How To Understand Insurance Liability Risks With Green Construction

Many challenges facing risk managers and insurers in developing coverage for “green” construction projects are similar to traditional construction risks with just a few differences. The difference generally being new technology and materials, which are untested and often experimental, and can lead to unfounded expectations. Green construction focus has brought to the table a whole new set of problems regarding what kind of damages may arise from green building projects, all the way from how to define them in insurance policies to coverage of damages and the services provided.

Despite recent attention on the subject, green building and sustainable design has been around for decades. Professionals long have sought to operate more efficiently and economically while taking the environment into account, but it is only in the past several years that sustainable design has gained more governmental and public focus. There are lots of buzzwords that are thrown around on these projects, including that they are “healthier, more energy efficient more environmentally friendly.” Translating those buzzwords into contractual language and then performance reality proves to be a challenge.

In many cases, the risks that we’re seeing for green construction are very similar to other risks that we see for non-green construction, but there are some unique exposures that are starting to emerge. The first is managing client expectations, particularly around the usage of new materials and their life cycle has yet to be determined. So just managing client expectations around that is is a challenge. One of the challenges that happens is you don’t want the designer to over certify things or to over guarantee something that may be more the builder’s responsibility and vice versa. The standard of care that will be applied to the architect or design professional is an issue if they’re holding themselves out as certified under the LEED (Leadership in Energy and Environmental Design) program.

Observers note that architects and engineers professional liability insurance expressly excludes coverage for warranties and guarantees. Another issue concerns product specifications for the construction, and using a standard product rather than a green product could result in an E&O claim.

One potential problem is whether bamboo, which is used on walls, floors and elsewhere, is in fact obtained from fast-growth forests as claimed. Another risk specific to green buildings is a vegetative roof, which involves installing a layer of dirt and planting grass. From a construction viewpoint, this is “fairly challenging” because the materials used are fairly heavy and require proper structural design and, once installed, must have a watering system in case of no rain.

There have been problems in particular with irrigation systems causing leaks because of improper design, they end up being much more expensive than people thought they were going to be to maintain. To the extent that the green building incorporates new technology that technology could become a product liability issue.

The biggest obstacle facing contractors and design professionals in green construction in a lot of instances is owners who do not “truly understand what they want.” While some owners embark on green construction for public relations reasons and others seek operational savings, a lot of times green design requires a higher upfront cost. There may also be a misunderstanding about the owner’s higher duty relative to upkeep of the property to ensure it continues to be a more efficient building to operate, he said.

Another factor that could lead to claims is that  some people still have the idea that they’ll get a better class of tenant, or their employees will be more productive if they have a green building.

Another possible issue is “the potential for over reliance” on computer modeling to evaluate how much energy a building will use over time. While there are disagreements over which computer model is best, “the real issue” is whether the consultant or engineer entering the data has “all the information, and do they know what they’re doing?

The cost to replace a system is another potential coverage issue. For example, if “you have what is considered a prototypical, truly revolutionary” heating, ventilation and air conditioning system and it is damaged or breaks down, what is the replacement cost of a prototype? There also is the issue of systems that do not perform as well as initially expected. Using an innovative system removes one of the typical defenses that most designing professionals would usually use (during litigation), which is, “We’ve used this on other projects without a problem.”

Insurance challenges can be overcome with a careful underwriting of the particular risk, and making sure our underwriters are asking the appropriate questions of our insureds and are really digging into the particular risk.

There is really no measurable difference between green and non green. Any variance in pricing or terms is generally going to come down to the scope of the risk itself and involves various areas of practices, size and scope of project.

About 40 insurers underwrite professional liability risks in this sector. About 80% of policyholders are small design firms that may buy $1 million or less in E&O coverage. But there are certainly many very large design firms and architectural firms and contractors that buy much more in the way of limits. Most insurers that write E&O coverage for architects, engineers and contractors can at least offer $5 million and many can go upwards in the $20 million range. Owners can rely on what the architects and engineers “bring to the table,” buy excess coverage such as owners protective professional indemnity insurance, or buy a project-specific dedicated policy “that in effect replaces” the architects and engineers coverage.

Capacity is “generally available, it somewhat depends on the type of policy that you’re looking for. The available capacity does tend to keep pricing rather competitive, although losses will have an impact on rates. There’s some discussion among the insurers that they’re able to hold their rates a little better than they had been able to,” but design firms with good experience can still find a competitive program.

Advanced Control Corporation is committed to do our part in making the state of Florida green.  We continue to advance the cause through energy management, reducing energy costs through lighting control, air quality control and staying in compliance with the LEED-certified standard. We have over 20 years of experience in designing, installing and servicing systems that benefit the environment, which has helped reduce the carbon footprint of several thousand buildings in Florida.  If you are interested in making your facility green with energy management in Fort Lauderdale, call us today at 954-491-6660.