News on Munich Re’s EPC Cover for Offshore Wind Projects ......2020/02/04 · EPC Contracts are mostly based on FIDIC standard contracts Defects in FIDIC contracts can be everything

News on Munich Re’s EPC Cover

for Offshore Wind Projects

A unique insurance solution for contractual warranties

October 2020

Chiharu Watanabe

Image: mauritius images / Cultura / Monty Rakusen

Pooling expert resources and know-how

in the field of:

Renewable energies and energy efficiency

Risk transfer solutions are developed and delivered

▪ Technical endorsement

▪ Bankability and

▪ Business enabling results to all

project stakeholders

Munich Re (Group)

Munich Re and Green Tech Solutions

The world’s largest reinsurer’s financial strength at your side

Feb 2020 2News on Munich Re’s EPC Cover for Offshore Wind Projects

Green Tech Solutions (GTS)

▪ World’s largest reinsurer by premium volume

▪ Founded in 1880

▪ Group Result 2018: €2.7bn

▪ 39,662 employees

Image: Marcus Buck / Munich Re

Manufacturers, component suppliers

and offshore contractors

▪ Covers the risk of large technical

losses in the wind industry

Project owners and service providers

▪ Protection against cost overrun for

unscheduled maintenance of wind

farms

Project owners and investors

▪ Covers shortage of revenue due to

underperformance of the wind farm

Green Tech Solutions

… pioneering risk solutions for the wind industry


Image: mauritius images/Masterfile Image: mauritius images/Masterfile Image: mauritius images/Masterfile

O&M Cover Lack Of Wind Cover

Wind Energy Yield Cover

Serial Loss Cover

EPC Cover

Evolving situations surrounding the wind industry

Images: mauritius images/Masterfile

Global competition about large scale wind projects

Technology race to become more powerful

at lower cost

Contractual liability demands on EPC contractors

become ever-larger

Cost pressure due to auctions instead of

predictable subsidies

Warranties for offshore wind farms (illustration)


Wind farm project setup

Investors

Suppliers’ & Subcontractors’ warranties

Project developer

EPC contractor’s warranties

A key driver

for bankability

Up to 100% of sub-contract value 100% of contract value

BanksOperator (SPV)

EPC WTG

EPC Foundation

EPC Cable

EPC Substation

Suppliers

Subcontractors

How does the EPC Cover work?


Cover structure for settling a large warranty claim

Terms and conditions:

▪ Defect warranty cover commencing at begin of warranty (Take-Over)

▪ Excluding known defects before Take-Over (CAR Period)

▪ Multi-year cover written for each offshore project up to a 5 (10) year warranty period

Years

EPC contractor’s warranty (100% of contract value including offshore cost)

Large warranty claim event

Component supplier’s warranty

Take-Over of

Works

4 5 6 7 8 9

EPC Cover

Offshore wind project insurance cover take out some

EPC contractor’s warranty risk


▪ CAR Maintenance Period: 2 to 5 years coverage for physical damages (PD), partially including EPC

contractor’s warranty claims

▪ OAR: Generally no coverage of EPC contractor's risk – Employers policy subsequent to warranty titles

Years

EPC contractor’s warranty

Take-Over

of Works

1 2 3 4 5 6 7 8 9 10 11

OAR – Operational All Risks

CAR – Construction All Risks CAR – Maintenance Period

Production Installation Operation

EPC Cover: The new tailor-made insurance solution for

offshore wind EPC contractors


Following costs of Large Single Losses and Serial Losses could be covered:

Repair or replacement for defective (excl. or incl. PD) components

Component suppliers’ warranty default (restrictions, insolvency)

Offshore logistics costs (crew, vessel, mobilisation)

Adverse weather conditions during warranty works (Waiting-on-Weather (WoW) Sublimit)

Most cost items resulting from a large warranty claim can be covered

Green Tech Solutions’ wind cover experts


Let’s talk


Munich

Dr. Mathias Hörmann

Tel.: +49 89 38 91-33 58

[email protected]


Tokyo

Chiharu Watanabe

Tel. +81-3-5251 6898

[email protected]


Backup

▪ Takes maximum available CAR policy terms into account

▪ Covers defects only (PD excluded)

▪ Covers Serial Losses only

▪ Policy Period up to 5 years

Munich Re’s EPC Cover relieves risky warranty peaks


Tailor-made

solution

to fit best

for EPC

contractors

▪ Covers entire Serial Losses

▪ Covers Large Single Losses

▪ Covers defects and PD

▪ Policy Period 5 to 10 years (e.g. for decennial liability)

Image: mauritius images / Masterfile Image: mauritius images / Masterfile

EPC Cover EPC Cover LIGHT

EPC Contractor’s obligations

Contractual Warranties for Defects

Increasing threats for EPC Contractors


▪ Design, execute and complete the Works

▪ Comply with technical standards, regulations and laws

▪ Make it fit for purposes: appropriate, and of a necessary standard, for its intended use.

