Our 21st century life is grounded in having reliable power; yet the United States has not made many improvements to the power grid since the 1960s and recent events demonstrate the grid’s vulnerabilities (e.g., recent extreme weather events testing the limits of Texas’s power grid). Put simply, the United States is asking more from our power grid than ever before. The United States needs reliable power, but in many states, there is a pressure to move toward renewables, an inherently different type of power generation. Further, transportation electrification, storm hardening efforts, and battery storage all pose unique challenges for the current power grid.
Governmental oversight of the grid is done by the Federal Energy Regulatory Commission, with the mission to “[a]ssist consumers in obtaining reliable, safe, secure, and economically efficient energy services at a reasonable cost through appropriate regulatory and market means, and collaborative efforts.” State agencies and laws also apply and may equally oversee power grid construction projects.
The Infrastructure Investment and Jobs Act pumped millions of dollars into the economy to upgrade US infrastructure, including the power grid. Dollars are slowly making their way to utilities, and projects are improving the reliability of the electrical grid, including increasing the security of our power, expanding power production by adding renewable generation (e.g., wind and solar), and building necessary transmission lines to take power generated from new renewable-friendly environments into our urban centers. As a consequence, power projects are becoming bigger and more complex.
Utilities interested in evolving the power grid by building, improving, and/or expanding on miles and miles of high-voltage transmission lines, thousands of substations, and the development of land for either transmission or generation must give care and consideration to environmentally sensitive areas, archeological sites, and private property of landowners who have granted the utilities right-of-way access. If that were not complicated enough, public/private cooperative utilities are profit-focused and risk-averse and want projects delivered via an engineering, procurement, and construction (EPC) or design-build delivery method on the belief that they can shed risk while getting a better project delivered at a better price with a faster schedule. For all industry participants, this is the intersection of opportunity and adversity, which can and should be managed by appropriate insurance coverage and contract negotiation.
Owners are Asking Others to Carry More Legal Risk
Mega-power generation projects and lump-sum EPC projects are risk-filled endeavors. At a high level, EPC projects, sometimes called “turnkey construction contracts,” are contractual agreements between a project owner and a contractor that transfers the complete risk of design, procurement, and construction to the contractor. The contractor, under this arrangement, will retain engineers and lower-tier contractors. In general, mega projects tend to generate more insurance claims than smaller, design-bid-build delivery projects. Pressure on schedule and budget associated with lump-sum EPC projects often results in scope compression and disputes about the scopes, resulting in change orders, economic losses, and claims.
Given the nature of the EPC structure, contracts can focus on construction, such that the terms and conditions presented to the engineer may have broadly written indemnities, liquidated damages for milestones the engineer does not control, high insurance limits relative to the engineer’s work, and warranties/guarantees that are not insurable via professional liability coverage. The engineer is then faced with the choice either to push back on such terms or to accept these risks.
Financial institutions and international developers also are entering this space and beginning to treat design engineers like a commodity. Reverse auctions and strategic sourcing are permeating the industry and engineers are presented with contracts drafted for construction or even goods, with little understanding of the technical deliverables needed for the project or how professional liability insurance functions. The “one-size-fits-all” approach to procurement makes negotiations difficult, hampers cooperation on difficult projects, and makes providing adequate insurance coverage difficult. It also often sets the stage for claim escalation because neither side has a robust understanding of the scope and division of responsibilities since the majority of the negotiation revolves around cost-cutting measures.
Negotiating reasonable indemnities and other terms of a contract requires that parties understand how professional liability insurance works. Professional liability insurance coverage, on the one hand, and property and casualty or commercial general liability (CGL) coverage (which are more traditional and widely understood), on the other hand, all have different triggers for coverage. Professional liability coverage is typically triggered by a “wrongful act” that results in a “claim,” while property and casualty coverage is triggered by “direct physical loss of or damage to” property and CGL coverage is triggered by the insured’s legal obligation to pay “damages” because of “bodily injury” or “property damage” caused by an “occurrence.”
