Insurance Law

Claims for Defective Solar Panels Are Covered by CGL Insurance

Several solar panel manufacturers and their distributors have been sued in class actions alleging the panels are defective and need to be replaced. As will be explained below, these kinds of claims are covered by general liability insurance (CGL), the type of policy purchased by virtually any business.

Claims for Defective Solar Panels Allege Property Damage

General liability policies typically cover bodily injury and property damage. “Property damage” is defined to include “loss of use of tangible property that is not physically injured.” Claims that the panels are defective and have led to a loss of electrical generation capacity of the roof are claims for “loss of use” of the roof for that purpose.

Consumers bought solar panels so they could use their roof surfaces to generate electricity. Due to the alleged problems with the panels, class members are claiming damages for the lost use of their roof surfaces for collecting solar energy and generating electricity from it. Class members have also suffered loss of use of the inverters. Inverters are connected to the panel array and convert the DC power generated by the solar system into domestic AC power. Defective panels reduce the use of the inverter (as less current is passed through it and converted to usable AC). Moreover, inverters have minimum thresholds, and the reduced output may shut the inverter down entirely. Thus, the claims of class members would also include loss of use of their inverters.

The “Impaired Property” Exclusion Does Not Apply

Insurers argue that the “Impaired Property” exclusion bars coverage for these claims. That exclusion, however, makes clear that coverage is intended for loss of use of other propertycaused by the insured’s defective product, if particular conditions are met.

The “Impaired Property” Exclusion bars coverage for:

“Property Damage” to “Impaired property” or property that has not been physically injured, arising out of:

(1) A defect, deficiency, inadequacy, or dangerous condition in … “your product” or

(2) A delay or failure by you or anyone acting on your behalf to perform a contract or agreement in accordance with its terms.

This exclusion does not apply to the loss of use of other property arising out of sudden and accidental physical injury to “your product”… after it has been put to its intended use.

(Emphasis added.) The term “impaired property” is defined as:

tangible property, other than …“your product”, that cannot be used or is less useful because:

a. It incorporates ...“your product” that is known or thought to be defective, deficient, inadequate or dangerous; or

b. you have failed to fulfill the terms of a contract or agreement;

if such property can be restored to use by the repair, replacement, adjustment or removal of “your product” … or your fulfilling the terms of the contract or agreement.

(Emphasis added.)

As shown above, the “Impaired Property” exclusion has an exception for loss of use“arising out of sudden and accidental physical injury to ‘your product.’” The problems with solar panels typically arise out of sudden and accidental damage to the product. There may be bad solder joints, which cause excessive heat at those connections. The thermal cycling and stressing weakens the connections and eventually causes them to break. Cells in panels may crack and break for various reasons. Diodes may fail due to undersizing or excessive loads. All of the foregoing failure mechanisms constitute “sudden and accidental” physical injury, which falls within the exception to the impaired property exclusion.

In many cases, a second exception to the exclusion will also apply. The “Impaired Property” exclusion only applies to “Impaired Property.” Property is “Impaired Property” only if “such property can be restored to use by the repair, replacement, adjustment or removal of ‘your product.’” Thus, the exclusion only applies if replacement of the product, and nothing more, will be sufficient to restore the property to its intended use.

Whether this second exception applies, of course, depends on the specifics of the initial installation, and the appropriate replacement product and configuration. Given the rapid technological development in this area, any replacement panels will likely have higher wattage per panel than the original system, and hence require a different configuration. This will mean the panels cannot just be removed and replaced with nothing more. The new configuration will require removal of the original racking system, repairing the roof penetrations, and the installation of a new racking system. In addition, this new configuration, or building code changes (such as the recent requirement that inverters provide arc fault protection), may require replacement of the original inverter. This additional work means that “mere replacement” of the defective product is not sufficient, and the exclusion does not apply for this reason as well.

The “Own Product” Exclusion Does Not Apply

Solar panel claims are also not subject to the “own product” exclusion. This exclusion applies to property damage to the insured’s product arising out of such product or any part of such product. It does not apply to loss of use of the roof. As noted above, the policy is expressly drafted to provide coverage for “loss of use” of other tangible property caused by a defect in the insured’s product.

Moreover, numerous cases recognize that repair or replacement of property that would otherwise be excluded is covered, where such repair or replacement is necessary to remedy other ongoing damage. Even if the product exclusion might otherwise apply (which it doesn’t), the costs of removal and replacement would still be covered since claimants have been suffering and will continue to suffer the loss of use of the roof surface, the solar energy generating system, the inverters and other components until the defective panels have been removed, and a different system installed.

Conclusion

Class actions for defective solar panels can be very expensive, and carry significant liability exposure. A company’s CGL policy provides clear coverage for these defense costs, as well as any eventual settlement payment, and should not be overlooked when a company is faced with litigation. A prompt tender of such litigation will assure the company has insurance coverage for what could be an expensive defense. Moreover, the company should make sure the insurer is kept fully informed of any settlement prospects, and the company should ask the insurer to fund any offers made in settlement negotiations. Getting settlement payments from the insurer may require the active involvement of coverage counsel for the insured, as insurers will typically resist coverage for these claims, and the insured will need to vigorously advocate the points above and the facts supporting these positions.

    By John Green, Partner, Farella Braun + Martel LLP

Read additional articles on legal developments that affect policyholders at the Policyholder Perspective blog.

 

For more information about LexisNexis products and solutions, connect with us through our corporate site