For this week’s Guest Post Friday, Musings welcomes Kevin Kaiser. Kevin is the online marketing director for Surety Bonds.com, a leading online surety company. He specializes in educating current and prospective business owners about local surety requirements. He helps contribute to the Surety Bond Education Center and the Surety Bond Insider. To keep up with surety bond trends, follow Kevin and his cohorts on twitter.
D.C. officials are considering changes to a promising-yet-controversial green building law that has raised the ire of the surety industry.
The landmark 2006 Green Building Act mandates new green building requirements for private and public building projects in the District. According to the new regulations, which are set to take full effect in 2012, projects that fail to hit the necessary energy efficiencies and other green standards would be on the hook financially — with the money coming from the developer’s performance bond posted with the city.
But surety companies and industry groups have expressed concern with the concept of a “green performance bond.” These key risk-mitigation tools are standard for most construction projects and ensure that project owners and taxpayers are protected if the contract defaults or fails to follow the contract.
But surety companies are uneasy about the idea of guaranteed performance when it comes to green building. And there are also questions about who’s really on the hook if a contractor fails to hit the mandated energy-efficiency levels.
Historically, sureties have balked at bonding projects that require specific environmental benchmarks or third-party certification. LEED certification and other national designations require an OK from third parties like the U.S. Green Building Council.
As currently written, the act’s language may leave project developers scrambling to find companies will to issue suitable bonds.
“It’s not always the party that has to post the bond that’s responsible for that element of LEED certification,” Bob Duke, director of underwriting and assistant counsel for the District-based Surety and Fidelity Association, told the Washington Business Journal. “Maybe the party posting the bond doesn’t have control of the total obligation.”
But it looks like a compromise may be coming.
Surety industry officials and other D.C. experts have been working to resolve the bonding issue regarding the Green Building Act. A small semantic yet significant step may be changing the regulations to require a “bond” rather than a “performance bond,” according to the WBJ.
“There is confusion as to the ‘performance bond’ required by the Green Building Act,” Chris Cheatham, a D.C. attorney who’s covered the issue extensively on his environmental construction law blog, told the Washington Business Journal. “Revising the requirement to a “bond” should eliminate some confusion but questions still remain as to the availability of these types of bonds.”
Both Kevin and I welcome your comments below. Also, please subscribe to keep up with this and other Guest Post Fridays here at Construction Law Musings.
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Good topic Kevin. Everyone has been scrambling to find an answer to whether CGL coverage is available for energy performance requirements, but I have not yet heard much about the bonding industry’s qualms with LEED liability.
In a state like Washington, this is a great debate. We have mandatory contractor bonding and heavy LEED construction.
I think the question might come down to the bond’s intention – is it to bond the contractor’s performance of the work, or work’s performance, or both. I think that sureties are going to have to embrace the challenge and find new pricing models for LEED building. Reaching LEED (or other similar) standards is part of a contractor’s job scope, like it or not.
Utilizing smart prescription periods and inspect & release mechanisms might make it easier on sureties. But I for one, would certainly like to see a contractor bonding company pop up and take on the challenge.
Thanks for the article!
Thanks for the great comment Doug!
The most intriguing element of surety bonding, liability and property insurance related to green building, in my honest opinion, will come from California’s adoption of CalGreen, their new green building code. Currently voluntary and slated to go mandatory for certain classifications of new construction, the green building code raises the bar for construction and development. Sureties bond guarantees that a contractor will comply with local building code in addition to their performance under the construction contract. How will the adoption of a more stringent code effect pricing and underwriting for trade contractors?
Also, property insurance includes provisions for rebuilding damaged portions of a structure to compy with building code (Ordinance and Law Coverage). If an existing structure is damaged by a covered peril, the new structure must be built to comply with the revised building code. In the case of California, there may be additional expense to rebuild to the green building code, so insurers may exclude, limit or raise the price for such coverage. Property owners should consult with their insurance counselor as to the impact of the code change on their specific property insurance policy. Worst case scenario is a property owner is underinsured after a loss when the insurer won’t pay the additional costs to bring the new space up to the current green building code due to an exclusion or limitation on their policy.
Thanks for the great comment Mark
Sureties bond guarantees that a contractor will comply with local building code in addition to their performance under the construction contract.
This issue is especially tricky in that no one entity has control over the outcome. It is always quite possible that the owner has provided adequate funding support, the A/E has done a state of the art design and the contractor and subcontractors have all worked diligently to meet the requirements, when the commissioning agent gets busy, things just don’t work as anticipated. How can all situations be anticipated when “Murphy was an optimist!”