Image of Martha Sperry
For this week’s Guest Post Friday, Musings has a real treat. Martha Sperry (@advocatesstudio on Twitter) is an attorney with extensive experience in the insurance industry. Martha’s clients have included underwriters and agents representing Lloyd’s syndicates, third party administrators and agents and various foreign and domestic insurers and reinsurers. Martha has provided claims handling advice, consultation on the drafting of policy forms and investigation and reporting on emerging risks. Martha also maintains a research and writing practice, AdvantageAdvocates at http://advantageadvocates.com with emphasis on research and written product for insurance agents and professionals. Her blog on law, research, writing and technology can be found at http://advocatesstudio.wordpress.com.
The following two-part series contains the opinions, conclusions and findings of the author alone and in no way reflects the opinions, positions, policies or viewpoints of any of the author’s past or present clients or employers.
This week Martha gives us part 2 of her great series.
The Pros and Cons to Green Coverage – The Great Unknown:
Part one of this series touched on some of the new “green” insurance products being introduced in the various lines of insurance business. Part two of this series addresses some of the unquantified risks that may impact the viability of these insurances.
Insurers are well aware of the benefits of green coverage. Green construction is booming, despite a poor economy. The general perception is that green engineering and construction techniques represent better build quality and lower risk. Insureds also realize the benefits – green certification represents positive publicity for a building and may encourage tenancies and reduce sick building exposures.
With any new area of risk, however, there are unknowns. Both insurers and insureds are struggling with forecasting and quantifying the potential exposures and losses. Disputes may arise due to a lack of understanding about the various green standards and which to apply in the event of a loss. New technologies employed in the design and construction of green buildings breed uncertainty: will these technologies fail and how will such failure manifest?
Labeling a project “green-certified” is sure to raise the expectations of property owners and occupiers. When these increased expectations are not met, affected parties are more likely to file suit. If an insurer offers a “certification” process for oversight of a rebuild, failed expectations might result in direct claims against the insurer.
Suits also will follow if a building is to be constructed to a higher green standard but fails to achieve the requisite certification. The standards themselves are evolving. There are no fewer than five standards currently in use, not including the American Institute of Architects’ own guidelines. While the Leadership in Energy and Environmental Design (LEED) standard seems the most popular, there are also the Building Research Establishment Environmental Assessment Method (BREEAM), the Green Building Challenge Assessment Framework, the Earth Advantage and the National Green Building Standard. How will these standards be applied to first party property upgrade claims and third party liability claims? Can insurers insist on applying only one standard to a loss? Can insureds pick and choose the most favorable aspects from among all of the standards?
Not only are there multiple certification systems employed by the green-building industry, there are rapidly changing federal, state and local laws that impact a rebuild. Which regulations will apply and how do contractual warranties and guarantees fit within this framework?
New technologies and methods mean more pressure on schedules and budgets of contractors and subcontractors covered by liability and business risk insurance. Contractors who lack sufficient “green” experience represent a greater liability risk. This concern extends to design professionals and errors & omissions risks: architects, engineers, and commissioning agents will be subject to claims based on negligent design, lack of experience, failure to meet heightened standards of care with respect to new technologies and lack of familiarity with materials and means.
New techniques may result in old familiar risk scenarios. Living roofs might increase the chances of water intrusion and mold growth, while tight buildings may impede airflow. Carriers are familiar with water and mold are still facing unknowns as the precise occupational risks associated with these new building techniques have not yet developed.
The net result is that it is difficult to write coverage for risks when they are not fully realized, developed or known. Of course, uncertainty is a necessary part of insurance. However, both insurers and insureds are gambling to a higher degree when assessing the economic viability of coverage in the uncharted waters of “green” construction, engineering and design.
As the Marsh report noted in part one of this series highlights, there is no question that insurers recognize consumer interest in green products. It is not clear whether this interest has yielded significant sales. Sales might lag because the products are new and purchasers are unsure of the extent to which they must manage this contingency. Carriers offering large discounts on all lines are looking to increase interest and may justify discounts with their belief that green building and construction techniques improve the risk. But what exactly is the risk?
Carriers and policyholders will have to face head-on uncertainties ranging from the durability of the technologies to assessing which standards to apply to design and construction from an industry and regulatory perspective. The extent of liability from unmet expectations, the failure to meet certification, the breach of duties expressed and implied and the impact of substandard performance present a moving target. Insurers will need to grapple with enhanced standards imposed on green industry design professionals and the morphing of the legal requirements from multiple industry certifications and changing federal, state and local laws and regulations. Unknowns represent a trap for the unwary on all sides of the table. Can insurers afford to provide the insurance? Can insureds afford not to purchase it?
Perhaps, in finding their answer, carriers and purchasers should be mindful of all aspects of the definition of “green:” while there certainly is “green” to be made in the process, participants in the industry are “green” when it comes to identifying and quantifying the risks in the course of assisting others in becoming “green”. But one thing is for sure: no one can afford an alternative that lessens our “green” landscape.
Please comment below and subscribe to keep up with this and other Musings.