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'Green' projects create new exposures

Posted On: Nov. 1, 2009 12:00 AM CST

'Green' projects create new exposures

Construction contract disputes loom as demand grows for buildings that meet environmental efficiency standards, insurance and legal experts say.

Available property/casualty insurance products, meanwhile, will pay property owners for the additional cost of rebuilding to a “green standard” after damage to an existing building. Insurance policies also will protect property owners from losses during the course of construction of a “green” building, insurance sources said.

But property/casualty underwriters have refrained from insuring a potential liability that contractors and design professionals may face, several experts said.

The potential exists, they say, for disputes between building owners and contractors or architects and engineers, should a new building fail to meet certification standards, such as those established by the Washington-based U.S. Green Building Council.

The council is a nonprofit organization known for its Leadership in Energy and Environmental Design certification for environmentally sustainable buildings. Under LEED's rating system, several levels of certification are possible, depending on a building's green qualities.

Demand for buildings certified for their environmental friendliness is growing because government building codes increasingly require that new structures meet green standards, construction sources say.

Demand for green buildings also is spreading because they are increasingly desired by tenants seeking a favorable public image, and more cities and states have begun offering substantial tax rebates to encourage their construction.

Some municipalities also provide building owners with other incentives, such as variances from local building codes. A building owner may be allowed more square footage or a tal-l-er build-ing than normally is permitted in exchange for obtaining a certain green certification level.

But the new incentives could fuel disputes between building owners and construction professionals, several sources say.

Disputes could arise should contractors or design professionals promise to construct a building that will obtain a specific green certification rating, but the completed building fails to meet certification requirements for that rating level.

The losses at stake include tax credits that building owners expected to reap from certification, said Paul Primavera, senior vp in Washington for Lockton Construction Services Group, a unit of Lockton Cos. L.L.C.

Lost tax incentives are a “new wrinkle” that green construction has added to traditional construction-related liabilities, Mr. Primavera said.

Investigating what might have gone wrong during construction, or rebuilding certain parts of a project to meet certification requirements, could be costly and send building owners to seek redress, experts said.

While there is a desire for insurance policies covering losses stemming from a contractor or design professional failing to meet specific green standards, insurers remain on the sidelines, said David Cohen, senior product director for commercial insurance at Fireman's Fund Insurance Co. in Novato, Calif.

“There is certainly going to be litigation coming out soon around this issue and insurance companies are waiting to see” the loss results before developing coverage products, Mr. Cohen said.

“We had a lot of discussions internally about what we can do and we are still looking for ways to design a product,” Mr. Cohen said.

Fireman's Fund does provide certain green building coverages. For example, a Fireman's Fund property policy has been broadened with endorsements. Its features include no sublimits for plants and trees.

That way, vegetative roofs that rely extensively on plants are covered. Likewise, the policy covers normally excluded underground pipes and cisterns used to capture runoff water.

Insurers have amended general liability and environmental policies to address green building risks, such as defects related to rooftop gardens that could cause water damage, said Paul Becker, Nashville, Tenn.-based construction practice leader of Willis North America and president of the construction division of Willis Americas.

“Those products have been amended to address (green building) risks, but as far as a guarantee that (contractors) will achieve (a specific certified green building) status, that really is not something we have seen in the normal casualty market,” Mr. Becker said.

A contractor's failure to deliver a certain certification could fall under a surety bond remedy, Mr. Becker said. “But even the bonding companies are being pretty darn careful...whether or not they will agree to bond that guarantee,” he said.

So far, only one lawsuit involving a failure to deliver a green certification has gained much attention, several experts said. It involved a Maryland condominium project with tax credits at stake totaling hundreds of thousands of dollars. The claim was settled without resulting in any legal precedent, observers said.

More lawsuits have yet to surface, in part, because the tax credits and other green building incentives are still very new, said Edward B. Gentilcore, an expert on green building construction contracts and vice chairman of the construction group at Duane Morris L.L.P. in Pittsburgh.

“The incentives are much younger than the green building process itself,” Mr. Gentilcore said.

But contractors have entered into agreements promising they will deliver buildings that meet certification requirements and many of those contracts are silent on the consequences of failing to deliver on those promises, said Mr. Gentilcore, who added that it is likely that the courts will have to determine those consequences.

More lawsuits also could arise because many of buildings that have been under construction during the past two years are beginning to seek green certification status, said Thomas Taylor, general manager for Vertegy, an Alberici Enterprise and sustainability consultant in St. Louis.

“Because you have that glut that is about to hit, I think we are going to start seeing owners saying, "Wait a minute. We didn't get what we paid for,' “ Mr. Taylor said.

To protect themselves, contractors and design professionals should avoid contracts that promise they will deliver specific energy savings or a building that meets certain green certification requirements, unless they truly have the ability to do so and understand the risks, several experts said.

“The risk management process in green construction has to begin with the contract,” said Michael Kennedy, general counsel for Associated General Contractors of America in Arlington, Va.