Further, utilities are also starting to require project-specific insurance policy language to ensure that limits are available for a specific project. But project-specific policies with large limits only exist with a few insurance carriers and premiums are usually beyond what the project owner and/or contractor are willing to pay. Activity in this space—and the greater frequency of claims—concerns some carriers where they see the trends and seek to retract limits. To fully understand what insurance is available to protect design professionals and other project participants, and why some are retracting their limits, it is important to understand the insurance market.
What Insurance Products Are Available to Mitigate Risk
There are many insurance products that may be implicated in a construction defect claim—and not all are discussed in this article. CGL policies are likely the most commonly recognized type of insurance because they are not unique to the construction industry. There are also first-party property policies that may respond to construction defect losses including builder’s risk policies and the project owner’s own property policy. Engineers, and others with design responsibility, will typically have professional liability policies. There are also subcontractor default insurance, owner controlled insurance programs (OCIP), or contractor controlled insurance programs (CCIP), to name a few types of insurance that may apply. Due diligence requires that project actors investigate all possible avenues of recovery, including possible insurance policies not discussed here.
Commercial General Liability (CGL) Policies
Turning to the most commonly recognized policy, CGL policies are often the first place to look for insurance coverage and the most ubiquitous insurance document both in the construction industry (broadly) and for utility construction projects (specifically). However, CGL policies are broadly used and provide coverage for all types of businesses, manufacturers, service providers, etc. These policies typically carry limits of $1 million or $2 million and are an insured’s primary defense against claims of “bodily injury” or “property damage.”
CGL policies have become quite standardized over the years and most often adopt the standard language of the Insurance Services Office, Inc. (ISO). On a very high level, it is critical to remember that a CGL policy is defensive in nature. CGL policies are “designed to protect the insured from losses arising out of business operations.” The modern CGL policy developed by ISO went through its last major revision in 1986. It responds to defend the policyholder against claims of others, and then to indemnify the policyholder if there is a judgment against them for covered losses. These claims can include defective workmanship and negligent construction (depending on the specific policy language).
A CGL policy is made up of several component parts: the declarations, coverage form, and typical exclusions and endorsements. Declarations are often the only part of the policy that is unique to the insured. They identify the insured party, which oftentimes is the name of the parent company rather than the subsidiary or division actually performing work; all affiliated parties covered by the policy (usually identified through endorsements); the policy period during which coverage applies; and the insurance limits.
The coverage form is almost always based on ISO Form GC 00 01 04 13 and most are nearly identical. The coverage form usually contains five sections: (1) coverage for bodily injury and property damage (Coverage A), (2) coverage for personal and advertising injury (Coverage B), (3) coverage for medical payments (Coverage C), (4) conditions that apply to the CGL policy, and (5) definitions. The vast majority of construction claims are under Coverage A.
Professional Liability Policies
Professional liability policies protect those providing professional services on a project, such as engineers. They are particularly important because CGL policies often exclude coverage “arising out of the rendering of or failure to render any ‘professional services.’” Put another way, if a company is arguably providing “professional services,” which can be defined as broadly as “any service requiring specialized skill or training,” there may not be coverage under a CGL policy.
Unlike the CGL policy, professional liability policies do not come on standardized forms, and insurers typically use their own forms for such coverage. While there can be notable differences, the policies typically provide coverage for the insured’s professional negligence. Such policies generally provide coverage for amounts the insured is “legally obligated to pay” as a result of a “Claim” for a “Wrongful Act.” “Wrongful Act” is commonly defined as a “negligent act, error, or omissions in the performance of Professional Services.” Further, a “Claim” can be more broadly defined than a lawsuit, including, for example, a “demand.”
It is often possible to procure an insurance policy for project-specific professional liability. Such policies generally provide coverage to all design professionals involved in the project, and they will provide limits that are dedicated to that project, as opposed to limits for a company that may be working on many projects. This alternative may be attractive to owners, as it relieves them of the need to ensure each design professional procures adequate limits for their professional liability policy and it provides a single source of recovery.
