Growth of Clean Tech Industry Delivers New Exposures, Opportunities

Backed by government policy and growing public support, demand for technology that is both clean and sustainable has increased substantially in the United States, Europe, Asia and other parts of the world over the last decade.

As the market for clean technology has expanded, it has attracted interest from investors who see potential in a promising new sector. Global venture capital into the aptly named “clean tech” sector has increased from a little more than $500 million in 2001 to nearly $8 billion in 2010, according to industry market research firm Cleantech Group.

New clean tech businesses have been formed as a result of this wave of investment and many are seeking to establish a supply chain that includes manufacturing facilities outside of the United States, where it is less expensive to build and operate facilities.

Businesses that are planning to establish manufacturing facilities outside the United States need to be aware of the challenges as well as the advantages of operating in foreign countries and take steps to manage the risk and reduce the possibility of a loss.

The Clean Tech Revolution

Clean technology (or “clean tech”) is a broad term that covers a wide range of technologies, products and processes that are renewable and seek to minimize impact on the environment while conserving natural resources.

Although solar panels and windmills are some of the most familiar clean technologies, clean tech products are used in a number of different industries from power generation and storage, to transportation, agriculture, water and wastewater treatment, and manufacturing. Other emerging clean technologies and innovations include fuel cells and advanced batteries for energy storage, compressed natural gas for fueling fleets of trucks, new lighting systems, and green roofs.

Demand for clean technologies has increased in the United States, as well as in Europe and Asia in the last decade, driven by a combination of government mandates and incentives as well as public and private financing.

In the United States, the American Recovery and Reinvestment Act of 2009, for instance, included more than $100 billion for the clean tech industry to be spent over several years, according to Cleantech.

At the state level, government also has helped to create demand for clean tech through its renewable portfolio standards (RPS). A renewable portfolio standard is a state policy that requires electricity providers to obtain a minimum percentage of their power from renewable sources by a certain date. According to the U.S. Department of Energy, there are 24 states plus the District of Columbia that have RPS policies in place. Five other states have nonbinding goals for adoption of renewable energy instead of an RPS.

Outside of the United States, there has been a great deal of support from governmental agencies and government sponsored incentives for clean tech products and services. While North America accounted for 69 percent of the total global venture capital invested in 2010, Europe and Israel accounted for 21 percent and Asia for 10 percent, according to Cleantech.

China also has become a top location for companies seeking to establish clean tech manufacturing facilities. These businesses are setting up operations in China where it is advantageous to operate and to link production to the global supply chain.

Before establishing facilities outside of the United States, however, businesses need to be aware of the risks they may face.

Two key areas of concern are:

• Construction and land use practices related to construction exposures and facility protection systems.
• Third party liability practices for product quality and applicable standards.

Manufacturing facilities for clean tech businesses often have to meet higher standards than other general types of construction, but building standards in foreign countries may not be as stringent as they are in the United States. These facilities also may require clean room environments, sprinkler systems or other types of specialized protection systems that are not standard for construction outside the United States or European Union.

Buildings that meet local building standards but not U.S. standards, or are not properly equipped with protection systems may be at increased risk of a loss. A delay or business interruption at a production plant also could result in violations of contractual obligations. Manufacturers of clean tech products also have to meet exacting quality assurance procedures to satisfy global specifications.

Managing the Risks

To ensure that both construction and product quality standards are being met, businesses have to have people on the ground to oversee operations.

It is also important for businesses to enlist the assistance of professionals who know the language of the country where the manufacturing facilities are located and who have expertise in critical areas such as engineering and construction.

To find professionals with these qualifications, businesses can turn to their insurers for help. In some cases, insurers will have engineering and loss control expertise of their own. Other insurers are often familiar with local and international firms that could provide the needed services.

Businesses will also need a property insurance policy that includes protection against financial losses caused by an interruption of business activities because of a property loss. A local admitted policy will provide businesses with the insurance they need to be in compliance with local legal or marketplace requirements.

Unfortunately, these policies do not normally provide the level of insurance to which U.S. clients are accustomed. As such and in addition to locally admitted policies, multinationals also should purchase a controlled master policy (CMP) as part of their global program.

Other insurance features should also be considered. Research and development business interruption, for instance, helps protect against the loss of a product that was still in the research and development phase and had not yet begun to generate any revenue. Environmental insurance also may be appropriate for some clean tech businesses depending on the technologies and locations.

Clean tech businesses also may be required contractually to purchase errors and omissions (E&O) insurance to protect them against their liability to their customers because a product or service they provided is defective. Warranties are another type of risk management tool that may be needed as some financial groups have recently begun asking product suppliers to include 25-year warranties on their products.

As the clean tech industry grows and expands, it faces new exposures that call for careful planning and risk management.

Topics USA InsurTech Europe Tech Manufacturing Construction