RESC Microfracture Endorsements LMA5516 and LMA5517

The frequency and quantum of losses attributable to microfractures/microcracking (herein after ‘microfractures’) within solar photovoltaic (PV) technology has increased considerably in recent years.

Many microfracture related claims have been contentious due to various factors, including a lack of clarity in respect of the cover afforded. Consequently, several insurers developed endorsements to address the issues encountered. However, the available endorsements vary widely which has resulted in challenges for relevant stakeholders including insurers, brokers and clients.

The Renewable Energy Sub-Committee (RESC) therefore decided to undertake a review of the existing endorsements available in the market and subsequently developed two model endorsements.

Paragraph 1 of the model endorsements state that Microfractures (the manifestation of any microscopic crack or fracture in the panel and/or cell of a solar PV module) shall not be considered physical loss of or physical damage to insured property unless certain qualifying criteria, as set out in Paragraph 2, are met.

Paragraph 2 determines the requirements the insured must evidence in order to seek coverage afforded under each of the endorsement and clarifies that losses arising from Thermal Cycling are excluded. Thermal Cycling is a natural phenomenon within solar PV panels and any related wear and tear/natural degradation is foreseeable and expected during its operational life.

Paragraph 3 sets out the additional conditions that must be met for recovery to be made, once the conditions of Paragraph 2 have been met. For example, where a panel has a manufacturer documented degradation rate of 5% per annum, at the end of year 5 after commissioning, a loss from microfractures would only be recoverable where power output had reduced by more than 35%.

Paragraph 4 sets out the basis of indemnity for damage, determined under the provisions of Paragraphs 2 and 3, which differs according to whether damaged panels are replaced or not and the timeframe within which they are replaced.

The model endorsements approach the recovery of microfracture testing costs in different ways, these are highlighted as follows:

Endorsement 1 - Testing costs are recoverable up to a specified sub-limit.
Endorsement 2 - Testing costs are co-insured 50:50 by the insurer and the insured up to a specified sub-limit, which is excess of an initial self-insured retention.

The other key difference between the model clauses is that Endorsement 2, under the provisions of Paragraph 6, provides an option to apply an overall sub-limit of liability for microfractures, inclusive of testing costs.

The two endorsements are linked below and will be available via the Lloyd’s Wordings Repository (LWR), which can be accessed via www.lloydswordings.com. All model clauses published on behalf of the RESC are purely illustrative and are distributed for the guidance of members, who are free to agree to different conditions or amend as they see fit. The RESC operates under strict terms of reference in drafting such clauses to ensure, amongst other things, compliance with Competition Law and it is for underwriters to decide whether or not any contractual language is acceptable on any given risk.

James Straker-Nesbit
Senior Technical Executive, Underwriting
james.straker-nesbit@lmalloyds.com