How the Current Macro Insurance Marketplace Is Impacting Coverage
Prior to reviewing the specific areas of consideration for a power generation project, it is critical to understand the overall state of the insurance marketplace. This marketplace directly impacts insurers’ willingness to underwrite various risks, including those specific to power generation projects. Many factors are influencing the current environment, where underwriting profitability has become a key priority for most domestic markets. Some of those factors are discussed in Figure 1.
Figure 1. 2023 Market Conditions
While insurers’ financial positions have improved in connection with investment income improvements over the past few years, headwinds remain from a pure underwriting perspective. These results can be seen in the combined ratio, a metric that evaluates the number of claims and expense dollars incurred versus the amount of net written premium. A combined ratio less than 100 indicates underwriting profitability; over 100 indicates underwriting loss. See Figure 2.
Figure 2. Key Sources for P&C Insurer Profits
Figure 3. ROE: P&C Insurance by Major Event, 1987-2021
Analyzing a sampling of insurance companies’ second quarter results from 2023 (see Figure 3), it is evident net written premiums have increased, and outside of Liberty Mutual, investment income also has improved in many cases substantially. Yet, combined ratios have deteriorated from 2022, with several examples over that noted “100” threshold into an area of unprofitability. It is important to understand the mechanics behind these metrics to also grasp the impacts in detail with respect to the power generation segment.
One key factor in the macroeconomic insurance environment is policyholder surplus, which is the industry’s financial cushion against large events, periods of economic stress, and financial market volatility. Policyholder surplus is also the source of capital in which risks are underwritten. In 2007, policyholder surplus was $518 billion. In 2021, policyholder surplus had climbed to over $1 trillion, but surplus fell by nine percent in one of the largest drops in history from 2021 to 2022, when surplus fell to $960 billion. This drop was caused by unrealized losses reserved by carriers for nearly $100 billion. In the basic economic equation of supply and demand, a nine percent reduction in supply (supply in this instance being the policyholder surplus) causes pressure on pricing and profitability. This goal leads carriers to a more restrictive appetite for risk and a much more stringent and rigid underwriting methodology.
In addition to reductions in capacity, carriers also have struggled with profitable deployment of that capital. Since 1991, only one underwriting year resulted in a negative net income for the property and casualty industry. Expectedly, that year was 2001 with the tragic events of 9/11. Since then, the industry has remained profitable, but with middling results averaging 6.7 percent return on equity results. A staggering reduction occurred from 2021 to 2022, however, as net income dropped 34 percent year over year due to catastrophic property losses and devastating results in the personal lines market. While the market remained profitable with over $40 billion in net income, it was the first year in the past five that did not return over $60 billion in net income.
When breaking down that net income between investment yields and underwriting gains/losses, the story becomes much clearer. Since 2009, only five periods returned an underwriting profit. The year 2022 was the worst underwriting year since 2011 with a loss of over $26.9 billion. Investment yields have improved with nearly $70 billion in gains in 2022 (see Figure 4).
Figure 4. US Industry Prior Year Reserve Development ($, B)
Again, the treasury departments within insurance companies have historically driven the results, while the underwriting houses continue to struggle to build surplus and deploy it profitably. The financial decisions of investments are also unique for heavily regulated industries such as insurance. Conservative approaches for investments are common, with more than 55 percent of insurer investments in bonds. Of the $2 trillion in assets managed by insurers, over $1.1 trillion is in some form of bond or debt security. Eighty percent of those positions are in 10-year or shorter durations, which means that a higher interest rate environment will gradually and favorably impact the insurer’s positions, especially on long-tail business such as workers’ compensation and general liability. The 10-year Treasury yield in July 2020 was 0.62 percent. In July 2024, it was nearly 4 percent. The impact will be gradual due to the maturing of bonds over time.
