Policy Wording and Claims Outcomes

Coverage Wording Matters: A Comparative Analysis of Power Generation Equipment Breakdown Policies

Introduction:

Let’s analyze three real-world power generation equipment breakdown losses and how they would be covered under three different insurance policies: a standard stock company policy, a standard industry mutual policy, and a custom-written manuscript policy. I was involved with each of these incidents and claims. I worked each of these claims. The real-world outcomes are known and not theoretical. We can compare how the results would have been under different insurance programs.

Main Themes:

• Importance of precise policy wording: The specific language used in insurance policies can drastically impact coverage outcomes, especially regarding complex losses.
• Limitations of standard policies: Standard policies, while generally affordable, may not provide comprehensive coverage for specific situations, leading to coverage gaps and potential financial hardship.
• Benefits of custom-written policies: Tailored policies offer the advantage of addressing unique risks and ensuring coverage aligns with specific needs, potentially mitigating financial losses.

Loss Scenarios and Policy Responses:

1. Lube Oil Flush Gone Wrong ($2M loss):

• Scenario: Improper cleaning procedures during a routine lube oil flush resulted in bearing damage across three steam turbine bearings over a three-month time period.

• Policy 1 (Standard Stock): “‘Accident’ where used in this policy shall mean a sudden and accidental breakdown of the Object, or any part thereof, which manifests itself at the time of its occurrence by physical damage to the Object that necessitates repair or replacement of the Object or part thereof.”
• Policy 1 Response: Covers the loss as three single "accidents" based on the sudden and accidental breakdown definition. Three deductibles would apply and there would be no payout.

• Policy 2 (Standard Mutual): “Occurrence is the sum total of all loss or damage of the type insured, including any insured TIME ELEMENT loss, arising out of or caused by one discrete event of physical loss or damage, except as respects the following: (Terrorism and Earth movement 72 hour clause)”
• Policy 2 Response: Not Likely covered as a single "occurrence" due to all of the damage not arising from one discrete event.

• Policy 3 (Custom Manuscript): “For the purpose of this insurance, an occurrence shall be defined as a loss, incident, or series of losses or incidents arising out of a single event or originating cause and includes all resultant or concomitant losses. An Accident is considered to be an occurrence.”
• Policy 3 Response: Explicitly defined "occurrence" to include a series of losses from a single originating cause, ensuring coverage.

Key Takeaway: The gradual nature of the damage could have led to coverage disputes under standard policies, highlighting the importance of clear "occurrence" definitions.

2. Generator Stator Bars Develop H2 Leaks ($3M loss):

• Scenario: Installation defects due to poor workmanship in the stator bars led to corrosion and hydrogen leaks seven years after refurbishment.

• Policy Responses:

• Policy 1 (Standard Stock): “This policy does not insure against direct loss by A.… latent defect, gradual deterioration B. … dampness of atmosphere, rust or corrosion”
• Policy 1 (Standard Stock): Excluded coverage due to the loss being attributed to latent defect and corrosion.

• Policy 2 (Standard Mutual): “C. This Policy excludes the following, but, if physical damage not excluded by this Policy results, then only that resulting damage is insured: 3) deterioration, depletion, rust, corrosion or erosion, wear and tear, inherent vice or latent defect.”
• Policy 2 (Standard Mutual): Excluded coverage for deterioration, corrosion, and latent defects, similar to Policy 1.

• Policy 3 (Custom Manuscript):” This policy excludes: f. rust, corrosion, fungus, mold, mildew or decay unless (i) such rust, corrosion, or decay is caused from a peril not otherwise excluded herein, or (ii) damage ensues and then this policy shall cover for such ensuing loss or damage."

(The corrosion was the damage and it was caused by poor workmanship.)

• Policy 3 (Custom Manuscript): Excluded rust and corrosion unless caused by a covered peril or if further damage ensues. This policy would likely cover the ensuing damage from the corrosion.

Key Takeaway: Standard policies typically exclude coverage for inherent defects and gradual deterioration, while a well-crafted custom policy can provide coverage for ensuing damage.

3. Compressor Stator Vane Liberation ($22M loss):

• Scenario: A known issue in the compressor model caused a stator vane liberation, necessitating a decision between costly repair or replacement. At the time of the loss there were two other wrecks in the fleet and the client needed to make a decision of repair or replace before the rotor was disassembled to understand all of the damage. Based on a weighted outcome analysis, the decision was made to buy a new upgraded Compressor Rotor. The price of the new rotor was $22M, a repair was estimated at $16M. The repair had many unknowns. Replacement guaranteed no BI. The risk of having to pay for a longer business interruption period drove the insurers to agree with the $22M option.

• Policy Responses:
• Policy 1 (Standard Stock): “1. The amount payable under the terms of this provision shall not exceed the smallest of the following: the actual expenditures incurred in repairing, rebuilding or replacing using the same or different kind of property and/or technology (less allowance for betterment, if any) whichever is the smallest on the same or another site.”
• Policy Responses: Policy 1 (Standard Stock): Limited coverage to the smallest cost: repair, rebuild, or replacement with similar technology, potentially excluding the chosen replacement with an upgraded rotor.

• Policy 2 (Standard Mutual): “Unless stated otherwise in an Additional Coverage, adjustment of physical loss to property will be subject to the following: F. On all other property, the lesser of the following: 1) The cost to repair. 2) The cost to rebuild or replace on the same site with new materials of like size, kind and quality.”
• Policy 2 (Standard Mutual): Similar to Policy 1, it limited coverage to the lesser cost of repair or replacement with the same kind and quality on the same site.

• Policy 3 (Custom Manuscript): “In the case of loss under this Policy, the basis of adjustment, unless otherwise endorsed herein, shall be as follows: a. the cost of repairing or replacing the damaged property, at the time of repair or replacement, to a condition at least equal to the condition of the property at the time of the loss and that will perform the same function(s) as the original property, per the performance quantity and quality that existed at the time of the loss, and not cause any insured to be in violation of any pre-existing warranty or other similar agreement. The cost of repairing or replacing shall be on a “new for old” basis, without any deduction for depreciation.”
• Policy 3 (Custom Manuscript): Allowed for replacement with property performing the same function, including reasonable betterment, ensuring coverage for the chosen new, upgraded rotor.

Key Takeaway: Standard policies often restrict coverage to like-kind replacement, potentially hindering necessary upgrades. Custom policies can provide flexibility in addressing technological obsolescence and ensuring optimal equipment performance.

Conclusion:

The analysis of these losses emphasizes the critical role of policy wording in determining coverage. Standard policies may fall short in addressing complex scenarios, while custom policies offer tailored solutions to mitigate financial risk effectively. Power generation facilities should carefully review their insurance policies, ensuring comprehensive coverage for potential equipment breakdown scenarios and considering custom solutions to address their specific needs and vulnerabilities.