Related: Read the article “How a disaster can endanger LEED certification” by Damon Gersch.

The most popular form is the “green upgrade” coverage. Following a covered loss, “traditional” buildings will be upgraded with green materials and equipment rather than “like kind and quality” replacement coverage. Such policies also cover business interruption that occurs during the time needed repairs are made. Green repairs may take longer than repairs with like kind and quality materials.

Construction: Where the Green Grass Grew

From her office overlooking historic Glastonbury, Conn., Linda Baronowskus, CPCU, CRM, saw green's luster. She values green as a personal responsibility to the planet as much as a viable economic business approach. Real estate investors sought her advice on insuring new green construction or refurbishing older commercial buildings to green standards. “In 2006-2009, green was the buzz and banks were still willing to lend,” said Baronowskus, whose focus as account executive at the Smith Brothers agency is construction-related insurance.

As capital dried up in the financial crisis, so did construction. “We're not seeing much demand at all now, though we've seen some recent movement to make green building improvements,” Baronowskus added. “There just aren't a whole lot of new structures going up, and if there are, fewer are seeking LEED certification.”

LEED is the U.S. Green Building Council's certification process that sets forth standards for architects and residential and commercial contractors that choose to use green materials, techniques and mechanical systems. In the latter half of the last decade, LEED certification began to emerge as a mainstream trend in commercial construction. That's changed.

“Demand has been low and part of that is the recession,” agreed Rod Taylor, managing director of Aon's Risk Solutions' Environmental Services Group. “There isn't nearly the kind of interest in new green construction that we had in the `boom' years.”

Large companies such as Hearst Publishing, Frito Lay, Livestrong, Marriott and Eaton Corp. have built trademark, LEED-certified home office buildings. Locating leased offices in LEED-certified buildings is considered desirable by certain business tenants. But much of the new green commercial construction in the past two years is occurring in the healthcare industry, where healthy buildings are part of the mission statement, Taylor said.

Though well-versed in pollution, professional liability and related GL packages for waste handlers/recyclers, environmental contractors and other customers, Denver-based Freberg Environmental Insurance (FEI) has seen only modest increases in demand for insurance products for “green” industries such as wind, solar and geothermal contractors and bio-fuels producers.

Related: Read the Mark E. Ruquet article “Benefiting from a greener world”.

“Rather than developing new insurance products tailored to this relatively small segment of the market, we've opted instead to take a more conservative approach,” said Cindy White, program manager for FEI's Environmental Contractors and Consultants Department. White's colleague at FEI, David Brereton, added, “There are many newcomers in these green industries. We think it's best to take a relatively cautious approach so that we can be confident that we are offering coverage of insureds truly qualified in their fields.”

New Products Still Emerging

In spite of the slowdown in construction, insurers who led the pack in green insurance and a few entrepreneurial MGAs are continuing to push into the new frontier. Typically, these new coverages and products tend to cover gaps or address risks surrounding renewable energy mandates.

California-based Fireman's Fund launched Green Financial Incentive Coverage in July 2010, which has been approved in all states except Florida, according to Stephen Bushnell, senior director of emerging industries.

The new coverage addresses tax or utility rebate recaptures. Like the federal energy efficiency tax rebate, many state and local governments are now offering incentives to residents who upgrade utilities with green equipment with rebates. Utilities in several states, such as New Jersey, also offer renewable energy incentives for solar panels or wind turbines added to properties. If the property owner suffers a covered loss, the owner has to pay all or part of the rebate back to the government. Fireman's endorsement covers this risk, among others.

“With the financial crisis that many governments are having now, this could well become a major issue,” Bushnell said. “We decided to get a policy form out there for our customers to help them protect the investment they made in renewable energy.”

Greener Pastures?

Coverages have sprouted to address renewable energy mandates such as a recently passed California law that requires utilities to derive 33 percent of power from renewable energy sources by 2020—the most aggressive renewable energy measure in the U.S.

Fireman's is among the carriers that introduced risk mitigation last year in California to address theft of solar panels. Fireman's also created an insurance program to cover solar power providers' exposures when installing solar panels on private property. Individual property owners can contract with these solar providers to receive reduced utility rates in exchange for hosting the panels on their property. Bushnell was so intrigued by the idea that he's got them on his own roof. “Some of these providers have up to 10,000 customers and are growing,” he said. “Each one has a property risk and liability risk. Our underwriters have been trained to recognize where it's a good risk and where it's not.”

Related: Read the article “Main Street producers can reap big benefits from growing the green sector”.

Catlin Insurance Group saw opportunity in green's uncertainty. The Bermuda-based company recently launched a professional liability policy that will pay a lump sum if a building fails to achieve certain LEED certification ratings, with a maximum limit of $500,000. The policy will only be offered when a third party provides oversight by a LEED professional for the certification process.

