Nordic Offshore Wind Insurance Conditions (NOWIC) - a new preferred standard for offshore wind projects?

Given the lack of standardisation of insurance terms in the offshore wind industry, we expect that the industry will welcome and use NOWIC going forward.

NOWIC is based on the principles of Nordic Marine Insurance Plan 2013 (the "Plan") and incorporate the general terms of the Plan. As such, NOWIC is an all-risks cover, subject to certain named exceptions. NOWIC was launched together with an agreed Commentary (the "NOWIC Commentary") modelled on the Commentary to the Plan. The NOWIC Commentary offers clause-by-clause guidance and summaries of relevant case law, including many illustrative examples. The Commentary to the Plan has enhanced clarity, predictability and prevented disputes and we expect the NOWIC Commentary to do the same. The NOWIC Commentary is a significant benefit compared to other standards such as WINDCAR (based on WELCAR 2001 – the standard for offshore projects), as it provides clarity on issues that otherwise can be contentious. It is also noteworthy that the London market was involved during the development of NOWIC. In addition to construction all-risks (CAR) insurance, it also provides a standard for the operational phase (OAR insurance). NOWIC has the potential of becoming the preferred standard for offshore wind projects.

The structure of NOWIC

NOWIC follows the structure of the Plan with Chapter 1 containing general rules relating to the scope of the insurance. Chapter 1 of NOWIC incorporates Part One of the Plan, meaning that the rules common to all types of insurance in the Plan (including for example provisions on duties of the assured, causation, liabilities of the assured and so forth) are incorporated unless these are stated to be non-applicable or amended.

Chapters 2 to 7 contain the individual insurances; these can be categorised as insurances for the construction phase and insurances for the operational phase of a project. As war perils are excluded under the all-risks covers, the war risks covers are set out in separate chapters.

The structure of NOWIC can be summarised as follows:

• General rules (Chapter 1)
• Construction phase:
  
  – Property insurance (Chapter 2) + delay in start-up (DSU) and initial business interruption insurance (Chapter 3)
  
  – War risks insurance – construction (Chapter 6)
• Operational phase:
  
  – Property insurance (Chapter 4) + business interruption insurance (Chapter 5)
  
  – War risks insurance – operation (Chapter 7)
  

Insurance cover in the construction phase

Property

NOWIC Clause 2-3 introduces the term "Unit," for which the parties agree on a list of values. Units include wind turbines, sub-stations, temporary installations, and other components, equipment, spare parts, and materials. The construction project itself is defined in Clause 2-1 as the "construction activities for an offshore windfarm."

During the construction phase, NOWIC covers loss or damage to a Unit or parts thereof (Clause 2-10). Pursuant to the NOWIC Commentary, "damaged" means that an identifiable physical change in a part of the object must have occurred, and this impairs the functionality and/or the durability of the covered property.

If a loss or damage to a covered property has occurred, the insurance covers the costs of repairing the Unit in such a manner that the Unit is restored to the condition it was prior to the damage. The insurer's liability is not limited to "reasonable costs of repairs" which is often the case for non-Nordic insurance conditions. However, it follows from the NOWIC Commentary that the assured should be prepared to demonstrate that it has exercised reasonable diligence to make sure that the repairs were carried out in a cost-effective manner under the circumstances. Under Clause 2-10(3) if the repairs lead to a "special advantage" for the assured, the insurer may deduct from the compensation the additional costs caused by the improvement.

The default solution under NOWIC is that a damage to components caused by error in design, faulty material or faulty workmanship is covered (resembling the LEG 3 clause used in WELCAR and WINDCAR forms). However, Clauses 2-13A and 2-13B provide two optional clauses that may be agreed in order to limit the cover for error in design, faulty material or faulty workmanship. Pursuant to Clause 2-13A (resembling the LEG 2 clause) the insurer is not liable for costs incurred in renewing or repairing a damaged part which was not in a proper condition as a result of error in design, faulty material or faulty workmanship. This means that consequential damage to other parts remains covered. Clause 2-13B (resembling the LEG 1 clause) is an outright exclusion for all loss or damage as a result of error in design, faulty material or faulty workmanship, including consequential damage arising from same.

