Claims For Defective Solar Panels Could Be Covered By General Liability Insurance

Contributors
Written by John D. Green
on September 23, 2015 No Comments
Categories : E-Features

Several solar panel manufacturers and their distributors have been sued in class actions alleging that certain models of panels are defective and need to be replaced. Class actions can be very expensive to defend, and the ultimate liability can also be significant, depending on the number of panels at issue and the facts.

Fortunately, a manufacturer or distributor that is sued may have insurance to help defray these costs. As will be explained below, there are strong arguments that these claims are covered by general liability insurance (CGL), a type of policy purchased by virtually every business.
{OPENADSALT=zone=72&float=right&margintop=10px&marginleft=10px}
General liability policies typically cover an insured's liability because of property damage. Property damage is defined to include ‘loss of use of tangible property that is not physically injured.’ As explained below, claims that the panels are defective and have led to a loss of electrical generation capacity of the roof are claims of ‘loss of use.’

Consumers bought solar panels so they could use their roof surfaces to generate electricity. The alleged problems with the panels reduce the capacity of the system to generate electricity. Thus, class members have lost some or all of the use of their roof surfaces for collecting solar energy and generating electricity.

Class members have also likely 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 result in a reduced use of the inverter because 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 include loss of use of their inverters, as well as loss of use of their roof surfaces.

Does not apply
Insurers argue that the ‘impaired property’ exclusion bars coverage for these claims. That exclusion, however, makes it clear that coverage is intended for loss of use of other property caused 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 a defect, deficiency, inadequacy or dangerous condition in … 'your product.'’

This sentence, standing alone, would bar coverage for the ‘loss of use’ claim. However, it is subject to an important exception contained in the very next sentence: ‘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.)

In addition, the exclusion only applies ‘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.)

Thus, there are two exceptions built into the exception, both of which may apply to solar panel claims.

The first exception is 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 that cause excessive heat at those connections. The thermal cycling and stressing weakens the connections and 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 first exception to the impaired property exclusion.

In many cases, the second exception to the exclusion will also apply. A claim is subject to the exclusion only if ‘such property can be restored to use by the repair, replacement, adjustment or removal of 'your product.'’ Case law has interpreted this clause to mean that the exclusion only applies if replacement of the product alone, and nothing more, would be sufficient to fully restore the property to its intended use.

Whether this second exception applies depends, of course, 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 a 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 may 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 any 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 solar panels is not sufficient and the exclusion would not apply for this second reason, as well.
{OPENADSALT=zone=157&float=left&margintop=10px&marginright=10px}
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 or loss of use of the inverter – which are not the insured's products, but other property. 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, seeing as the homeowners have been suffering and will continue to suffer the loss of use of the roof surface and the inverters until the defective panels have been removed and a different system installed.

What to do if sued
As noted above, class actions for defective solar panels can be very expensive and carry significant liability exposure. The company should immediately review its insurance program and tender the claim to all its CGL carriers that issued policies from the beginning of the class period to the present. These claims may trigger multiple policies, so the company should tender to all potentially applicable insurers. This notice should advise the insurer of all facts that support coverage, seeing as some of these facts may not be expressed in the complaint.

For example, the complaint may allege that the power generation has been reduced but may not describe the claim as involving a ‘loss of use’ of the roof surface and inverters. In addition, the complaint may not describe the sudden nature of the damage to the panels. Bringing these facts to the insurer's attention will assist in obtaining a favorable coverage determination. This notice should be sent as soon as possible, as insurers generally take the position that ‘pre-tender’ legal fees – attorneys' fees incurred before notice is given – are not covered. Thus, delay can cost a company dearly, especially if there is significant activity early in the case.

The company should also investigate whether it bought any solar panel warranty insurance. This is a specialized, non-standard insurance product that the company may have bought. This policy is written on a ‘claims made’ basis. If this coverage was purchased, then the company should put this insurer on notice as soon as the policy is identified. Failure to give timely notice may result in a loss of this coverage.

Following the tender, the company should evaluate the insurer's response letter. Carriers may improperly deny coverage for the claim – which should be addressed immediately with a detailed explanation of why coverage is provided. Moreover, even if the insurer accepts coverage, it may not advise the insured of its right to independent counsel. This should also be carefully evaluated. The law in most jurisdictions allows the insured to have counsel of its own choice if the insurer reserves the right to deny coverage, as the coverage issue may cause a conflict of interest between the insurer and insured. Though considerations may vary from case to case, invoking the company's right to independent counsel is often the best course.

The company should also remember to keep the insurer in the loop even after these ‘defense’ issues are resolved. The insured has a duty to cooperate with the insurer, and it is prudent to keep the insurer advised of the case status.

Moreover, the company should make sure to notify the insurer in advance of any settlement discussions to avoid any potential breach of the insured's duties and to involve the insurer in the funding of any settlement. 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.

Involving the company's insurers in the defense and settlement of class-action litigation can be a complex process, but there are steps that can provide significant monetary benefit to the insured.

John D. Green is a partner at Farella Braun + Martel LLP, where his litigation practice focuses on recovering insurance policy proceeds for corporate policyholders. He can be reached at (415) 954-4492 or jgreen@fbm.com.

Leave a Comment