Approximately $500 billion of the assets managed are in stocks, and the current corrective period endured by the market represents a potential buying opportunity for property and casualty insurers. These investment decisions will continue to impact the overall results of the insurers, as measured by return on equity (ROE). Figure 5 overlays the catastrophic losses by year with industry ROE. Not since 2013 has the industry seen ROE greater than 10 percent, and when considering the Fortune 500—All Industry return of 17.1 percent in 2022, property and casualty carriers must make changes to present their stocks in a more favorable manner. With investment yields improving, as outlined previously, the focus turns to underwriting profitability. While the key events in Figure 5 headline the claims marquee, the continued escalation of claims costs is also a significant piece of the underwriting profitability puzzle.
Figure 5. Defense and Cost Containment Expenses as Percent of Incurred Losses, 2020-2022
Figure 6. P&C Insurance Industry Combined Ratio: 2001-2023F
A sampling of issues causing increased costs in the categories noted in Figure 6 include:
- Increase in speed to trial;
- Trucking accident litigation (commercial auto);
- Reviver statutes;
- Opioids, glyphosate, 3M earplugs, and talcum litigation; and
- Latent exposure/injury cases.
These unknowns cause insurers to struggle with accurately setting claims reserves for casualty claims. Social and economic inflation are to blame. As detailed in Figure 7, 2022 saw the most dramatic adverse reserve development, particularly in personal auto liability. Adverse reserve development cripples policyholder surplus.
Figure 7. Insurer Financials Have Improved But Headwinds Remain
Insurance Marketplace Update—Power Generation
Having established the key areas of focus and concern facing the larger property and casualty marketplace, the discussion of insuring highly complex, large, and lengthy power generation projects is special in many respects, including (i) reduced underwriting appetite, (ii) strained limits and capacity, (iii) restrictive coverage terms and conditions, and (iv) conservative rates and pricing.
Outside of solar and wind farms and a handful of natural gas–fired plants, very few ground-up projects have started in the power generation space within the past decade in the United States. The last coal-fired power plant to come online did so in 2013. The last nuclear power plant came online in 2023, with the last one before that in 2016. Limited underwriting datasets from a claims or exposure standpoint create highly uncertain or more volatile underwriting results. Heavy emphasis is placed on detailed submission documents and intense risk engineering review of those items.
Factoring each of these areas into the marketplace equation results in conservative carrier positions on the four areas of project-based placements: (i) general liability controlled insurance programs, (ii) builder’s risk, (iii) subcontractor default insurance, and (iv) professional liability. For this article, eight types of power generation projects were researched: nuclear, coal, hydroelectric, geothermal, natural gas, solar, wind, and tidal.
With respect to each type of project-specific insurance program, the insurance carriers’ Environmental, Social, and Governance (ESG) program also played a key role in their underwriting appetites. One carrier shared part of their underwriting restrictions that resulted from a focus on green building. Those restrictions included the following: (i) no power plants or operational facilities with a thermal coal share above 25 percent as determined by electricity generated divided by revenue; (ii) no companies exceeding 10 million metric tons of thermal coal annually mined; (iii) no power utilities exceeding 5GW installed coal capacity; (iv) no power utilities, mining companies, or coal service providers planning new coal, power plants, or mines; and (v) no construction or operation of coal-related infrastructure that predominantly serves the coal value chain (e.g., respective rails, roads, ports, movable equipment, third-party equipment, or contractors in mines).
These restrictive positions prohibit the availability of insurance to coal power plants specifically, but the market research showed similar results for nuclear and, to a lesser extent, natural gas.
General & Excess Liability Controlled Insurance Programs
For all construction projects, the expectations from an underwriting submission standpoint have been heightened significantly. This is especially true for heavy industrial projects, including power plants or power-generating facilities. Detailed budgets, Levels 2 and 3 schedules, specific equipment, and turbine models, as well as tie-in processes, are required to begin underwriting processes for general liability and excess liability policies. These documents are scrutinized by risk engineers and other specialists prior to any type of release of proposals. In most circumstances, when a carrier has an appetite to pursue a particular project, there will be a team of underwriters working the various project angles. One carrier cited their Renewable Energy, Oil & Gas, and Construction groups each participating in recent underwriting roundtables. The specific operations will dictate the underwriting resources and risk engineering requirements. Carriers also have outlined their appetite on operations, maintenance, and decommissioning contractors as well. Similar to new project starts, the appetites vary widely on type of plant and are subject to variability based on geography.
