated. Mr. Kern points out, “Some of the exhilaration and newness of the past few years has been replaced with business realities. Those realities are the loss of financing or funding delays, lower oil and gas prices and business models based on assumptions no longer valid as far as feedstock, costs, transportation and potential pricing of the final product.” One major reality affecting the entire energy market continues to be efforts to prevent plant development which Mr. Kern describes as “build absolutely nothing anywhere near anything (BANANA).”

According to Ms. Harris, the major loss exposures for wind, solar and hydro power operators and developers is equipment breakdown, business interruption and general liability. Mr. Price believes that business interruption is a particularly significant exposure for the wind industry because “a very small property damage loss can result in very big business interruption loss. For instance, if lightning strikes the distribution transformer on a wind farm, the entire wind farm field generation is lost for some time.“

Mr. Price believes equipment breakdown coverage is extremely important because it is not part of the basic property and can be difficult to place. Ms. Harris says often one problem with the coverage is lack of available parts. As a result, Mr. Price believes the limits are often insufficient because of the length of time it takes to repair and replace this specialized equipment. He says limits up to $100 million are available if the account is presented in the right way to the right energy market.

A major exposure for the biofuel group, according to Mr. Kern, is contaminated product because “a research project that ran tests at various suppliers’ terminals and service stations found almost no consistency in the quality of the batches of products supplied. As an example, one bad batch at a service station could easily damage 100 automobile engines, resulting in a claim settlement and loss expense of between $500,000 and $1,500,000.”

Insurance prices have been stable or slightly lower compared to last year but varies based on the type of fuel. Mr. Kern states that the biofuel industry is currently hurting, with many facilities forced to cut back production, shut down or file for bankruptcy. While the rates on these risks have gone up, reduced exposures have caused the premiums to drop. Mr. Price adds that overall pricing is more sensitive to individual risk characteristics than it is to general insurance marketplace conditions.

The growth of this market depends on two factors, according to Mr. Price–concern about pollution and the price of oil. He adds, “These two factors will either decrease or increase the demand for alternative fuels. Mr. Kern adds, “Right or wrong, alternative energy end-product costs are compared to the price of oil, gas and coal. At the moment, because alternative energy costs cannot compete, they are losing customers and investors.” Because of this, he sees companies buying narrower CGL coverage or eliminating excess coverage.

The insurance marketplace is open and responsive to the alternative fuel industry's needs. The stimulus package may provide the much needed push to move this industry into a more sustainable future.