Risk of Electric Vehicle Lithium Batteries and Considerations for the Insurance Market

Electric vehicle (EV) uptake in Australia may initially have been slow by global standards¹, but over the past year the industry has reported a 120% rise in sales, with projected steady growth over the next few years². However, despite the important role EV’s are expected to play in meeting net zero emissions, fire hazards from the lithium batteries, challenges with repairer capability and capacity and a number of other risks mean there is further work to do for the insurance industry to ensure cover is viable and fair in meeting the increased demand.

Lithium batteries & fire risk

Fire risk associated with electric vehicles is an area that has received substantial attention. Lithium-ion batteries commonly used in EV’s to date are highly volatile and can combust due to the toxic gases they emit when heated. Although rare, fires caused by electric vehicle batteries not only spread quickly but are near impossible to extinguish, making them higher severity and intensity. These batteries are also susceptible to short circuits and overheating if they suffer physical damage, are overcharged, or have manufacturing defects. Battery fires that ignite as a result of overheating continue to burn even while under water. Should a fire ignite, the only option left is to control the spread rather than extinguish.³

In addition to fire hazards within the batteries themselves, charging stations, especially those located in residential buildings, may also present additional fire risk. Electrical systems in residential buildings have not traditionally been designed to handle the load of EV charging, yet charging stations continue to be installed in residential buildings because of increasing demand, as well as an overall increase in apartment living. Should this trend continue, instances of battery fires may continue as installers attempt to contain more and more charging facilities into spaces without the appropriate capacity to handle the charging load.⁴

Minimising fire risk

The most significant part of minimising fires igniting from electric vehicles is in the installation of charging facilities, namely the location. The Australasian Fire & Emergency Services Authorities Council Limited (AFAC) recommends engaging with fire authorities at the design and concept stage, even when installing charging stations to existing buildings⁵. Open air/external charging stations should be first preference over internal stations, and charging facilities should be grouped into small numbers with extensive space between groupings. Charging stations should also not be placed adjacent to building utilities such as gas or electricity lines, fuel tanks or air conditioning intakes. Annual checks on charging facilities by qualified electricians, and residual current devices should be installed on all charging systems to protect from ground faults⁶. The Australian Building Codes Board has also published comprehensive guidelines to support safer charging of EV’s, including ensuring prominent placarding/signage to identify charging points; providing a master isolation switch with signage at fire indicator panel/fire detection Indicator panel or building entrance, and providing collision protection in the form of vehicle impact bollards or stops⁷. There is an abundance of guidelines and recommendations available to builders and installers when it comes to Electric Vehicle Charging Installation, but ultimately the responsibility sits with the involved parties to determine which precautions are practicable and reasonable. As EV’s become more common, authority bodies are likely to adjust and revise their recommendations, so it’s important for clients to ensure they’re keeping up with these changing guidelines.

Considerations for the insurance market

Clients in the Power & Energy industry have been prominent early adopters of EV vehicles in alignment with their ESG policies and net emission goals. Nonetheless, insurers have been reluctant to reward this positive climate change initiative. There are multiple factors to consider for the insurance industry when it comes to ensuring cover for EV’s is adequate, fair, and viable. While many insurers have covered electric vehicles under conventional motor vehicle insurance policies, challenges exist in pricing fire risks, repairer capability, battery replacement and driving risks. When it comes to adequately pricing fire risk, risk averse insurers have been hesitant to provide cover for EV’s due to limited data being available. Repairs have also proven to be challenging as they often involve multiple parties, where one repairer will fix structural damage, and a different repairer is needed to repair and reprogram the electronic components. Combined with the overall limited supply of approved repairers, this can lead to longer lead times, increased towing costs, and potentially a preference to write off vehicles due to the complexity of these repairs. The implication for the long term could be increased premiums.

EV batteries are also a noteworthy consideration for the insurance industry. In addition to the fire risk they pose, an EV battery can cost over $AUD20,000 to replace, so a vehicle write-off is often the preferred avenue in a claim. This may however increase the likelihood of fraudulent claims, as consumers may look to claim on battery damage knowing they’re likely to receive a brand-new vehicle. As the preference is to use original equipment manufacturers (OEM’s) for repairs, OEM’s play an important role in addressing the challenges faced by facilitating access to battery performance data and addressing barriers to repairing battery packs following collisions. Without access to this data, increased premiums and exclusions to cover may be more likely.

As the transition to EV’s accelerates, insurers will also need to consider the accompanying driving risks. While an initial increase in collisions may be inevitable, industry experts anticipate this will only be a temporary increase as drivers become used to manoeuvring the vehicles. In some EV models, the brake light does not come on if the driver lifts their foot off the accelerator pedal, and this may confuse other drivers on the road leading to further collisions.

Considering software comprises a significant portion of electric vehicles’ makeup, cyber risks should also be on the radar for the insurance industry. As EV’s evolve, they are likely to have even more connectivity and increased reliance on data, sensors, software and AI, making way for further cyber vulnerabilities. Failure to install updates and faulty updates could also compromise safety, and damage hardware, raising concerns for many insurers. Unless insurers introduce cover for cyber exposures into specific EV offerings, EV owners may even need to take out separate cyber insurance policies to protect them against cyber risks.

As uptake of EV’s grows, the insurance industry undoubtedly has further work to do to ensure it is able to keep up with the growth viably. Access to adequate data, appropriate repairer networks and capabilities and a holistic understanding of the overall risks presented by EV’s can all play a role in helping insurers adapt to and provide cover for EV’s fairly and sustainably.

¹ABC Science, ‘Electric Vehicles 14 per cent of global new car sales, but less than 4 per cent in Australia: IEA’ accessed 25 June 2024.
²The Guardian, ‘No longer a novelty: massive rise in Australian EV sales, industry report finds’, accessed 25 June 2024.
³Vero ‘RM Insights, Issue 173 Hazards of Lithium-ion Batteries in Electric Vehicles’ accessed 25 June 2024.
⁴Ibid.
⁵Australasian Fire & Emergency Services Authorities Council Limited, ‘Electric Vehicles (EV) and EV Charging Equipment in the Built Environment’ accessed 25 June 2024.
⁶Vero ‘RM Insights, Issue 173 Hazards of Lithium-ion Batteries in Electric Vehicles’ accessed 25 June 2024.
⁷Australian Building Codes Board, ‘Electric Vehicles in Buildings’ accessed 25 June 2024.