As green construction becomes more prevalent, numerous previously unforeseen risks are being identified. These include financial and regulatory risks, risks associated with the performance of green products, systems or buildings, and risks related to design and construction. It follows that these risks affect everyone involved in a construction project: owners, design professionals, builders, contractors and insurance companies. Although the green building industry is growing fast, there have been very few reported claims related to these risks. It is likely, however, that these risks will soon manifest themselves in the form of legal claims among construction participants and their insurance carriers and claims by owners against their own policies.
Many insurers are beginning to recognize that their current policies do not properly account for the new risks inherent in today’s green construction landscape. These “green gaps” expose the insured to potential uninsured claims and possibly the insurer for unintended coverage. Though insurance providers have started to account for some of these green risks, others have largely been ignored.
Its important to understand that while a standard CGL policy might cover most of the issues an owner or builder could face during the construction of a green building, there are situations that may be unique to green building and might fall outside the coverage provided by the CGL policy. As a result, new green builders’ endorsements are being created by several insurance companies.
A variety of insurance products are beginning to appear in the marketplace, offered by providers such as Fireman’s Fund, Zurich, Travelers, Lexington Insurance, Liberty Mutual and AAIS. Some of the products focus on providing coverage to owners, while other products cover builders for problems associated with the green construction process. For example, some insurance endorsements cover the added costs of attaining a specific level of green certification if the certification standards change during construction. Other products cover delays related to the completion of a green construction project.
A separate problem associated with green construction that could lead to legal action is “greenwashing.” At its most basic level, greenwashing can be defined as the dissemination of misleading information in order to create an “environmentally friendly” public image. In the construction industry, greenwashing can refer to the practice by builders, designers, contractors or suppliers of overpromising or misleading the consumer as to the beneficial green effects that their products or services will provide. When these misleading or false assertions result in a building that fails to deliver promised cost savings, expected tax credits or the desired certification level, legal claims are sure to follow. Yet there are little to no insurance options available that expressly cover these types of claims.
One of the few insurers to offer some coverage in this area is AIG with their AIGRM Green Reputation Coverage. According to AIG, the plan would cover costs associated with managing a reputation crisis related to the “increased public scrutiny” and “negative media coverage should a building fail to meet green industry standards.” The coverage would include costs of crisis consultants to manage the event and to guide and counsel company personnel, the costs associated with mitigating adverse publicity and the cost of defense. The language of the policy has yet to be tested, and some observers doubt the coverage will apply in situations where green certification is not achieved. Still, others believe the reputation coverage would kick in for owners of buildings that fail to achieve a promised green certification level.
There is no coverage offered by insurers for more traditional design or contractor claims that might arise from the failure of a project to achieve a guaranteed level of certification. Insurance carriers are not providing coverage for architects or contractors who guarantee a specific level of certification will be achieved upon completion of the project. There are no additional endorsements available, and standard errors and omissions insurance will not cover guarantees made by design professionals. The surest way to avoid these types of problems is for design professionals and contractors to avoid guaranteeing, or even assuring, the owner that a specific certification level will be accomplished.
Until green-specific coverage is available, green risks will test the limits of current standard policies. One additional area of concern for design professionals is whether the standard of care expected of them is shifting as rapidly as the growth of the green building industry. As design professionals hold themselves out as accredited green professionals, it is likely that they will be held to a higher standard of care if their projects, systems or buildings fail to perform at the level expected by the owner. In addition, as green construction becomes the norm, professionals who do not claim any special green credentials may nevertheless be expected to possess some level of green expertise. Fortunately, as the normal standard of care for design professionals evolves with the green construction industry as a whole, it is likely that professional liability insurance will also evolve to protect professionals from claims related to the failure of a project to achieve new green expectations.
In this boom of green construction, insurers wield significant economic clout and they will likely affect how green construction moves forward. Not only will their policies potentially shift the allocation of risk among construction participants, but insurers’ recognition of green construction by accounting for it in their policies could diminish much of the uncertainty that is inherent in green construction today. Yet insurers seem to be waiting until the risks become clearer and more quantifiable before they act. Until some of these potential claims become reality and result in a judgment that can provide guidance to the rest of the industry, it is unclear how insurers will expand their coverages from where they are today.
Design professionals, consultants, builders and contractors should consult their insurance providers and attorneys to determine what insurance and contracting protections are available to them.
To learn more about insurance for green construction, contact one of our Construction attorneys or the Leonard, Street and Deinard attorney with whom you regularly work.
Go here to view a complete list of our Construction attorneys.