Wood Pellet Industry Insurance Risks

Fire risk within the wood pellet industry is high. While this raises numerous commercial, health, safety and environmental issues for operators within the industry, it also raises insurance questions.
By Bryan Gaston | July 09, 2018

Fire risk within the wood pellet industry is high. So high, in fact, that fires in varying degrees of severity have been commonplace, and are viewed by many as inevitable—simply a byproduct of the industry. While this raises numerous commercial, health, safety and environmental issues for operators within the industry, it also raises insurance questions.

Currently, there are traditional insurance options available to participants in the wood pellet industry. This includes all types of standard coverages such as property, liability, business interruption,
pollution, etc. Like any insurance product when placing coverage, carriers will assess risk, review claim history (if applicable) and evaluate other factors to determine whether to place coverage, and on what terms.

The wood pellet industry is small and highly specialized. More significantly, although the use of wood as a fuel source for heating has existed since prehistoric times, wood pellets as a commercial industry is relatively immature. Options available to industry participants may evolve as the industry matures. The age of the industry, combined with numerous casualty events, a high degree of financial distress, and capacity consolidation may affect insurance trends in the industry over time. Additionally, the optimal way to insure participants in the industry may naturally evolve as the industry matures.

A possible means to obtain insight into future trends is to draw parallels to other industries or sectors. An interesting comparison to the wood pellet industry is the oil and gas industry. Whether you define wood pellets as renewable energy, forest products or by some other industry definition, there are clearly significant differences between wood pellets and oil and gas/chemicals. However, there are also similarities. Both pellets and oil and gas are commodities, involve a significant logistical/transportation component, and entail high-risk operations in remote and harsh working environments. Therefore, the oil and gas industry's insurance trends over the past 50 to 100 years may provide some insight into future insurance trends in the wood pellet industry.

Oil Casualty Insurance Ltd. is an interesting case study from the oil and gas/chemicals sectors within the broader energy industry. OCIL was incorporated in Bermuda in May 1986. This occurred when commercial energy insurers had ceased to provide adequate directors and officers liability insurance, and excess liability insurance coverage for energy industry risks. Parties in the energy industry (i.e., future OCIL shareholders) saw a need for a new, industry-owned vehicle specializing in liability insurance. Now in business for over 30 years, OCIL holds a Class 3B license under the Insurance Act 1978. OCIL considers itself a recognized expert and provider of reliable risk transfer solutions for the global energy industry. According to OCIL’s website, it is rated A, “Excellent,” by A.M. Best. OCIL’s shareholders comprise companies operating in the energy industry, and among them are Exxon Mobil Corp., Lyondell, Dow Chemical, ConocoPhillips Company and Motiva, just to name a few. OCIL’s mission is “to provide substantial excess liability limits to shareholders over the longer term with excess liability and property coverage on terms comparable, or better, than the conventional energy insurance market, and to provide experienced, prompt and friendly claims and underwriting services.”

With debate as to what constitutes the beginning of the oil and gas industry, whether you define it as Col. Edwin Drake's heralded discovery near Titusville, Pennsylvania, in 1859, or the Spindletop discovery in Texas in 1901, that set the stage for a true commercial expansion of the new oil economy, it took the oil and gas industry 70 to 120 years to adopt the self-insurance option made available through OCIL. Although it may not take place overnight, perhaps a change or trend in insurance markets could drive pellet participants to pool risk in a manner that leads to other or arguably better insurance options like OCIL. Who understands the risks unique to the wood pellet industry better than the operators within the industry? Perhaps OCIL, or others like it, may consider expanding membership into wood pellets. As the wood pellet industry evolves, could this happen naturally. Time will tell, but as Jack Welch once said, “Control your own destiny, or someone else will.”

Author: Bryan Gaston
Managing Director, Dacarba LLC