Renewable Energy Insurers Trying to Limit Coverage for Severe Convective Storms

Severe convective storms, also known as severe thunderstorms, may not generate the same headlines as hurricanes, but these storms can pose a greater threat to inland solar and wind energy projects. The increasing frequency of severe convective storms in recent years has led many property insurers to introduce higher deductibles and/or lower sublimits for these storms.

COMMENTARY

Some insurers may now be trying to further limit coverage by unreasonably defining the term “severe convective storm” to include ordinary thunderstorms. Policyholders should pay close attention to how their property insurance policies define the term “severe convective storm” because that definition can have a big impact on coverage.

What Is a Severe Convective Storm?

A convective storm is a storm formed through the process of convection. Outside of the tropics, convective storm is simply another name for thunderstorm.

According to the National Weather Service, which uses the term thunderstorm rather than convective storm, a “severe thunderstorm” is a thunderstorm that produces a tornado, winds of at least 58 miles per hour (mph, 50 knots or about 93 kilometers per hour [km/hr]), and/or hail at least 1-inch in diameter. In 2022, severe convective storms were responsible for a combined $29 billion insured loss as compared to an estimated $50 billion to $55 billion insured loss for Hurricane Ian, the second-most-expensive insured loss event on record.

Solar and wind energy projects are uniquely vulnerable to severe convective storms because these projects often cover large surface areas and tend to be concentrated in regions with significant severe convective storm activity. In 2019, for example, a hailstorm caused $70 million in damage to a solar energy project in Texas.

High winds and lightning associated with severe convective storms have also caused significant damage to wind energy projects in the Southwest. As the number of solar and wind energy projects increases over the next several years, the damage caused by severe convective storms will also increase.

How Do Insurers Define Severe Convective Storm?

A policyholder might reasonably expect its insurance policy to define severe convective storm the same way the National Weather Service defines severe thunderstorm, but that is not always the case. Some insurers, for example, define severe convective storm as follows: Any storm or cluster of storms that can generate high winds through a variety of phenomena, including tornados, straight-line winds of at least 58 mph (50 knots or about 93 km/hr), derechos, and/or hail, and/or lightning.

At first glance, this definition looks remarkably similar to the National Weather Service definition of a severe thunderstorm, but upon closer inspection the “and/or” clauses toward the end of the definition allow an insurer to argue that any storm with hail (regardless of size) or any storm with lightning (any thunderstorm) qualifies as a severe convective storm. The difference between a property policy’s standard deductible and its severe convective storm deductible may be several million dollars, and a severe convective storm sublimit can further restrict coverage. As a result, there may be a lot riding on whether a particular storm is a severe convective storm.

What Should Policyholders Do?

Policyholders have several significant arguments against any insurer that tries to push the boundaries on what type of storms can be considered severe convective incidents.

First, any such interpretation is inconsistent with the plain language of the term being defined. Since any thunderstorm necessarily generates lightning, an insurer arguing that any storm with lightning is a severe convective storm would be effectively interpreting the term “severe convective storm” to mean convective storm or thunderstorm, which completely (and unreasonably) ignores the “severe” modifier.

Second, the insurer’s proposed interpretation would make most of the definition unnecessary. If every thunderstorm is a severe convective storm, it does not matter whether the thunderstorm also produces a tornado, a derecho, or straight-line winds of at least 58 mph. The insurer’s proposed interpretation would effectively render all of the policy language that gives meaning to the “severe” modifier meaningless.

Third, this interpretation is inconsistent with a policyholder’s reasonable expectations. A policyholder might reasonably expect to pay a higher deductible for a loss caused by a severe weather event, but no reasonable policyholder would expect to pay a higher deductible for a loss caused by an ordinary thunderstorm, particularly when the policy at issue uses the term “severe convective storm” and defines that term to include storms that generate tornadoes, derechos, and straight-line winds of at least 58 mph.

If insurers in the renewable energy sector continue to define the “severe convective storm” in a way that allows them to argue that losses caused by ordinary thunderstorms are subject to a higher deductible or a lower sublimit, there are going to be coverage disputes. Policyholders faced with this argument should not simply accept the insurer’s proposed interpretation. They should instead insist on an interpretation that is consistent with their reasonable expectations. ■

—Jeffrey Meagher is a partner, and Nick Chan is an associate, in the Pittsburgh, Pennsylvania, office of K&L Gates.