For example, a real estate owner for a business complex may tout the prospect of
a certain amount of savings on energy bills.

Alternatively, pre-construction marketing aimed at attracting tenants or charging higher rents for an apartment complex might advertise the prospect of a cleaner environment, warranting the achievement of a Platinum LEED certification from the United States Green Building Council. (LEED stands for Leadership in Energy and Environmental Design. For details, go to www.usgbc.org.)

Green-building generally involves practices aimed at increasing efficiency and sustainability of buildings and their use of energy, water and materials. Organizations such as the USGBC and Energy Star have set green-building benchmarks measuring performance in several key areas of human and environmental health. (See “What it means to be green” sidebar.)

USGBC, for example, assigns point values to each area, such as 17 possible points for energy efficiency issues. Certification levels–certified, silver, gold or platinum–are determined based on total values assigned.

Experts say that while green-building initiatives may reduce risks related to property damage and bodily injury typically covered by commercial general liability policies, there are a host of liability risks that fall into grayer coverage areas. Bad publicity arising from greenwashing allegations is one of them, Fobert said.

The typical coverage afforded under a CGL policy is for bodily injury and property damage liability, and advertising or personal injury, he noted. Breach of warranty and breach of contract are exclusions, he added, explaining that when a third party alleges a building didn't live up to its green-building hype, insured real estate owners or property managers might not find coverage under a CGL policy for the costs of responding to such charges.

“The exposures to these individuals are predominately economic and reputational,” he said.

One way in which the Chartis Green Reputation endorsement can fill the gap is by providing crisis management consulting services, he said. In the event of adverse publicity events and lawsuits, buyers of the endorsement–introduced about a year ago–get 24/7/365 access to crisis consulting firms that are under contract with Chartis.

Fobert said just the threat of an adverse publicity event or lawsuit can trigger coverage.

An executive at the insured company, for example, might hear that a group of protesters will be outside at 8 a.m. the next day because a building is not green enough, or because builders plowed down a forest to make way for a building project, he explained–noting there are many groups of eco-terrorists whose sole purpose is to generate publicity when they uncover shortcomings in green guarantees or activities that damage the environment.

Eco-terrorism and negative publicity are by no means the biggest risks on the minds of real estate and building executives. Fobert said Chartis, as well as members of property owner trade groups, see substantial first-party financial costs arising from the need to correct deficiencies in properties that fail to achieve green standards.

Uncovered costs

Fobert gave the example of a developer or owner contractually warranting that a prospective tenant will be able to get a certain number of carbon credits. “The architect, the engineer, the designer, the manufacturer–somebody along the way doesn't get it done right. There are then not only going to be defense costs”–to deal with lawsuits–”but there's a financial impact contractually to now go and do it right.”

While defense costs are covered by the Green Reputation CGL endorsement, Fobert said the cost of making things right is not currently covered under standard property policies.

Chartis and other insurers have introduced “upgrade-to-green” property coverages, but those are only triggered in the event of a physical property loss–allowing an insured to upgrade to a green-certified level in the event an insured building burns down, for example. (See “What are the liability exposures” sidebar.”)

“What about the financial cost to the first party of making themselves green so they can comply with these contracts” with leasers and tenants? Fobert asked.

“Actually getting green-certified is not easy–and it's costly,” he said. A developer or builder that secured $100 million in loans to put up a building might now need another $25 million–a prospect that's particularly tough in the current economy, he added.

“It is something that I see as an exposure, and I'm not saying we're looking at doing it, or we're not looking at doing it,” he said, referring to the possibility of creating an insurance coverage response.

Paul Primavera, senior vice president of claims in the Washington office of broker Lockton, flagged the cost of investigating which party is at fault for the failure of a building to meet a performance standard as another that might not be covered by insurance policies as they're now crafted.

“There are many factors that go into certifying a building to a certain level,” he said–noting, for example, that a building's emissions might turn out to be 20 percent greater than they should be for a gold or silver certification.

The higher-than-expected emissions could give rise to a breach-of-contract claim by an owner against a general contractor for failing to live up to an agreement to provide a green building, he said. While the “root cause” of the high emissions might not be readily evident, the cost “just to investigate that is going to be expensive. Testing will need to be done,” he explained.

Primavera suggested that even after spending a great deal of money, testing might only produce a finding that the ventilation system is causing the emissions problem–but it could still be unclear if there's a design flaw or some problem with the piping that's flowing emission steam out of the building. “Was it the result of a design error or a construction error? We don't know,” he said.

Explaining why the investigation costs might not be covered, he said CGL policies require an occurrence, as well as covered damages, to respond. “There has to be an accidental event, and in many states, defective work is not considered accidental.”

Turning to the issue of damage–property damage liability, in particular–he noted that while the venting may be the cause of the emissions problem in this example, “there's really no damage to the venting. It's just the way it was constructed,” he said, drawing a parallel to a situation where a handrail for a stairway is supposed to be four feet off the ground but is placed 6 feet off the ground instead. “There's no damage. That's not covered under the CGL policy,” he said.

If the design was correct, “we're stuck with a claim that is not GL- or professional liability-based” and a contractor that “may not have coverage from a pure property and casualty standpoint.”