There continues to be difficulty on the general liability lines of business in New York, Florida, and California. More specifically, power generation also will cause reduced appetite in wildfire-prone areas of the country. Wildfire risk is not only reserved for California; modeling is required for all power generation projects and underwriting will seek answers to numerous control and risk transfer questions.
Builders Risk
With the propensity for extended construction schedules and increased construction costs associated with power generation projects, capacity has become scarce in the builders risk space. It is likely that a coordinated effort between global and domestic markets would be required to build proper capacity. If the project is larger than $1.5 billion or longer than eight years, the placement will almost certainly require a loss limit, a coverage provision that sets a maximum loss that the project can sustain under the coverage afforded by the builders risk program. Builders risk programs also will require rigid underwriting requirements with a heavy emphasis on the equipment, turbines, and mechanical processes. Diligence from all markets with respect to procurement, type, and installation of the power mechanics continues to intensify. Engineers, contractors, owners, and their insurance representatives should expect to provide an onerous amount of information to their underwriting partners. Performance guarantees will be specifically excluded from coverage. Proprietary equipment could be removed from coverage under delay in start-up provisions. Any hot work with nuclear facilities also is going to lead to a limited marketplace.
Solar and wind farms appeared to be the most wanted types of projects from a builders risk perspective. Many of the other types of power generation facilities are heavily scrutinized due to ESG programs, lengthy schedules, prototypical equipment, and large contract values.
Professional Liability
Similar to builders risk, the marketplace as a whole for project-specific professional liability (PSPL, CPPI, OPPI, etc.) has been difficult in the previous 24–30 months. Very little capacity exists, and it is expensive, particularly on highly complex projects like power generation. Efficacy is an issue with professional liability placements, and normally the first exclusion on a policy is performance guarantees. The design and engineering risk is heightened with prototypical equipment or proprietary equipment, particularly with turbines that have not yet been tested or installed domestically. Similar ESG programs impact the PSPL availability, with coal being the least desirable, followed by hydroelectric and tidal due to adaptive uses of technology. Again, solar and wind were shown to be the most desirable class.
Subcontractor Default Insurance (SDI)
In a limited marketplace such as subcontractor default insurance (only eight carriers offer such coverage), the appetite is a bit broader from a flexibility standpoint. However, the carriers are much more selective in the availability of limits and coverage terms. Again, efficacy and performance guarantees, even on a line of business that generally provides coverage for indirect costs, including liquidated damages, will be excluded. A very small market for liquidated damages exists outside of this line of business. On many power generation projects, the subcontracts can be extremely large, which causes exposure to be concentrated to a smaller number of subcontractors, or self-performed by the prime contractor. From an underwriting model perspective, that would make the program extremely expensive and/or cause deductibles to increase significantly. Long project durations generally do not lend themselves to SDI placements due to restrictions on subcontractor terms being less than 48 or even 36 months. Again, the hot side of nuclear projects also will be excluded. Contractual provisions tend to be particularly onerous, which is another area of concern for the SDI marketplace. For this line of business, solar and wind create a unique risk in the sense that they are generally in rural areas with less access to qualified subcontractors. Additionally, with solar and wind, work is often repetitive, where poor or faulty work could lead to extensive and expensive rework.
Engaging Insurers and Resolving Disputes
When there is a triggering event for insurance coverage, it is important to understand the legal requirements provided by the policy, and the law generally, for both the insurer and the insured. Even if a policy is in place, claims to the insurer are to be made in compliance with the legal requirements. And doing so ensures that an insured can, in turn, require the insurer to comply with their legal requirements and provide the promised coverage.
