Over the past decade, LEED certification has become an increasingly popular objective for builders and owners of commercial and residential properties. According to the USGBC, more than 36,000 commercial projects and 38,000 single-family homes have already participated in LEED since the rating system was first introduced in 2000. The volume of participating properties is enormous—about six billion square feet of projects are registered, and developers of another six billion square feet of projects are currently pursuing certification.
Although claims adjusters are generally familiar with the LEED concept, relatively few among them possess comprehensive knowledge of how LEED certification affects the recovery process following a disaster, such as a flood or fire. This knowledge gap creates risks for both the insured and the insurer, but adjusters can close that gap by more carefully assessing how restoration of an insured LEED-certified property differs from disaster recovery for real estate not certified by LEED.
Although most LEED rating systems do not require periodic recertification audits, there is an exception in the case of LEED for Existing Buildings (LEED EB): Operations and Maintenance (O&M). This certification, which encompasses maintenance programs, energy and water usage, waste management, and indoor environmental quality, is performance-based, and requires recertification every five years.
The bad news—which few adjusters are aware of and even fewer address—is that if an LEED EB: O&M-rated building experiences a disaster, it is at risk of losing its LEED certification unless it is restored with a rating-appropriate approach. For example, if a building’s HVAC system is damaged, and a company replaces it with an inferior or alternative system that is less environmentally friendly, the building may no longer qualify for its certification when the five-year audit is conducted.
It is also important to note that LEED guidelines are still fairly new. The laws governing them are constantly being refined, so it’s entirely possible that other types of LEED certifications will be subject to periodic audits in the near future. This means that buildings that have achieved other LEED ratings, such as LEED New Construction and Major Renovation, could also be subject to the loss of certification if the materials and methods used to restore and repair the damages following a loss are not up to LEED standards.
Forestry Stewardship Council-certified wood, for example, is equivalent to one LEED credit, whereas standard plywood is not. One point may not sound like much, but it could easily be the deciding factor between a lower and higher rating. Under current guidelines, 34 to 42 points are required for a LEED Certified Building; 43 to 50 for LEED Silver rating; 51 to 67 for LEED Gold; and 68 to 92 for LEED Platinum rating. In other words, every point counts, and these points ultimately translate into money.
Another consideration is the increasing popularity of “green insurance,” which offers more generous policies to owners of eco-friendly commercial or residential buildings, compared to policies for commercial and residential buildings that have not received any kind of formal green recognition. A 2009 Wall Street Journal article explained this dichotomy, noting that green buildings are perceived as safer and less expensive to operate in the long run. Furthermore, some insurance companies are now offering homeowners the option, in the event of a loss, to have damaged areas restored with green materials for a small premium.
As LEED continues to gain traction within the real estate market, it is essential for claims adjusters to familiarize themselves with LEED rating systems. If they don’t understand the higher performance levels LEED buildings must meet to retain their certification, adjusters may end up approving restoration efforts that do not fulfill policy obligations of “like kind and quality.”
There are many aspects of the restoration process that may prove problematic when it comes to LEED regulations. For instance, many of the cleaning chemicals that have been used by restoration companies over the years would not be considered to be environmentally friendly by today’s standards. Even the most common supplies used on a typical restoration project, including cleaning detergents, solutions, deodorizers, and heavy solvents, have a clear impact on a building’s indoor environment. As a result, the use of some toxic cleaning supplies used in the restoration process may result in the need for the same work to be performed again in order to correct the error. In the context of repairs and reconstruction, when you consider the possibility of having to replace new construction materials that don’t meet the existing standards, the potential costs incurred from these mistakes can be enormous.
Fortunately, there are many ways to ensure that such replacement costs are not incurred. The first step is for claims adjusters to fully understand that LEED-rated buildings are holistic entities.
As William S. Janhonen, environmental consultant for WSJ Enterprises explains, “Because of the integrated nature of the building, you cannot look at adjustments as just a ‘quick fix’ to a disaster. The view of how the damage to the structure affects the function of the entire building has to be considered.” He continued, stating that “Out-of-the-box construction by green builders requires out-of-the-box adjusting approaches. Just listing the number of 2x4s and sheets of plywood, plus the labor at X number of hours isn’t going to suffice, unless the adjuster knows how the integration of the building relies upon the specifications of construction.”
Janhonen offers a hypothetical example to illustrate this point, using the case of a hotel fire which has resulted in the loss of five rooms. “If the entire hotel was fitted with LED lights, the cost savings in kilowatt hours might be huge, and each LED bulb may have cost $13 to $20 per bulb,” he posits. “An adjuster may allow $1.39 per replacement bulb because that’s in a typical pricing database for a 65-watt incandescent bulb, not knowing that an LED bulb runs on just 8 watts and lasts 50,000 hours.” Adjusters must have a clear understanding of the issues involved when dealing with LEED certified property, and should also consider the true replacement cost, rather than relying on what standard pricing programs may indicate.
Furthermore, every insurance firm should have LEED Green Associates and LEED Accredited Professionals on staff to provide guidance in such situations and ensure that restoration efforts of LEED-rated buildings incorporate green practices and materials. Fortunately, there are a wide variety of training courses available both in person and online, many of which are listed on the USGBC site, www.usgbc.org.
Alternatively, firms can consider working with consultants when training isn’t feasible, or when time is limited. Companies should also conduct due diligence when determining which contractors to hire in restoration efforts. Do these contractors have LEED accredited professionals on staff? Do they offer green services or products? As LEED building methods become more prevalent, these are important questions to ask before deciding on a contractor.
Some insurance firms are taking these preventative steps, but there is still a long way to go to reduce the knowledge gap that exists among claims adjusters regarding LEED issues. Meanwhile, LEED continues to gain popularity, and these numbers are sure to continue growing, especially now that new rating systems are being introduced at a rapid rate. LEED for Retail, for instance, was just launched in November.
In short, insurance firms ignore LEED at their own peril. It is vital that insurance companies educate their adjusters about green building in order to remain relevant. Disasters do not distinguish between LEED-rated buildings and non-LEED buildings, but restoration and reconstruction efforts must. If those regulations are ignored, your customers could lose their certification, and may even hold you and your company liable for both the short- and long-term losses incurred as a result of the adjusting decisions made following a loss. Adjusting professionals should avoid exposing themselves to the risks of not being versed in LEED building standards, but should learn the ins and outs of the ratings. In fact, a firm’s survival may depend upon it.