OpEd: A Hundred Identical Things

Anyone approaching offshore wind coverage for the first time expects the money to be in the turbines. It is in the cables. Subsea power cables are a small share of a wind farm’s capital cost but a disproportionate source of insured losses.

AXA XL puts them at around 10% of a project’s overall cost, while cable failures account for some 80% of offshore-wind insurance claim payouts; TGS / 4C Offshore similarly reports that subsea cable incidents drive 70–80% of the total global cost of offshore wind insurance losses despite representing only around a tenth of project cost.

More recent claims analysis from AXIS Capital sharpens the severity question: export cables made up only about 6% of offshore wind claims by count, yet carried the highest average claim cost — some $18.8m — largely because a fault can halt generation for months while it is located and a specialist repair vessel is mobilised within an available weather window. The severity sits in the outage, not the copper.

Two things follow, and both matter to reinsurers. The loss is driven by consequential business interruption rather than repair cost. And the exposure is inherently serial, because the assets are inherently repetitive.

The inherited wording

Offshore wind construction is normally placed on the WELCAR 2001 wording, the offshore construction project form developed for oil and gas and last formally revised in 2014.

It was written for a world in which a project is a platform, a handful of subsea structures and a pipeline — a few large, individually engineered assets. The form’s architecture assumes that shape.

A wind farm inverts it. A modern project is a hundred or more turbines, each identical to the others, on identical foundations, joined by identical inter-array cables with identical protection systems at each interface, installed by the same contractor using the same method within the same season.

That is not a difference of degree. It is a different kind of insured property, and the wording was not written for it.

The defective-part problem

Construction all-risks cover does not insure defects; it insures damage.

The machinery that draws the line — the London Engineering Group clauses and their WELCAR equivalents — grades cover for damage caused by defective design, workmanship or materials: at one end excluding all resulting loss, at the other paying for the resulting damage but not the cost of putting right the defective part itself.

It is worth noting, because the insured side often misses it, that defective design here need not involve negligence.

The interpretive nub is this: where cover excludes the defective part but pays for resulting damage, what is the part? In a wind farm the question has no obvious answer. Suppose a cable protection system at the interface between the cable and the monopile permits excessive movement, and over two years this abrades the cable at 42 of 90 foundations. Is the defective part the protection system? The length of cable it was meant to protect? The cable as a whole? The array?

Each answer produces a materially different indemnity, and the wording does not resolve it. Historic cable-protection-system failures are the standard illustration of a design issue producing serial losses across multiple farms, and they show the definitional difficulty precisely.

This is a factual and engineering question rather than a drafting one. It should be answered by asking what, on the evidence, was designed and specified as a discrete component with its own function, interfaces and failure mode — not by reference to how a schedule of insured property happens to be organised, which is typically drawn up for valuation and premium purposes and reflects no engineering judgment at all.

Tribunals are regularly invited to read the answer off the schedule. They should decline.

The accumulation question

The market’s response to repetition is the serial defect limitation, which caps exposure where one defect damages many units.

That puts aggregation at the centre of the dispute — the same question that dominates mass-tort coverage: how many occurrences, and how many deductibles and limits do they engage? Where cover applies per occurrence and 42 protection systems have failed for a common design reason, the answer decides whether the insured bears one deductible or 42, and reaches one limit or several.

The incentives here are not fixed, and it is a mistake to assume they are. Where deductibles are large relative to the individual repair, the insured wants a single occurrence; where the aggregate loss exceeds any one limit, it wants many. What a tribunal should resist is the assumption that identical assets failing in the same way must constitute one occurrence, or must constitute many.

Both are conclusions, not premises. Those 42 failures may share a single design decision taken once — or they may reflect installation variability, different vessels, sea states, crews and bending radii achieved on different days, operating on a design that was marginal rather than defective.

Those are different cases with different answers, and the difference is established by evidence about what actually happened at each location.

For a reinsurer, this is the heart of it. The accumulation potential of a wind-farm placement cannot be read off the wording, because the wording does not settle the unit of loss.

NOWIC: the market half-admits the problem

The market has begun to respond. The Nordic Offshore Wind Insurance Conditions have emerged as a purpose-built alternative to adapted oil-and-gas forms.

NOWIC makes cover for design error, faulty material and workmanship the default, with optional clauses by which the parties may narrow it, and includes a dedicated serial defect limitation.

The drafting philosophy repays attention: by making cover the default and requiring parties to contract out expressly, NOWIC places the burden of clarity on the party seeking to narrow the indemnity. That a serious alternative wording now exists is itself evidence that the adapted approach has been found wanting.

The part the commentary misses

Here is the point coverage discussion neglects. Cable claims are marine operations claims.

The recurring causes — over-bending on pull-in, insufficient burial depth, free spans developing over mobile seabed, scour, damage from the cable-laying spread itself, protection failure at the J-tube interface — arise from vessel operations conducted in a marine environment under weather constraint.

Establishing what happened means reading vessel logs, tension-monitoring data, survey records, marine warranty surveyor approvals and method statements, and understanding what a competent marine spread can and cannot do in a given sea state.

Yet these disputes are conventionally treated as construction-insurance disputes and decided by tribunals selected for construction-insurance expertise.

Questions of marine operational reasonableness — whether proceeding within a marginal weather window was a defect in workmanship or a defensible operational judgment — are therefore answered by decision-makers with no independent basis for evaluating them, largely by choosing between opposing experts.

The point is not that marine lawyers should displace construction lawyers on these panels. It is that a panel constituted without marine competence is missing a discipline the disputes actually require.

What follows

Three propositions, offered for argument. The defective part should be identified on engineering evidence about discrete components and failure modes, not read off a premium schedule.

Whether serial failures constitute one occurrence or many should be established from the origin of each failure rather than assumed — and installation variability across a hundred locations is a serious answer, not a makeweight.

Offshore wind tribunals should be constituted with marine operational competence alongside construction and insurance expertise, because the dominant loss category in this class of business is marine.

The industry is scaling faster than the doctrine that governs its risk transfer. The wordings are being rewritten; the disputes are arriving in volume. It would be well if the tribunals hearing them were built for the work.

Sources: cost- and payout-share figures from AXA XL (axaxl.com) and TGS / 4C Offshore (tgs4c.com); export-cable claim-frequency and average-severity figures from AXIS Capital (investor.axiscapital.com).

Hon. Russell D Pulver (Ret) is an arbitrator and mediator and a former US federal Administrative Law Judge. He is on the arbitrator rosters of the SCC Arbitration Institute, the Swiss Arbitration Association, the German Arbitration Institute, and the Vienna International Arbitral Centre, and a member of the Chartered Institute of Arbitrators, the London Court of International Arbitration, ARIAS US, and other professional bodies. Contact: rpulver@international-adr.com. The views expressed are the author’s own, offered in a scholarly capacity; they are not positions the author would regard himself as bound to adopt as arbitrator in any particular matter.