▪ Assure free from Defects: to be customized defined because FIDIC does not contain a

definition of Defects

▪ Provide long-term and high-limit warranties: duties of the EPC contractor to

remedy any Defects within the Defects Notification Period (FIDIC clause)

EPC Contracts are mostly based on FIDIC standard contracts

Defects in FIDIC contracts

can be everything

14 September 2018 13EPC Cover for Offshore Wind Projects – A backup of contractors’ defect warranties

Defects in the Industry

Limited Insurance

Underperformance in use

Deviation from specification

Design error

Latent risk of instability

Serial Defects

Physical Damages (PD) Yes Insurance ? No

Insurance

Policy

CAR

OAR

EPC Cover

Remedy

Prevention

Repair

Replacement

Rejection of Owner

Large warranty claims are rare – but they can have serious

implications for EPC contractors


By frequency By impact

Large warranty claims are often

▪ due to generic failures affecting several or all components (Serial Loss)

▪ caused by faulty design, material, production or installation

▪ resulting from PD and to a large extend from defects

Basic warranty claims

Single main component

failures

Serial failures

Single main component

failures

Serial failures

Large

warranty claim

(Serial loss)

Large

warranty claim

(Serial loss)

Single

component failuresSingle component failures

Basic warranty

claims

Basic warranty claims

How much of EPC contractor‘s warranties are insured?


▪ Warranty Period 5 to 10 years

▪ Liability for defects (no fit for purpose) and PD

▪ Serial Losses – also all defective parts – to be

rectified or replaced

▪ Entire offshore logistics and costs

▪ Responsibility for scope and performance of

suppliers & subcontractors warranties

CAR Maintenance Period EPC contractor’s warranties

▪ Covered period typically from 2 to 5 years

▪ PD is covered

▪ Only resulting from faulty installation

▪ No restriction (best case)

▪ PD resulting from defects are covered

▪ LEG 2: Offshore costs excluded

▪ LEG 3: Offshore costs included

▪ Serial Loss Clauses for proven PD vary

▪ Only foundations typically covered

▪ No recourse to EPC contractor’s warranties

(co-insured)

Contractual Warranties

Increasing threats for EPC contractors


▪ 50 to 100% defects liability limit of contract value (vs. Oil & Gas 10–15%)

▪ Long-term warranties from 5 to 10 years

▪ Front-end-design transfer from employer to EPC contractor

▪ Fit for purpose warranted instead “made to specification”

▪ Extensive Defects and Serial Loss clauses

▪ Sub-contract values are extraordinary high due to high (steel) cost of components

(up to 80% of contract value goes into subcontracts)

▪ Faulty works or delays of subcontractors

▪ Non-performance of suppliers

▪ Limits or default of subcontractor & suppliers warranties

▪ Ultimate warranty exposure stays with EPC contractor

Employer’s demands

EPC contractors’ exposure to subcontractors & suppliers

How much is insurable in the EPC Cover?


Our insurance solution provides a substantial buffer to safeguard the EPC contractor's existence even in the

event of large warranty claim. A substantial loss participation is expected.

Insured’s deductibles

▪ Insurance covers on a warranty claim basis in excess of the AAD

▪ In excess of the AAD the insured keeps a proportional participation (co-insurance): SIR

Policy Limit

Self-Insured Retention of client (SIR)

Annual Aggregate Deductible (AAD)

Offshore WoW Sublimit

Insurer

AAD

90%1 10%1

Insurer

1 Example figures

EPC Cover at a glance


The EPC Cover delivers bankability and enables

EPC contractors new business

▪ Covers most of the actual cost of a large

warranty claim

▪ Closes risk gaps between EPC contractor’s

warranties and conventional CAR insurances

▪ Complements risk management strategy:

major commercial threat now insurable

▪ Secures liquidity of the insured in event of a

major warranty claim

▪ Competitive advantage:

Company warranties, backed by strong insurance

companies, appreciated by wind farm investors

and financial institutions

Image: CharlieChesvick / Getty Images

Documents

News on Munich Re’s EPC Cover for Offshore Wind Projects ......2020/02/04 · EPC Contracts are mostly based on FIDIC standard contracts Defects in FIDIC contracts can be everything