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Once a novel concept, green construction is becoming mainstream.
In fact, it has been estimated that green construction would increase 400% in 2013 compared with 2011. As with any developing industry, the risks and liabilities attendant to that industry develop over time. So, too, do the options to spread the risk of such an exposure.
Not surprisingly since the first U.S. green insurance product was introduced by Fireman's Fund Insurance Co. in 2006, many more insurers have entered the fray to offer additional coverage options to address potential exposures.
An important question for companies participating in the green construction process is whether they have sufficient insurance to protect against anticipated and unforeseen risks.
In fact, proactive risk management considerations today could pay off multifold tomorrow. An important component is an insurance audit to determine the scope of existing coverage and how to fill any gaps. As with any business activity that may create new exposures, insurers are quick to offer specialty coverage to address that risk. Until the market for those products expands, however, they can be quite expensive.
Without a full appreciation of its own unique exposures, it is difficult for a company involved in green construction to know what specific specialty coverage may be necessary and if the cost is reasonable.
Cyber security coverage provides an analogous situation. As cyber risks became more prevalent, several insurers offered expansive but expensive protection. Many companies, validly concerned about their potential exposure, have purchased specialty coverage that either did not address that company's unique cyber risks or “overinsured” the company.
For example, until case law developed, many companies were more likely to face liability for cyber breach response costs (e.g., expenses associated with credit monitoring, investigating and stopping the breach, and public relations) as opposed to litigation costs. As a result, specific cyber security litigation insurance may not be necessary.
Additionally, broad cyber coverage may not be necessary in some instances because adequate protection is provided by traditional coverages, such as commercial general liability, business interruption, errors and omissions liability, directors and officers liability, media liability or crime insurance. Companies that have conducted coverage audits before adding specific cyber security protection to their insurance portfolio have been able to most cost-effectively insure against those risks.
The same holds true for green construction risks. Before companies pay expensive premiums for policies or endorsements to their existing policies that address green exposures, they should evaluate the specific risks they face and, thus, the type of specialty coverage that may be appropriate. Before going to market, the company should evaluate its traditional coverages to determine how they will respond to the identified risks. Then a company can determine specific green insurance products to purchase. If the existing coverage is potentially adequate, then the need for additional protection may be limited.
For example, with respect to first-party coverage, it may not be immediately apparent that additional protection is necessary. However, specific green endorsements or coverage could provide important protection for a property loss at a green building.
Consider a fire that causes substantial damage to a building that was constructed pursuant to green standards. To rebuild, significant portions of the building must be removed and destroyed. Many property policies contain coverage for “debris removal;” often, an additional policy limit applies to pay for such removal. Debris removal provisions in many policies will pay for “reasonable and necessary” expenses incurred in removing debris from the covered property. But, what constitutes “reasonable” may require the policyholder to send the destroyed property to a landfill.
With green materials, policyholders may be required to do more than that, however. In many instances debris cannot simply be disposed of inexpensively. Instead, the policyholder must expend additional sums to recycle “debris.” “Recycling” debris may not be covered by certain policies. However, many green coverage endorsements will pay for “the reasonable and necessary additional cost incurred by the insured for green removal, disposal or recycling of damaged insured property.”
Whether this additional coverage is necessary will depend upon the breadth of the debris removal coverage contained in the policyholder's existing property policy.
Another example where additional coverage may be important is with respect to business interruption losses.
Business interruption policies typically will pay for lost profits during a specifically defined “period of indemnity”—the time that it reasonably should take the insured to replace or repair its property before it can return to normal business operations. With respect to a damaged or destroyed green building, the reconstruction process can take longer, possibly substantially so, due to needs to comply with certification issues, possible delays in obtaining special materials, the need to use special equipment and consultants, and other reasons.
Traditional property policies often apply a “reasonableness” standard to ascertain the proper period of indemnity during which the policyholder is entitled to reimbursement. Without specific allowances for rebuilding under green standards, which could lead to delays, an insurer may argue that the building could have been completed and the policyholder back in business sooner if it rebuilt in nonconformance with green requirements.
Again, whether the buyer may need additional protection with respect to its business interruption coverage will depend on the scope of its current coverage and whether the period of indemnity in that policy can be argued to include a consideration of green reconstruction. And if the buyer decides that green coverage is necessary, it should be careful to ensure that the policy it purchases defines “green” in a manner that provides maximum protection. It may be that the policy definition is not sufficiently broad to address the buyer's specific needs.
The same is true with respect to whether the insured's property coverage will pay for the additional costs associated with rebuilding a green building, such as more expensive materials, the need for specific consultants to ensure that the construction is in compliance with green standards, extra costs associated with air filtration issues and other costs, or additional amounts spent to meet new green standards that have developed since the building first was constructed.
Someday, building green and the attendant expenses may be the norm. Until that time, it may be that insurers will argue against reimbursing the additional green expenditures. However, until a policyholder conducts a detailed review of the company's existing property coverage, it may be difficult to determine the extent to which additional protection is necessary. And if the purchaser of insurance decides that green coverage is necessary, it should be careful to ensure that the policy it purchases defines “green” in a manner that provides maximum protection. It may be that the policy definition is not sufficiently broad to address the policyholder's specific needs.
Companies also should consider whether green construction issues may require an evaluation of third-party coverages such as commercial general liability and errors and omissions policies. Construction defect claims have been and will be pursued at green projects, as with nongreen projects. Traditional disputes under the CGL coverage issued for a construction project in question, or the policies purchased individually by the various contractors on the project, arguably will arise, regardless of whether the construction is green.
For example, a claimant may argue that a building is defective because otherwise, well-functioning green materials were improperly installed in a building and thus caused damage. Insurers typically argue against coverage for alleged defects in a given contractor's work, but will pay for such defective work that damages another contractor's activities on the project. In that scenario, traditional CGL coverage may be sufficient to respond to the claim.
Additional coverage issues may arise with respect to increasing lawsuits regarding “greenwashing,” which essentially addresses claims that individuals or entities overpromised the green benefits of their product or work that they perform on a product. Under a CGL policy, insurers may argue against coverage by arguing that the policy does not cover the failure of a product to perform as advertised or promised. Depending upon the nature of the claim and the policy language at issue, the insurer may have a basis to avoid coverage.
Additionally, whether greenwashing claims are covered under E&O policies again will depend upon specific policy language, including the definition of “professional activities” contained in the policy at issue and whether it contains applicable exclusions.
As the risks attendant to and potential liabilities associated with green construction continue to develop, so too will the availability of specialty coverage to address the risks. As more insurers enter the market, the cost of such insurance products will decrease. However, before a policyholder spends additional premium dollars on this coverage, it should audit its specific business risks and its existing insurance policies to ensure that it does “overinsure” against its green risks.
Linda D. Kornfeld is a Los Angeles-based partner in Jenner & Block L.L.P.'s litigation department and is a member of the insurance litigation and counseling practice, representing corporate and individual policyholders in high-stakes litigation. She can be reached at (213) 239-5176 or email@example.com.