While the property insurance marketplace was the first to offer special coverages for Green buildings, the other major commercial insurance markets, including design firm professional liability, builder’s risk coverage, and surety, have been slow to respond.

But there are now insurance products that limit liability for the unique issues of Green buildings and contribute significantly to reducing operating costs.

Design Firm Professional Liability

Accepting that much of the risk associated with Green building arises from design and related services, the exclusion contained in most design firm professional liability insurance policies for representations and warranties made by the design professional, is problematic. Such has become a real risk, including in jurisdictions with mandatory Green building laws where, for example, an owner requires a warranty from the architect that the project will be LEED® Silver Certified to comply with the law, or absent a requested warranty, that the architect by his contract is bound to design to a building that will complies with all laws, including the law that the building be LEED certified. Owners are also requiring design professionals warranty third party certification of a project as Green, when such is a condition of a tenant lease (whether a government tenant that must lease green or a private sector tenant that seeks market advantage by being located in a Green premises).

In response to that risk, there is at least one major Green Architects & Engineers Professional Liability insurance program available. The Argo Insurance Brokers program, underwritten by Lloyd’s of London, incorporates specific Green language, broadening the definition of professional services performed by green design professionals (offering coverage to green building consultants) and with the Argo Green Pro endorsement expressly providing coverage for certain Green assurances to the owner.

Argo even advertises “a substantial premium discount of USGBC members.”

Builder’s Risk Coverage

In recent months, at least two green builder’s risk products became available in the marketplace. Zurich, N.A. offers a Better Green builder’s risk endorsement that is customizable for projects pursuing LEED certification or Green Globes registration.

Fireman’s Fund Insurance Company offers a “Delay of Occupancy or Use – Green Amendment” endorsement, an enhancement to Fireman’s Fund Builder’s Risk/Owner’s Risk product. The endorsement covers soft costs incurred after a covered loss, such commissioning the building systems, restoring indoor air quality, diverting debris to recycling, and costs of re-certifying or re-registering with GBCI.

Property Coverages

At least five insurers have issued Green enhancements to their standard property forms or specific Green insurance policies. They include: Fireman’s Fund, AIG (thru Lexington) ACE Group, Travelers, and Liberty Mutual. Of import, each of these insurers offer discounted pricing (sometimes at significant dollar savings) for building owners and tenants who commit to Green standards contributing to lower operating costs. The rationale is that with “state of the art” electrical, plumbing, and roof systems, Green buildings experience fewer incidents of risk and loss.

There are a broad breadth of coverages available for new construction, renovations and LEED EB-OM projects. Fireman’s Fund’s Green Certified Building Coverage is written broadly enough to include coverage for a vegetated roof, alternative water system, and Green power generating equipment. It can include the cost of hiring a LEED Accredited Professional to oversee the repairs. That policy also covers the cost of a commissioning engineer.

Several carriers now offer a Green Upgrade Coverage that lets an owner replace standard systems and materials with Green ones in the event of a loss. These cover the cost to rebuild and replace with specified Green alternatives such as: low volatile organic compound paints and carpeting, Energy Star rated electrical equipment, enhanced roof and insulation materials, energy-efficient lighting systems, and water-efficient interior plumbing. In the event of a covered total loss, several of these policies pay the cost to rebuild, from top to bottom, as a Green certified building.

Suretyship

While one can anticipate a performance bond claim arising from a construction contract for a building that fails to achieve LEED certification, there are not yet specific surety instruments tied to Green building.

However, the D.C. mandatory Green building law, which takes full effect in 2012, will cause the industry to change. The D.C. law requires that applicants for construction of privately owned buildings provide a performance bond that is due and payable prior to receipt of a certificate of occupancy. The law requires that the performance bond shall be forfeited to the District and deposited in the District’s Green Building Fund if the building fails to meet LEED certification requirements. No such surety product yet exists in the marketplace.

But then no product existed in the marketplace prior to 1898, when the first liability car insurance policy written in the U.S. was issued for Dr. Truman J. Martin. The invention of the automobile in the late nineteenth century created a need and an opportunity for insurance to protect motorists from the potentially enormous financial loss from operating a car. It is all but certain the insurance industry will respond to the opportunity with specific surety instruments tied to Green building.

Conclusion

Obviously, each insurer’s coverage varies in its approach, but all of these coverages address Green construction. Some also cover commissioning and LEED certification costs.

We have assisted businesses in a variety of industries, including public companies with coverage comparisons to assess how effectively each insurance product addresses the need of a specific Green building project; much of that work being done by ajhon Sustainable Systems Integrator, a non-legal affiliate of our law firm. If we can assist your company, including working with your in house counsel and outside consultants, please contact Stuart Kaplow.