Challenges with insurance for bioenergy plants

09 February 2017

The insurance landscape for bioenergy plant owners has been rocky in recent years. Insurers’ unfamiliarity with these assets, combined with some eye-watering claims, has presented challenges in securing sufficient capacity to drive meaningful competition.

As a pleasant change we can offer some good news, particularly with reference to the business interruption (BI) risk. This coverage protects the insured from loss of revenue, profit or the increased cost of working incurred as a consequence of insured physical damage to the facility.

In a recent exercise we were engaged by a client to review the BI sum insured taken out for a mechanical biological treatment (MBT) plant. The original declaration by the insured was based on the full revenue for two years generated under a public private partnership (PPP) type contract for accepting waste from a local authority and it was to this figure that the insurer applied its rate to calculate the BI premium.

As a result of our analysis it became clear that this sum insured was overstated which resulted in the BI premium being unnecessarily inflated.
Our exercise assumed a significant loss scenario following which the plant would be unable to process incoming waste, although it could still be accepted from the authority. The operator had no option other than to redirect the waste, unprocessed, to landfill, incurring an additional landfill tax burden. Crucially, as the waste could still be accepted contractually, availability payments could continue. JLT developed a BI loss model that recognised the different parties involved and established the revenue impact and extra costs that could arise, mainly landfill tax costs. 

In insurance terminology these items are normally labelled as ‘loss of gross revenue’ and ‘increased cost of working’. By finessing the declarations with this approach the value upon which the insurer’s rate was applied reduced by 49%. This was a welcome saving in a tight margin business with the added assurance of knowing the coverage was tailored to the specific BI exposures involved. The relatively modest consulting fee involved was regarded as money well spent.
The same logic could be applicable to any availability based waste contract, with even more mitigation opportunities for those operating multiple sites where any spare capacity can be used for transferred waste from the damaged plant.

However we would advise caution when reducing the level of cover purchased. JLT has seen a number of policies placed on a ‘gross profit’ basis. The insurance definition of gross profit differs from that typically used by accountants and this commonly leads to the insured’s claim not being paid in full. In addition, we have found on occasion that the insured’s sales and maintenance costs are not truly variable, i.e. not directly proportional to the period of the delay. In this case clients may find themselves underinsured.

For those plants that produce electricity, we are often asked whether the policy would acknowledge the TRIAD regime for energy supply. This is something of a grey area in insurance wordings; in particular, time deductibles can unintentionally eliminate this crucial revenue, so we always seek to include our own bespoke clause to ensure a happy outcome for our client should the worst ever happen.

For more information contact Paul Fenwick, Account Executive on +44 (0)20 7558 3411 or email paul_fenwick@jltgroup.com