Insurance documents normally are the world’s best cure for insomnia. However, I came across one recently that opened my eyes to an issue that no doubt will become more prominent with the passage of time. What are the liabilities associated with green building?
The insurance industry has a powerful vested interest in that question, which was the point of “The Green-Built Environment in the U.S. - 2008 Update of the State of the Insurance Market,” authored by the insurance giant Marsh. Bottom line - it’s all pretty new to the insurance industry, and they don’t know entirely what to make of it yet.
On the construction side, most insurers surveyed view the green-built environment as potentially more risky than traditional construction. Their concerns include:
- Lack of green qualifications and experience by contractors and subs, leading to potential workmanship and defect claims.
- New and untested products, materials and processes.
- Potential structural and water damage from green roofs.
- HVAC performance and air quality issues.
- Inadequate maintenance.
The study noted that surety markets have yet to take any specific position with respect to green construction nor have they changed their underwriting standards. However, sureties expressed concerns about onerous contract provisions and the risk of inadvertently guaranteeing a specific performance or efficacy for energy usage, water consumption and/or LEED certification.
One surety was said to be considering an energy savings guarantee policy for HVAC firms. The study did say that so far there were “no known issues of ‘green’ related contractor defaults.”
Some good news is that, at least from the standpoint of environmental underwriters, green construction was viewed as less risky than traditional construction. They cited more recyclable materials, leading to less waste going to disposal sites; more attention to health and safety factors such as indoor air quality; and reduced site run-off issues.
Certain insurers also recognize that the certification process for a green building helps to verify that the electrical, HVAC and plumbing systems are working at high levels of performance, thus reducing claim potential.
Overall, however, it’s hard to ignore the bull that’s beginning to snort in this china shop. The Marsh study took note of certain claims that have already taken place against designers and builders based on things like:
- Failure of a building to achieve intended LEED certification.
- Water infiltration from a green roof.
- Water retention and mold resulting from cork flooring.
- Project delays caused by lack of green product availability.
- Failure to improve indoor air quality.
Green roofs seem to be the biggest area of concern for insurers. Roofs in general have always been a big cause of construction defect claims, and green building adds to the risk by incorporating rooftop gardens and new energy systems such as mini-cogeneration units, windmills and solar panels. These systems add weight and stress to the roof and structure, as well as enhanced damage potential from windstorms.
Five insurers have started to issue policies that specifically address green construction either as enhancements to standard property coverage or specific green insurance policies. They include: Fireman’s Fund, AIG (thru its Lexington subsidiary), ACE, Travelers and Liberty Mutual. Experience is limited, however, and nobody knows whether these coverages adequately assess risk.
What is abundantly clear is that construction defects have proven a lucrative growth market for the lawsuit trolls for many years, and green building gives them another angle of approach. When it comes to green construction or any other progressive activity, the American legal profession stands ready to assure that no good deed goes unpunished.