Building Risk: Green Projects Create New Exposures
Condensed from Business Insurance, November 2, 2009 Edition
Author: Roberto Ceniceros

Construction contract disputes loom as demand grows for buildings that meet environmental efficiency standards, insurance and legal experts say.

When an existing building is damaged, currently available property/casualty insurance products may pay insureds for the additional cost of rebuilding to a "green standard". Further, insurance policies can be obtained to protect property owners from losses during the course of construction of a "green" building.

However, P&C underwriters have refrained, according to the article, from insuring a potential liability that contractors and design professionals may face. This potential liability exists for disputes between building owners and contractors or architects and engineers in the event a new building doesn't meet certification standards like those established by the U.S. Green Building Council, a not-for-profit organization known for its Leadership in Energy and Environmental Design (LEED) certification. Under LEED’s rating system, four levels of certification are possible depending on the building’s green qualities, with the highest level of LEED certification being platinum.

Demand for green buildings is growing for several reasons including -

  • building codes increasingly requiring new structures to meet green standards;
  • more tenants are seeking out green buildings; or
  • cities and states have begun offering substantial tax rebates/credits to encourage their construction.
Some municipalities are also offering building owners other incentives in the form of variances from local building codes. For example a building owner may be allowed more square footage than is normally permitted in exchange for obtaining a certain green certification level.

The incentives could fuel disputes between building owners and construction professionals, according to several cited sources. These disputes could arise when contractors or design professionals promise to construct a building that will obtain a specific green certification rating, but fails to meet the certification requirements for that rating.

The incentives that could potentially be lost include tax credits that building owners expected to reap from certification, said Paul Primavera, SVP for Lockton Construction Services Group. He said, "Lost tax incentives are a "new wrinkle" that green construction as added to traditional construction-related liabilities".

Additionally, investigating what might have gone wrong during construction or rebuilding certain parts of a project to meet certification requirements could be costly and could send building owners to seek redress experts have noted. "There is certainly going to be litigation coming out soon around this issue and insurance companies are waiting to see the loss results before developing coverage products," said David Cohen, senior product director for commercial insurance at Fireman’s Fund Insurance Company in Novato, CA.

"A contractor’s failure to deliver a certain certification could fall under a surety bond remedy," Paul Becker, Nashville, TN-based construction practice leased of Willis NA and president of the construction division of Willis Americas, noted.

So far, only one lawsuit involving a failure to deliver a specified green certification has gained any attention. The case involved a Maryland condominium project with tax credits at stake totaling hundreds of thousands of dollars. The claim was settled without resulting in any legal precedent, so details are sketchy at best.

"More lawsuits could arise because many buildings that have been under construction during the past two years are beginning to seek green certification status," said Thomas Taylor, general manager for Vertegy, and Alberici Enterprise and sustainability consultant in St. Louis.

[IMUA Note - Mr. Taylor was a presenter at the
2009 IMUA annual meeting in Tucson in May 2009]
He also believes that there is glut of potential litigation on the horizon because building owners are going to start noticing that they aren’t getting what they paid for. Taylor’s suggestion - to protect themselves, contractors and design professionals should avoid contracts that promise they will deliver specific energy savings or that the building will achieve a certain green certification requirements unless they truly have the ability to do so and understand the risks, several experts said.

It is only a matter of time; more will develop on this topic.

IMUA Marketing Note
In addition to its 2009 annual meeting, several IMUA Regional Committees have recently presented local seminars on this hot topic. Further, on December 16, 2009, under the auspices of the IMUA Webinar Committee, IMUA will be presenting a webinar entitled Going Green: The Hows, Whys and What Forms. Please look at the IMUA website www.imua.org for more information, or to register on line go to www.getonline.imua.org.


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