The Process: The Insured Reporting and the Insurer Responding
When an insured believes they may have a claim, they should promptly report such claim to their insurer. In addition to the obvious reasons to tell the insurer—namely, the insurer cannot respond unless they know about the claim—timely notice is often required to realize the full benefits of the policy. For “claims made” policies, such as Professional Liability policies, failure to make a claim within a particular period may preclude coverage entirely. For CGL policies, the duty to defend only arises after the insured tenders the claim to the insurer.
Once a claim is tendered to a liability insurer, the insurer must promptly investigate the claim, respond to the insured, and disclose any basis for denying or limiting coverage. Failure to do so may preclude an insurer from disclaiming coverage. An insurer may accept the claim, deny the claim, or accept it under a reservation of rights (where the insurer is reserving its right to deny all or part of the claim at some later point). There are a number of reasons an insurer may deny coverage based on a particular policy—for example, a CGL insurer may deny a claim because a lawsuit is not yet filed, so there is no “suit” giving rise to defense obligations. Or the insurer may believe there is an exclusion that precludes coverage. In any such event, the insured should engage with the insurer to explain why the insurer has, or will have, exposure and should assist in resolving the claim. This could include preparing a presentation to provide the information the insurer needs to understand about potential costs and risks.
An insurer’s duty to defend is expansive, and it is generally determined by comparing the allegations in the complaint with the policy language to see if there is any potential for covered damages. As articulated by one court: “(1) the duty to defend extends to every claim that ‘arguably’ falls within the scope of coverage; (2) the duty to defend one claim creates a duty to defend all claims; and (3) the duty to defend exists regardless of the merits of the underlying claims.” So, if there are any allegations of a covered claim, the insurer must defend the entire lawsuit.
When a liability insurer provides a defense to its insured, it often does so by selecting defense counsel from a pre-approved panel of attorneys who have longstanding relationships with the insurer. The tripartite relationship dynamics between insured, insurer, and defense counsel are not always precisely aligned or an easy relationship. Conflict of interest issues may arise, and when such a conflict arises, the insured may be entitled to independent defense counsel—transferring an insurer’s duty to defend into a duty to reimburse for reasonable attorney fees.
In some jurisdictions, if there is a case that involves both covered and uncovered claims in the same lawsuit, the insurer may have the right to be reimbursed for the defense costs incurred in defending the uncovered claims. In a similar vein, in some states, the insurer may seek to recover its defense costs after establishing that it had no duty to defend the insured, even though it had been defending the insured prior to that determination. While many jurisdictions have allowed reimbursement, the more recent trend appears to be moving against reimbursement.
The Substance: Evaluating Coverage
State law applies to interpreting insurance policies, so the first step in any coverage analysis is determining what state’s law applies. Standard CGL policies do not contain a choice-of-law provision, and it is a common misconception that the state where the claim occurred controls the CGL coverage interpretation. Instead, the state where a lawsuit is commenced will apply its own choice-of-law rules to determine what state’s law applies. The most common test is from the Restatement (Second) of Conflicts of Law and is commonly known as the “most significant contacts” test. The Restatement analysis looks to five factors: (a) the place of contracting, (b) the place of negotiating the contract, (c) the place of performance, (d) the location of the subject matter of the contract, and (e) the domicile, residence, nationality, place of incorporation, and place of business of the parties. Courts often weigh most heavily the “principal location of the insured risk.”
After establishing what law applies, the burden shifts back and forth between the insured and the insurer to prove whether a particular claim is covered. First, the insured must demonstrate that there is coverage under the initial grant of coverage under the policy—for example, demonstrating there is an “occurrence” and “property damage” under a CGL policy. Second, after coverage is initially established, the burden then shifts to the insurer to prove that an exclusion applies, negating coverage. Under a CGL policy, the insurer could try to demonstrate, for example, the applicability of the “your work” exclusion. Finally, it is the insured’s burden to demonstrate that any exception to an applicable exclusion applies. Again, with the CGL example, there is an exception to the “your work” exclusion for damages caused by a subcontractor.