NOWIC also includes a Serial Defect Limitation (Clause 2-6). This sets out four bands for the parties to agree in the insurance contract. For each band the liability of the insurer is reduced from 100% to ultimately 0%.

Under Clause 2-23 a Unit is considered a total loss if it is lost without there being any prospect of it being recovered, if it is damaged and cannot be repaired or if the estimated costs of repair amount to more than 100% of the insurable value of the Unit or 80% of the sum insured of the Unit, whichever is the lower value. In case of a total loss the assured may claim payment of the sum insured of the Unit, but not in excess of the Unit's insurable value.

Delay and business interruption

Pursuant to Clause 3-1, NOWIC covers loss of revenue due to delay in start-up (DSU) or if a turbine is unable to operate as a consequence of damage recoverable under Chapter 1 and Chapter 2. The main trigger for cover is that the assured has had a "loss of revenue".

Clause 3-1(2) excludes cover for loss of revenue caused by an intervention or restriction from a public authority; in addition the assured's loss of revenue is not covered if this is caused or increased by the assured's decision to stop or curtail operation of undamaged objects.

The compensation is calculated based on the period of time the wind turbine was out of operation and the loss of revenue per day (Clause 3-2). The loss of revenue is determined on the basis of the actual revenue that would have been earned without the damage, unless the insurance contract includes an agreed daily amount. Should a wind turbine be partially out of operation, then a proportionate share of the agreed daily amount will be covered.

Insurance cover in the operational phase

Property

Chapter 4 covers "operation activities" for a windfarm. It follows from Clause 4-1 that the operation activities include "work of ordinary maintenance and repairs". It follows from the NOWIC Commentary that what is considered "ordinary" maintenance might develop over time and that this must be considered based on what is, at any time, considered ordinary industry practice.

The cover for loss or damage to property during the operational phase under Clause 4-9 is substantially the same as for the construction phase. Also for this cover NOWIC sets out two optional clauses for the insurer's liability for error in design, faulty material or faulty workmanship for the parties to agree (Clauses 4-12A and 4-12B). Without any explicit agreement, there will be cover for damage caused by design error, faulty material and faulty workmanship. There is also a similar Serial Defect Limitation (Clause 4-5).

The total loss cover under Clause 4-22 is similar to the total loss cover for the construction phase.

Business interruption

The insurance cover for business interruption during the operational phase is similar to the cover during the construction phase. Pursuant to Clause 5-1 the insurance covers loss of revenue due to the windfarm being wholly or partially unable to operate as a consequence of loss or damage to the insured object or nominated objects. The cover includes the same exclusions for interventions of public authorities and the assured's own decisions to stop or curtail operations and includes the same basis for calculation of compensation (Clause 5-2).

War perils

In contrast to the rest of NOWIC, the war risks insurance is on a named perils basis. Clause 2-9 of the Plan is explicitly contracted out of. This means that the war perils are limited to those set out in Clause 6-1 for the construction phase and Clause 7-1 for the operational phase.

As the construction phase to a large extent includes transportation of objects, Clause 6-1 incorporates six standard war clauses typically used for construction and transportation of cargo (being the standard Institute War and Strikes Clauses for builders risk, air and post, cargo and air cargo) and provides a broader cover than what follows from Clause 7-1 for the operational phase.

Clauses 6-1 and 7-1 name "riots, sabotage, acts of terrorism, any malicious act of any person or groups of persons, strikes and lockouts" and "use of arms or other implements of war in the course of military exercises in peacetime" as war perils. In addition the operational cover names "derelict mines, torpedoes, bombs or other derelict weapons of war". For the construction phase cover this peril follows from the Institute Clauses.

A key difference between the war perils under the Plan and NOWIC is the wording of "any malicious act of any person or groups of persons" which extends the war cover under NOWIC compared to a war risk insurance under the Plan. According to the NOWIC Commentary this solution was chosen to simplify drawing the borderline between marine and war risks insurance and the solution fits better with typical buy-back covers. The NOWIC Commentary states that the term "any person acting maliciously" refers to "situations where a person acts in a way which involves an element of spite or ill-will or the like in relation to the property insured or at least to other property or perhaps even a person, and consequential loss of, or damage to, the insured property ensues".