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Solar equipment failures spark demand for defective building material coverage

Contractor general liability cover for defects tied to property damage

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Solar equipment failures spark demand for defective building material coverage

As solar energy becomes more popular in the United States, reports suggesting an increase in equipment failures could lead to a sudden spike in solar contractors seeking coverage for defective building materials.

From 1999 to 2009, failure rates as high as 15% were measured along key metrics within the International Electrotechnical Commission's design qualification and safety testing regimen, according to a pair of reports published in July by the Solar America Board for Codes and Standards, an advisory coalition for the solar industry funded by the U.S. Department of Energy.

In a 2011 sample study of 204 solar panel modules that included 53 separate designs, approximately 17% experienced failures qualifying for warranty returns, according to one of the reports. The upward trend in solar panel failure rates should be of immediate concern to small and midsize installation contractors, attorneys say, particularly as market conditions continue to pressure domestic and foreign solar panel manufacturers to cut costs by using cheaper components, assembly methods and shipping safeguards. In turn, smaller general contractors and subcontractors — themselves under pressure to deliver timely completion of their work on much thinner operating margins than in years past — could expose themselves to financial liability stemming from defective, low-cost solar panels.

“It's something that policyholders should be thinking about,” said Scott Turner, a Washington-based insurance recovery attorney at Anderson Kill & Olick P.C. “If (the failure trend) continues to bloom and develop, I would think there are a number of commercial buyers of these solar products out there that would have millions of dollars potentially at stake.”

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“If those (failure rates) are legitimate, then yes, you're likely to see a rise in defective building materials claims,” said Amy Joseph Coles, a Pittsburgh-based partner at Duane Morris L.L.P. “It looks to me like we're still in a mounting-up period, and I can't tell how or when that spike will hit, or how significant it will be.”

The extent to which an installation contractor would be able to recover losses stemming from defective solar panels through a commercial general liability or builder's risk insurance policy will depend largely on the nature of the panels' failure and, in most cases, whether that failure resulted in physical property damage, attorneys say. Many of the solar panel failures outlined in the Solar America Board for Codes and Standards' reports were due to either an initial shortfall or accelerated reduction in wattage output, as opposed to a mechanical or physical defect. In those circumstances, coverage attorneys say, installation contractors likely would be hard-pressed to find coverage under their traditional commercial general liability or builder's risk policies for underperforming solar equipment, especially if the losses incurred are economic in nature.

“Whether it's a GL policy that requires an occurrence and then resulting property damage, or a builder's risk policy that's going to have an exclusion for faulty or defective workmanship or latent defects, you're not going to find a lot of relief in terms of coverage for economic losses,” said Steven Ginsburg, an Atlanta-based partner at Duane Morris.

In the event that an installation contractor's dispute over coverage for losses stemming from defective solar panels reaches the litigation stage, the jurisdiction in which the case is tried could be a crucial factor in that contractor's success, attorneys say. State and federal judicial districts have come to a variety of decisions when it comes to providing defective building materials relief for contractors under general liability policies.

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“There are states that will consider 'property damage' to include any damage caused by the removal and replacement of a solar panel, but other states won't recognize that as covered damage,” said William Knowles, a Seattle-based insurance coverage and claims attorney at Cozen O'Connor.

As an alternative to seeking coverage under a traditional general liability or builder's risk policy, solar contractors may be able to leverage market conditions to require panel makers to buy manufacturers and system-level performance warranty insurance policies, which can be tailored to provide contractors and project owners with an additional layer of financial protection against costs associated with defective solar power systems or components. “The lesson to be learned here is that if you're purchasing and installing these systems, the market is at a place right now where you may well be able to get what you need from the manufacturer to protect yourself,” Ms. Coles said.

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