By Susanne Sclafane, managing editor, NationalUnderwrtier P&C

“Greenwashing” sounds like a reference to environmentallyfriendly laundry products, but when the term is applied toconstruction or property management operations, it can signaldecidedly unfriendly consequences for participants in the buildingprocess, such as lawsuits and organized protests.

Joseph Fobert, senior vice president and practice leader for thereal estate solutions group of Chartis Insurance in Tampa, Fla.,explained that when builders, contractors, real estate owners ormanagers promise to undertake green-building processes, if finishedconstruction projects fall short of promised levels of greenness,then one or more project participants might face allegations ofgreenwashing–or green whitewashing.

The promise, he explained, can take any number of forms.

For example, a real estate owner for a business complex may toutthe prospect of
a certain amount of savings on energy bills.

Alternatively, pre-construction marketing aimed at attractingtenants or charging higher rents for an apartment complex mightadvertise the prospect of a cleaner environment, warranting theachievement of a Platinum LEED certification from the United StatesGreen Building Council. (LEED stands for Leadership in Energy andEnvironmental Design. For details, go to www.usgbc.org.)

Green-building generally involves practices aimed at increasingefficiency and sustainability of buildings and their use of energy,water and materials. Organizations such as the USGBC and EnergyStar have set green-building benchmarks measuring performance inseveral key areas of human and environmental health. (See “What itmeans to be green” sidebar.)

USGBC, for example, assigns point values to each area, such as17 possible points for energy efficiency issues. Certificationlevels–certified, silver, gold or platinum–are determined based ontotal values assigned.

Experts say that while green-building initiatives may reducerisks related to property damage and bodily injury typicallycovered by commercial general liability policies, there are a hostof liability risks that fall into grayer coverage areas. Badpublicity arising from greenwashing allegations is one of them,Fobert said.

The typical coverage afforded under a CGL policy is for bodilyinjury and property damage liability, and advertising or personalinjury, he noted. Breach of warranty and breach of contract areexclusions, he added, explaining that when a third party alleges abuilding didn't live up to its green-building hype, insured realestate owners or property managers might not find coverage under aCGL policy for the costs of responding to such charges.

“The exposures to these individuals are predominately economicand reputational,” he said.

One way in which the Chartis Green Reputation endorsement canfill the gap is by providing crisis management consulting services,he said. In the event of adverse publicity events and lawsuits,buyers of the endorsement–introduced about a year ago–get 24/7/365access to crisis consulting firms that are under contract withChartis.

Fobert said just the threat of an adverse publicity event orlawsuit can trigger coverage.

An executive at the insured company, for example, might hearthat a group of protesters will be outside at 8 a.m. the next daybecause a building is not green enough, or because builders ploweddown a forest to make way for a building project, heexplained–noting there are many groups of eco-terrorists whose solepurpose is to generate publicity when they uncover shortcomings ingreen guarantees or activities that damage the environment.

Eco-terrorism and negative publicity are by no means the biggestrisks on the minds of real estate and building executives. Fobertsaid Chartis, as well as members of property owner trade groups,see substantial first-party financial costs arising from the needto correct deficiencies in properties that fail to achieve greenstandards.

Uncovered costs

Fobert gave the example of a developer or owner contractuallywarranting that a prospective tenant will be able to get a certainnumber of carbon credits. “The architect, the engineer, thedesigner, the manufacturer–somebody along the way doesn't get itdone right. There are then not only going to be defense costs”–todeal with lawsuits–”but there's a financial impact contractually tonow go and do it right.”

While defense costs are covered by the Green Reputation CGLendorsement, Fobert said the cost of making things right is notcurrently covered under standard property policies.

Chartis and other insurers have introduced “upgrade-to-green”property coverages, but those are only triggered in the event of aphysical property loss–allowing an insured to upgrade to agreen-certified level in the event an insured building burns down,for example. (See “What are the liability exposures” sidebar.”)