The Resolution: The Insurer’s Duty to Settle
Once coverage is established, liability insurers have certain duties to the insured. Of course, if a judgment is entered against the insured, the insurer is obligated to indemnify the insured for damages from covered claims. But even prior to a judgment being entered against the insured, another key duty relates to the insurer’s settlement obligations. Liability insurers must act reasonably in assessing the insured’s liability during settlement negotiations. While insurers generally must disregard policy limits when considering settlement proposals, if there is a settlement proposal that is within policy limits and an eventual judgment against the insured in excess of policy limits, the insurer may be liable for negligence or bad faith (thereby increasing exposure). Of course, cases develop over time and so can assessments of an insured’s exposure. Just because an insurer does not accept an earlier settlement proposal does not mean it was inherently negligent or acting in bad faith. Similarly, because most cases settle, it is also important to note that there does not need to be a jury verdict for there to be a bad faith or negligence claim against the insurer for refusing to accept a reasonable settlement offer.
Practical Tips for Negotiating a Contract to Mitigate Risk
Engineers, among others, are wedged in between demanding clients and reticent carriers, with the coverage environment becoming increasingly more difficult. Claim activity in the space has some insurance carriers keen to increase rates, while others see the trends and seek to retract limits. Climate driven claims such as wildfire and flood create problems for generation and power delivery projects, and some carriers are opting to not provide coverage for those exposures. Carriers are facing economic pressures from social inflation and catastrophic losses that affect the premiums for engineers who may have long-term MSA/GSA agreements with utilities and do not have the ability to change their billing rates to adjust to the increased costs. To protect themselves, companies are left negotiating for a reasonable contract that includes a reasonable indemnity and limitations of liability that are insurable.
For example, engineers now must confront risk of wildfires. Wildfire exposure creates problems for power delivery projects in drought-prone areas and funneling electrical power creates a risk of arcing and fire. Designers alone cannot carry the risk associated with wildfire and expect to stay in business. Yet clients are increasingly averse to taking risks for projects that provide them with a long-term benefit.
To make matters worse, financial institutions and international developers have entered the space and are beginning to treat design engineers like a commodity. Reverse auctions and strategic sourcing are permeating the industry, making it more difficult to come to terms and for engineers to obtain margins on their projects to support ongoing profitability.
The good news is that there are ample opportunities for design professionals working in the energy space. Power delivery, renewables, and battery storage projects are abundant, and design professionals can find ways to negotiate terms that will benefit all parties. Practitioners must (i) negotiate fiercely, (ii) identify what you will and will not accept in your terms, (iii) define what your scope does not include, and (iv) communicate expectations clearly.
To these ends, design firms need to take some time to understand what contract terms are deal breakers and be ready to walk away from projects where the clients are unwilling or unable to meet those terms. Similarly, practitioners must be willing to take the time necessary to negotiate a fair contract and bring clarity to the scope, which includes what is not included in the scope.
Companies also should be aware of the basic principles of contract interpretation and how it may impact any potential litigation down the line. Overall, if there is a dispute over contract terms, legal professionals will look at the “plain meaning” of the contract. This means legal professionals will look at the language of the contract, and if the language is not ambiguous, the language of the contract applies objectively. If there is ambiguity, absent language in the contract to the contrary, contracts are construed against the drafter. It is a best practice to ensure that contracts are sufficiently clear and terms are defined. It is better to have a conversation upfront to make sure expectations are clear and terms are defined than operate in ambiguity and sort the terms out through litigation years later.
Lastly, professional service providers in the power space need to take the time to develop long-term relationships with insurance brokers and carriers. Risk aversion is usually rooted either in not understanding the work being done or in the roles assumed by the various parties. Brokers and underwriters see hundreds of projects and firms, and it is beneficial to take the time to foster understanding of the work and the risks from a professional services point of view. Everyone benefits from understanding the goals and challenges of the project.
Conclusion
The US power grid is in need of upgrades that design professionals, owners, contractors, and insurers are going to need to grapple with in the coming years. To be best situated for power projects, entities should understand the applicable insurance, how market trends are impacting coverage, and how solid contract negotiations can create project success.