Oct 13, 2010 2:00 PM  PST

Green Insurance: Identifying & Closing Coverage Gaps

Now that building green is main stream; many stakeholders are scrambling to determine the legal risks and liabilities associated with this trend. The insurance industry is not alone in assessing the potential impacts of building green. To date, insurance companies have been surprisingly pro-active in responding to some coverage gaps. Before we analyze some of the insurance solutions commercially available today, we must take a closer look at some potential exposures.


Risks for Owners, Developers, and Contractors

  • Failure to achieve standards for LEED certification may result in diminution of real property values
  • Increased documentation for LEED certification may lead to increased “soft” costs
  • Failure to achieve LEED certification may lead to loss of tax savings (government incentives to build green)
  • Many contractors claim to be “qualified green contractors” but may not have necessary knowledge to complete job (green washing). This may lead to increased construction defect litigation.
  • Standard property insurance policies will not pay increased costs to re-build to LEED standards following a covered claim. This gap in coverage can exist from project inception (during course of construction) through completion.

Risks for Design Professionals & Other Service Providers

  • Increased standard of care inherent in “green” projects if they fail to reach specific level of LEED certification
  • New modeling (particularly energy modeling) and components used in green projects can be untested – may lead to more E&O claims based on failure to perform as modeled.
  • Many E&O contracts exclude warranties – expressed or implied. This increases the “risk” for all parties, but most particularly the design professional.
  • In order to maintain certification, some service providers may have increased responsibilities associated with their services. For example, property managers that don’t keep proper records of maintenance may jeopardize certification leading to a negligence claim.

Insurer’s Perspective

Now that we’ve identified several areas of concern, it’s important to emphasize that insurance is not always the panacea. Effective risk management, such as proper contract review, careful selection of contractors, and realistic expectations is as much a solution as the selection of appropriate insurance. The insurance buyer should realize that insurance contracts are not standardized. There are nuances inherent in every policy form – whether property or liability. Given that the green trend is relatively nascent, there is little case law for insurance companies to review. Undoubtedly as claims occur, carriers will be adjusting both rates (premiums) and coverage forms. Let’s look more closely at what’s available today.

Green Property Insurance

Most property insurers have embraced the green trend. First and foremost properties that have green components may be less susceptible to loss. Several insurers currently offer property forms that include key coverage enhancements that fill gaps in the traditional property policies. Furthermore, several insurers offer premium discounts for green properties. Coverage enhancements include:

  • Replaces property to its original, green certified condition following a covered loss
  • Provides coverage to hire a LEED accredited professional to oversee the repairs
  • Provides coverage to re-commission buildings
  • Includes eco-friendly practices including specific requirements for the insurer to recycle waste post loss
  • Several carriers have property loss control services to assist the green building owner.
 
Importantly, similar “gaps” in property coverage exist on buildings during the course of construction (known as builder’s risk). Builders Risk policies are often written on “unfiled” policy forms which means insurers can more easily manuscript coverage to fit the exposure.

 

Green Liability Insurance

The standard commercial general liability policy does not have any specific exclusionary language related to green building. Liability insurers, particularly those that write commercial and residential wrap-ups, will be paying careful attention to case law.

 

Design Professional Liability Insurance

We are aware of only one “green” design professional liability policy available commercially today. The carrier is Lloyd’s of London and the program is available exclusively through Argo Insurance Group. The policy eliminates ambiguities in most design E&O policies by amending the definition of professional services to include traditional and green design functions. Importantly, the policy does NOT have a guarantees / warranties exclusion.

 

Other Professional Liability Exposures

Lawyers, property managers, janitorial services and other “service” providers on green buildings each have increased exposure from potential claimants on green buildings.

 

Key Recommendations for All Parties

  • Don’t overpromise
  • Have a lawyer review all contracts carefully (particularly for design professionals). Remember that E&O contracts do not include contractual liability (unlike General Liability policies) so an insurer may not be obligated to adhere to the terms of the contract.
  • Get educated. LEED certification is constantly being updated and improved.
  • Get references. Any person can say they are “green” qualified, but may not be.
  • Contact an insurance professional with experience identifying gaps in insurance policies and providing insurance solutions that close those gaps.

Provided by:            September 2010


For additional information on this article, please contact:
 
William C. Feree Feree
 
Source: USGBC - Northern California  
http://www.usgbc-ncc.org

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