“What about the financial cost to the first party of makingthemselves green so they can comply with these contracts” withleasers and tenants? Fobert asked.

“Actually getting green-certified is not easy–and it's costly,”he said. A developer or builder that secured $100 million in loansto put up a building might now need another $25 million–a prospectthat's particularly tough in the current economy, he added.

“It is something that I see as an exposure, and I'm not sayingwe're looking at doing it, or we're not looking at doing it,” hesaid, referring to the possibility of creating an insurancecoverage response.

Paul Primavera, senior vice president of claims in theWashington office of broker Lockton, flagged the cost ofinvestigating which party is at fault for the failure of a buildingto meet a performance standard as another that might not be coveredby insurance policies as they're now crafted.

“There are many factors that go into certifying a building to acertain level,” he said–noting, for example, that a building'semissions might turn out to be 20 percent greater than they shouldbe for a gold or silver certification.

The higher-than-expected emissions could give rise to abreach-of-contract claim by an owner against a general contractorfor failing to live up to an agreement to provide a green building,he said. While the “root cause” of the high emissions might not bereadily evident, the cost “just to investigate that is going to beexpensive. Testing will need to be done,” he explained.

Primavera suggested that even after spending a great deal ofmoney, testing might only produce a finding that the ventilationsystem is causing the emissions problem–but it could still beunclear if there's a design flaw or some problem with the pipingthat's flowing emission steam out of the building. “Was it theresult of a design error or a construction error? We don't know,”he said.

Explaining why the investigation costs might not be covered, hesaid CGL policies require an occurrence, as well as covereddamages, to respond. “There has to be an accidental event, and inmany states, defective work is not considered accidental.”

Turning to the issue of damage–property damage liability, inparticular–he noted that while the venting may be the cause of theemissions problem in this example, “there's really no damage to theventing. It's just the way it was constructed,” he said, drawing aparallel to a situation where a handrail for a stairway is supposedto be four feet off the ground but is placed 6 feet off the groundinstead. “There's no damage. That's not covered under the CGLpolicy,” he said.

If the design was correct, “we're stuck with a claim that is notGL- or professional liability-based” and a contractor that “may nothave coverage from a pure property and casualty standpoint.”

While Primavera agreed that an owner might be able to call upona surety bond guaranteeing the performance of a contractor in thistype of situation, “that gets problematic,” he said.

“That's there for protection, but you have to be careful abouthaving claims on it, he said, noting that sureties can look back tothe contractor to recoup costs. “It's a solution, but it's notnecessarily an adequate solution,” he added.

New coverages emerge

Although costs to pinpoint sources of a building'snonperformance or to correct deficiencies in undamaged buildingsaren't covered by standard liability and property insurancepolicies, Fobert confirmed that Chartis' Green Reputation CGLpolicy endorsement does cover costs to defend green-buildinglawsuits.

Beyond standard CGL occurrences, the endorsement defines an“adverse green claim” as a cause of loss–”a civil lawsuit fromanyone other than an insured under [the] policy demanding monetaryor non-monetary relief and alleging your failure to meet or complywith industry-recognized green-building standards.”

The endorsement defines adverse defense costs as “reasonable andnecessary costs and expenses resulting solely from the response toand/or defense to or appeal of an adverse green claim,” headded.

Fobert said typical buyers would be owners, real estateinvestment trusts, asset managers, property managers, developers orgeneral contractors involved in commercial or residentialconstruction.

He said while there is no filed cap, a recommended meaningfullimit is $50,000 per occurrence and $100,000 in aggregate.

The minimum endorsement premium is $2,500, but an average chargeis $10,000, he said, noting that the actual amount will depend onthe extent of the “greenness” of the project. “Are you going forEnergy Star or are you going for LEED Platinum? How have you soldthat?