Massachusetts-based Energi, a U.S. program administrator and MGA whose core business is property-casualty coverages in the energy sector, teamed up with Hanover Re to launch two new warranty products last year. The Solar Installers Performance Warranty backstops the performance warranty from solar panel installers, which are required by certain states, developers and institutions that finance these projects to guarantee that their panels will generate a certain amount of kilowatt hours.

McCarthy is hopeful that this warranty coverage will play well in states like California by enabling solar installers to get these contingent liabilities off their balance sheets.

In December 2010, Energi introduced another unique product called the Energy Savings Warranty (ESW), a contractual liability backstop that transfers an Energy Services Company's (ESCO) performance guaranty risk that their installed energy savings measures will reduce energy costs. Like the solar performance warranty, the ESCO product enables broader financing of these projects. ESW provides the ability for emerging ESCOs to compete in a market that is dominated by a limited number of multinational companies, McCarthy said. A U.S. Government Accountability Office report released in 2008 identified this current lack of competition in the ESCO marketplace, indicating some form of insurance was needed to allow risk transfer.

Getting Ahead of the Climate Change Curve

As they up the ante for renewable energy, policymakers are also urging reduction of fossil fuel use and the need for creative approaches to reduce carbon footprints.

Zurich recently launched a coverage that enables businesses to move from more carbon-dense environments to eco-friendly ones by addressing supply chain factors, said Michael Golden, Zurich Financial Services' senior vice president of distribution management. This “supply chain insurance” allows customers to transfer their supply chain risks for named supplies and suppliers.

“For instance, if a manufacturer has a choice of being in location `A' where smog is a problem, supply chain insurance allows them to move up the coast to a smaller locale or to a country that is an emerging manufacturing location with the goal of creating a smaller carbon footprint,” Golden said.

For the product to work well and effectively transfer risk, Zurich works with brokers and customers to precisely identify their critical suppliers and critical routes to offer a broad coverage, he added.

The second new product, Zurich Fleet Intelligence, targets businesses with 500 vehicles and up—from small auto fleets to major long-haul trucking—to install in-vehicle sensors and equipment to precisely monitor driver behavior and routes. This way, they can manage their business in an environmentally friendly manner and save fuel. “Fleet owners can use this information to train these drivers not to brake hard or accelerate rapidly from red lights,” Golden said.

Key to any new product launch is profitability and sustainability, said Aon's Taylor. “These clients are already paying an extra premium for the cost of building green—from 1 percent to 5 percent for the components and paying for third-party oversight. Whether they are willing to pay more is a question.”

Bushnell says Fireman's continues to invest in R&D for green products in part because the company has seen green-related premium volume grow by $150 million through 2009. Customers who have Fireman's green coverages have a 10 percent better loss ratio than the rest of Fireman's business, he added. And the company's claims history indicates that green materials are also becoming cheaper and more accessible than in previous years.

“Electrical fires, plumbing leaks and HVAC issues are in the top five causes of commercial building losses,” Bushnell said. “With green renovations, even a 50-year-old building can perform like a new building from a risk standpoint. That's why we are excited about green.”

Bridging the Education Gap

Next to the economic slowdown, the next major reason green product sales have not yet fully developed is the need for more complete education and awareness in the agent and broker communities, carrier representatives said.

“These certainly are not off-the-shelf products a broker or agent can sell,” Golden said. “They are much more a consultative sell that requires good collaboration. The issues and solutions are still emerging, so we all have to work together to better understand the challenges and opportunities.”

Education is essential to unlock green's potential, but there's a steep learning curve that agents must climb, McCarthy said. Energi made a strategic decision to work with a limited number of independent agents—about a dozen—who have done their homework on how Energi's warranty products work. “Having our products gives them an advantage, something unique for their agency, and it reduces my operating costs,” he said. Energi provides video-based training for these agents via a Web portal.

Fireman's Fund holds bi-monthly meetings with a “green agents” network of about a dozen agents across the country to get their input on green products. The company also recently launched a “Green Risk Advisor” website available to the public and a “GoGreen Toolkit” to arm agents with good arguments when describing how green products can help improve customers' bottom lines.

“One of the barriers is that agents, in general, may still think of green as only an environmental conservation argument,” Fireman's Bushnell said. “The economic savings argument is more compelling.”

As Aon's “green expert” and environmental thought leader, Taylor believes that although the promise of green growth may have been initially oversold, its greatest promise may lie in improved employee productivity. If work conditions are good, especially air quality, employers may reap significant benefits from reduced absenteeism and greater worker output.

“While energy savings in water and electricity is attractive,” Taylor said, “it is far less significant than the cost of employing people who are achieving a high level of productivity.”