While Primavera agreed that an owner might be able to call upon a surety bond guaranteeing the performance of a contractor in this type of situation, “that gets problematic,” he said.

“That's there for protection, but you have to be careful about having claims on it, he said, noting that sureties can look back to the contractor to recoup costs. “It's a solution, but it's not necessarily an adequate solution,” he added.

New coverages emerge

Although costs to pinpoint sources of a building's nonperformance or to correct deficiencies in undamaged buildings aren't covered by standard liability and property insurance policies, Fobert confirmed that Chartis' Green Reputation CGL policy endorsement does cover costs to defend green-building lawsuits.

Beyond standard CGL occurrences, the endorsement defines an “adverse green claim” as a cause of loss–”a civil lawsuit from anyone other than an insured under [the] policy demanding monetary or non-monetary relief and alleging your failure to meet or comply with industry-recognized green-building standards.”

The endorsement defines adverse defense costs as “reasonable and necessary costs and expenses resulting solely from the response to and/or defense to or appeal of an adverse green claim,” he added.

Fobert said typical buyers would be owners, real estate investment trusts, asset managers, property managers, developers or general contractors involved in commercial or residential construction.

He said while there is no filed cap, a recommended meaningful limit is $50,000 per occurrence and $100,000 in aggregate.

The minimum endorsement premium is $2,500, but an average charge is $10,000, he said, noting that the actual amount will depend on the extent of the “greenness” of the project. “Are you going for Energy Star or are you going for LEED Platinum? How have you sold that?

“To my knowledge, from a GL standpoint, we are the first carrier to release Green CGL endorsements,” he said–also referring to a second Chartis endorsement, known as the Green Indoor Environment endorsement, which focuses on the pollution exclusion of CGL policies and potential gray areas of coverage related to the maintenance of special equipment to improve indoor air, water or climate quality.

While the typical wording of the pollution exclusion from the Insurance Services Office has broadened over the years–with the introduction of exceptions to the exclusion for hostile fires and heating equipment–the standard wording still does refer to all “fumes and vapors” as pollutants that trigger the exclusion.

Fobert said green-building equipment is costly and technically challenging to maintain. Under the endorsement, if such equipment breaks down and “a substance or odor [is released] that causes bodily injury, that's now covered as an occurrence,” he said.

ACE USA is tackling a different set of environmental exposures–those arising during the building process rather than those from equipment maintenance–through a green-specific contractors pollution liability program known as ACE Green CPL.

William Hazelton, senior vice president of ACE Environmental Risk in New York, said ACE Green CPL–introduced in April 2009–is unlike most contractors pollution liability policies in that it is project-specific. It can be written as an owner-controlled program, a contractor-controlled program, or as a standalone contractors pollution liability project placement, he said.

He also identified three features–enhanced coverage, premium discounts and green-specific risk management services–distinguishing the program from ACE's standard contractors pollution coverage.

“There's broader coverage available for fungi and legionella bacterium,” he said–also noting the availability of coverage for non-owned locations to which green-building contractors take their waste. There's also expanded coverage for transportation exposures and for completed operations not found under ACE's standard contractors pollution form, he said.

“We're being affirmative that those would be covered,” he said, explaining his use of the term “broader coverage.” Most other policies in the contractors pollution world “are silent” on legionella, for example, with no language either explicitly granting coverage or excluding it.

Hazelton said policy discounts for ACE Green CPL are typically in the 10 percent range. “We've taken this very idealistic approach that if someone is going to do something inherently good, like build a green building, [then] we're going to give some discounts for that,” even though green-building risks “actually may be greater to take on from an insurance perspective.”

Illustrating the greater risks, he noted, for example, that pollution liability insurers don't have a history of monitoring claims related to vegetative roofs used in some green projects. Such roofs may raise water intrusion potential and ultimately increase mold exposure, he said.

In addition to coverage, Hazelton said ACE provides services through its own environmental consulting firm, Hygienetics–a unit of ESIS, a risk management subsidiary. “We can give LEED-certification training to our contractors,” he said, explaining that if an insured firm only has a few employees on site with proper certification from the Green Building Council, then training sessions can bring the rest up to speed.

In addition, because Hygenietics employs LEED-certified individuals, the firm can perform the actual certification process for a building, he said. The consulting firm can also perform indoor air quality and comfort monitoring, and even help clients calculate their carbon footprint, he added, noting that service costs can be built into the cost of the insurance program, or separately purchased outside of it.

Hazelton said ESIS' participation in the underwriting process is determined on a project-by-project basis, noting that the target market for the program includes contractors working on buildings in the LEED-certification process and those involved in renewable energy projects, such as power plants and wind farms.

Policy limits up to $50 million are available, with terms up to 13 years, he said. Costs vary by project, but since most projects have construction values in the hundreds of millions of dollars, premiums are typically at the six-figure level, he noted.

Beyond contractors, Hazelton said ACE Environmental offers a green endorsement to its standard premises pollution liability policy. The PPL Green endorsement has the same coverage and service features as ACE Green CPL, he said.

Originally published in the January 11, 2010, issue of National Underwriter P&C

Susanne Sclafane is managing editor of National Underwriter P&C,part of Summit Business Media's P&C Magazine Group, which includes American Agent & Broker.