“To my knowledge, from a GL standpoint, we are the first carrierto release Green CGL endorsements,” he said–also referring to asecond Chartis endorsement, known as the Green Indoor Environmentendorsement, which focuses on the pollution exclusion of CGLpolicies and potential gray areas of coverage related to themaintenance of special equipment to improve indoor air, water orclimate quality.

While the typical wording of the pollution exclusion from theInsurance Services Office has broadened over the years–with theintroduction of exceptions to the exclusion for hostile fires andheating equipment–the standard wording still does refer to all“fumes and vapors” as pollutants that trigger the exclusion.

Fobert said green-building equipment is costly and technicallychallenging to maintain. Under the endorsement, if such equipmentbreaks down and “a substance or odor [is released] that causesbodily injury, that's now covered as an occurrence,” he said.

ACE USA is tackling a different set of environmentalexposures–those arising during the building process rather thanthose from equipment maintenance–through a green-specificcontractors pollution liability program known as ACE Green CPL.

William Hazelton, senior vice president of ACE EnvironmentalRisk in New York, said ACE Green CPL–introduced in April 2009–isunlike most contractors pollution liability policies in that it isproject-specific. It can be written as an owner-controlled program,a contractor-controlled program, or as a standalone contractorspollution liability project placement, he said.

He also identified three features–enhanced coverage, premiumdiscounts and green-specific risk managementservices–distinguishing the program from ACE's standard contractorspollution coverage.

“There's broader coverage available for fungi and legionellabacterium,” he said–also noting the availability of coverage fornon-owned locations to which green-building contractors take theirwaste. There's also expanded coverage for transportation exposuresand for completed operations not found under ACE's standardcontractors pollution form, he said.

“We're being affirmative that those would be covered,” he said,explaining his use of the term “broader coverage.” Most otherpolicies in the contractors pollution world “are silent” onlegionella, for example, with no language either explicitlygranting coverage or excluding it.

Hazelton said policy discounts for ACE Green CPL are typicallyin the 10 percent range. “We've taken this very idealistic approachthat if someone is going to do something inherently good, likebuild a green building, [then] we're going to give some discountsfor that,” even though green-building risks “actually may begreater to take on from an insurance perspective.”

Illustrating the greater risks, he noted, for example, thatpollution liability insurers don't have a history of monitoringclaims related to vegetative roofs used in some green projects.Such roofs may raise water intrusion potential and ultimatelyincrease mold exposure, he said.

In addition to coverage, Hazelton said ACE provides servicesthrough its own environmental consulting firm, Hygienetics–a unitof ESIS, a risk management subsidiary. “We can giveLEED-certification training to our contractors,” he said,explaining that if an insured firm only has a few employees on sitewith proper certification from the Green Building Council, thentraining sessions can bring the rest up to speed.

In addition, because Hygenietics employs LEED-certifiedindividuals, the firm can perform the actual certification processfor a building, he said. The consulting firm can also performindoor air quality and comfort monitoring, and even help clientscalculate their carbon footprint, he added, noting that servicecosts can be built into the cost of the insurance program, orseparately purchased outside of it.

Hazelton said ESIS' participation in the underwriting process isdetermined on a project-by-project basis, noting that the targetmarket for the program includes contractors working on buildings inthe LEED-certification process and those involved in renewableenergy projects, such as power plants and wind farms.

Policy limits up to $50 million are available, with terms up to13 years, he said. Costs vary by project, but since most projectshave construction values in the hundreds of millions of dollars,premiums are typically at the six-figure level, he noted.

Beyond contractors, Hazelton said ACE Environmental offers agreen endorsement to its standard premises pollution liabilitypolicy. The PPL Green endorsement has the same coverage and servicefeatures as ACE Green CPL, he said.

Originally published in the January 11, 2010, issue ofNational Underwriter P&C

Susanne Sclafane is managing editor of NationalUnderwriter P&C,part of Summit Business Media's P&CMagazine Group, which includes American Agent &Broker.