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Are You Covered?

Insurance experts are learning that green building is fraught with risks to owners and their service providers. Casualty liability underwriters worry that the widespread use of new and untested products, materials, and processes in sustainable construction could cause a spike in product liability claims. And a lack of contractors qualified to install those products could generate faulty workmanship and construction-defect claims.

Those were a few of the findings presented in “The Green Built Environment in the United States: The State of the Insurance Marketplace.” Insurance giant Marsh wrote the report. While a few insurers are tweaking policies and developing products for green building, researchers found that many providers are still sitting on the bench, studying the exposures that arise from sustainable design.

“Understanding how the risks emanating from green building differ from those emanating from traditional buildings is very important,” says Catha Pavloff, a senior vice president in the construction practice at Marsh and head of the company's green building initiative.

Landlords who ignore the unique risks of green building may be opening themselves up to liabilities or gaps in coverage, says attorney Paul D'Arelli, shareholder in the Fort Lauderdale law office of Greenberg Traurig. “If you purchased a green building and didn't give any thought to your property insurance, I would certainly revisit it and look at some of these issues,” says D'Arelli.

Counting costs

How can conventional property insurance fall short? “You have soft costs you might not have in a non-LEED certified building,” D'Arelli says. Suppose a fire destroys an office building with LEED gold certification under the U.S. Green Building Council's Leadership in Energy and Environmental Design program. The owner might expect his insurance to pay to replace the asset and also pay consulting fees and costs reapplying for LEED gold certification.

What's more, because the Green Building Council periodically raises its criteria, a property that earned LEED gold a few years ago might need to significantly enhance its sustainable features to re-qualify for gold certification after reconstruction. Standard property insurance might be inadequate to cover the cost of such claims, D'Arelli says.

It's critical to set accurate values in a property policy, Pavloff says, or the policyholder might receive insufficient coverage or wind up paying too much in premiums. Assessing value can be difficult because sustainable projects frequently involve new materials and evolving technologies. Owners should make sure the policy meets their goals for repair or replacement, and allow for potentially longer construction times, Pavloff says.

Property insurers were the first to offer special coverage for green buildings, Marsh found. All five of the property insurers Marsh surveyed have issued green enhancements to their standard forms or offer green insurance policies.

Among them are Fireman's Fund, ACE, Travelers, Liberty Mutual, and AIG subsidiary Lexington Insurance. All five can address the increased cost of green construction and additional time required to order, deliver and install special materials or equipment, while some can cover consultant and LEED certification fees.

Marsh also assessed insurers' treatment of architectural and engineering design firms' liability, pollution liability, construction insurance, surety bonds and casualty coverage. Green building concerns varied by coverage type.

Those that insure builders voiced concern over project delays while procuring special equipment or waiting for dust to clear from ventilation systems after construction. Surety bond providers worry about the risk of inadvertently guaranteeing performance for energy usage, water consumption or LEED certification.

LEED and liability

There is the potential for LEED submittals, which verify to the U.S. Green Building Council completion of steps toward LEED certification, to be deemed as performance guarantees by the architect or engineer who signs the forms. That's a problem for building designers because professional liability insurance typically excludes coverage of a claim when the policyholder has failed to deliver a guaranteed result.

For example, an engineer signs a LEED submittal confirming that the heating and cooling system selected for a project meets criteria for ozone control. Later testing reveals the system produces too much ozone, so the owner demands it be replaced. The engineer's insurer could reject a claim to cover the cost because professional liability policies carry breach of warranty exclusions.

The question of whether or not a LEED submittal constitutes a warranty hasn't been tested in court. Even so, XL Design Professional Insurance Co. advises clients to add contract language in which the owner must acknowledge that LEED submittals are solely for the purpose of asserting LEED compliance and are not performance guarantees. “It's as simple as putting that in your contract,” says Gary Kingery, an underwriter for the firm.

Architects and engineers also risk coverage exclusions if they promise a project will meet certain energy savings or green certification, says Frank Musica, senior risk management attorney at insurance underwriting manager Victor O. Schinnerer & Co. in Chevy Chase, Md.

Rather than risk a warranty exclusion that would limit the architect's ability to correct problems later, Musica says a savvy developer won't demand a guarantee but will instead make its performance goals clear to the design team and then let those professionals do their jobs.

Musica has collected examples of insurance claims that illustrate how well intended efforts to build green can result in costly damages. In one case, cork flooring in an office kitchen sprouted mold, requiring removal and replacement with linoleum.

In another instance, windows at a new university library that were intended to usher in fresh air instead brought in air contaminated by pigeon droppings that accumulated under a rooftop solar shade. Students reported respiratory illness when using the library.

Insurance claims have included water damage from a defective vegetated roof and project delays while waiting for a green product. There was even a claim that an architect violated a client's confidentiality by detailing plans of the client's green building in an awards competition.

GREEN GAINS STEAM: Since the start of the LEED program in 2000, 1,705 commercial projects, including some with green roofs, have been LEED certified.*

LEED Level Number of Projects Certified
Certified 543
Silver 571
Gold 499
Platinum 92
* Cumulative total as of early August 2008
Source: U.S. Green Building Council
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