Greening Risks and Rewards – the Insurance Perspective (Part I)

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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.

What is “green?” If you check the established dictionaries, you will find definitions of “green” that range from a certain hue to one’s level of expertise or even a slang term for money. What you won’t find is a standard definition pertaining to the “green” movement. A safe definition may be the support, promotion or protection of the environment and the endorsement or employment of environmentally-friendly methods or means in accomplishing everyday tasks.

Despite the lack of a precise definition, everyone seems to be “going green” these days and the trickle-down is reaching the insurance industry. The building trades and related services alone expect a 400% increase in green construction over the next two years. Leading insurance agent Marsh’s “Green Built Environment in the United States” report, updated in December 2008¹, highlights a ramping interest in the “business of green” among insurance companies across sectors. Many carriers already have green insurance policies on the market and a second wave of carriers is now considering the risks and responsive products.

The Marsh report closes with the statement that “[t]he U.S. Green Built Marketplace continues to grow at a rapid pace,… There is increasing interest by the insurance marketplace in understanding the risks and benefits of building green.”

Therein lies the rub: insurance writers and purchasers are struggling with that understanding, perhaps grappling with the lack of definition. Everyone seems to have the sense that “green” is better: insurers understand that green risks are believed to represent better design principles, construction techniques and build quality while insurance purchasers know that “going green” makes good business and moral sense. However, new means and methods are difficult to underwrite and charge for. Writing risks and adjusting claims is uncharted territory for all parties to the green insurance contract.

Can the insurance industry afford to forge ahead sans definition? Can they afford not to? There are many unknowns in this nascent field that undoubtedly will be fleshed out over time. In the meantime, part one of this series touches on some of the available insurance products. Part two lists some of the risks and pitfalls that will need to be considered, from policy inception through claim presentation and adjustment

Green Insurance Products Sprout and Grow in Fertile Soil

It is fair to call green insurance a risk-management infant approaching toddler-hood. The birth boom has occurred over last three years. Most are found on manuscript insurance² forms, but the industry is moving towards creating standard form³ language and seeking approval from the state insurance departments.

Existing insurance policies may offer some “green” lee-way – local building codes sometimes impose environmentally-friendly standards. Building code cost coverage may cover some of these requirements. However, existing insurance policies may not go far enough. For example, how should loss to a “living roof” be handled? Is it a structure? Is it vegetation? Most policies have a sublimit for vegetation, trees and shrubs that does not even come close to meeting the high costs of replacing the structure? Or how will a policy with a conventional limitation of 100-feet for foundations and underground structures respond to an alternative water system with underground tanks and piping far exceeding that limit? How will business risk and professional liability policies meet heightened standards? New language is needed to address these “growing” green risks. Before that language is drafted, the risks must be identified.

Commercial Property Coverages: The commercial property area has the most established products, addressing coverage for building upgrades. Upgrades can take the form of reconstructing a non-green building to meet green standards, returning a green building to the same green standard, or upgrading a green building to a higher green standard. Green upgrades usually include replacement with low Volatile Organic Compound (VOC)-emitting carpets and paints, more efficient plumbing and electrical systems, building materials without formaldehyde and Energy Star-rated appliances. Higher replacement cost limits address green upgrades, which generally are more expensive than traditional reconstruction.

Commissioning coverage, often an adjunct to the upgrade extensions, reimburses the costs of a commissioning engineer to oversee the rebuild of the building and its systems towards green certification. Commissioning provides an extra quality control step – the agent will examine the building’s systems and offer suggestions to improve those systems.

Debris recycling coverage reimburses costs to demolish and dispose of loss debris in an environmentally-responsive manner and will pay for disposal at recycling facilities.

The policy may pay for indoor air quality testing following construction to ensure proper removal of construction contaminants. Another popular feature enhances the loss of income coverage: insureds that employ alternative energy systems and sell back energy to the grid can be reimbursed income lost from that source during reconstruction, while costs to buy energy from the grid during that period also are handled. Foundation and underground property coverage can be extended up to 1,000 feet from a covered location to account for alternative systems.

Personal / Homeowners Coverage: There are insurance products now being offered in the personal homeowners market that mirror the commercial property coverages. Homeowners can purchase upgrade coverage, environmentally-sensitive demolition and debris removal coverage, coverage for sustainably-developed and recycled building materials, lower impact surfaces and Energy Star appliance replacements. The personal products also offer the use of green certification professionals to oversee the rebuild.

Other Coverages: As risks are identified, carriers will extend green variations on all types of existing insurance products. Current offerings include green builder’s risk endorsements to existing policies, endorsements to Errors & Omissions policies extending professional liability coverage to architects and engineers for green oversight, products liability coverages for green manufacturers, workers’ compensation policies that account for improved working environments and air quality, and even auto policies with fleet coverage with upgrade or replacement coverage for hybrid cars.

The concept of “green” can be applied to a wide range of insurance products. Ultimately, it seems quite likely that “green” elements will be integrated to some degree into all traditional forms of insurance, from the standard fire policy, to the general liability and homeowners policies, from traditional marine and inland marine to professional liability and errors and omissions policies. One can envision claims against directors and officers for failing to ensure a company’s compliance with green standards or a suit against a realtor for neglecting to address environmental issues outside of the traditional pollution context. Where there are potential claims, there will arise an insurance product to meet that need. And the “green” building and design arena appears “ripe” for such claims and responsive insurance products.

Endnotes:

[1] Marsh, The Green Built Environment in the United States (2008), http://global.marsh.com/news/articles/Green_Building/index.php (last visited August 15, 2009)

[1] Manuscript Insurance

Coverage tailored to the particular requirements of an insured, when a standard policy cannot be used to provide coverage for real or personal property. A manuscript policy is often written on site by an agent (most often representing a large brokerage house) to reflect the special conditions and provisions.

Dictionary of Insurance Terms, Barron’s Educational Series, Inc. (2000), AllBusiness.com Business Glossary, Dun & Bradstreet (2009) http://www.allbusiness.com/glossaries/manuscript-insurance/4953585-1.html (last visited August 15, 2009)

[1] Standard Form

Approved or accepted policy for a particular type of risk. The only type of risk covered by a standard form mandated by law is the fire policy. In 1886, New York adopted a standard fire form that has since been revised and adopted by every other state. In other types of coverage, states may prescribe mandatory or optional minimums or may forbid certain provisions. Therefore, while life and health benefits may vary widely, for example, policyholders are given certain uniform rights like grace periods for paying premiums. In other areas, insurers have voluntarily adopted standard forms. One example is the standard automobile policy. Other types of coverage are offered on standard forms developed by rating bureaus such as the Insurance Services Office (ISO) . Although insurers may use these forms, they are not obligated to do so, and many develop their own forms.

Dictionary of Insurance Terms, Barron’s Educational Series, Inc. (2000), AllBusiness.com Business Glossary, Dun & Bradstreet (2009) http://www.allbusiness.com/glossaries/standard-form/4956259-1.html (last visited August 15, 2009)

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