Viewing The World Thru Green-Colored Glasses Shows Insurers New Opportunities

The "green" movement is becoming progressively more relevant to the insurance industry as consumers react to reports about the impact of climate change, and as President Barack Obama launches his agenda to promote energy efficiency while improving the economy, the environment and national security.

"Going green" encourages a trend toward the use and support of environmentally friendly products and materials--everything from energy-efficient hybrid cars to washers, refrigerators and other appliances.

In addition, green building construction is becoming more common in commercial and residential projects, as some reports estimate buildings use 40 percent of the total energy consumed in the United States.

As more people and organizations become concerned with the size of their carbon footprints--and begin to see that making a positive environmental impact is a badge of honor (and possibly a powerful marketing tool)--the green building movement is gaining momentum.

Underwriters are now focusing on the insurance implications of green awareness, such as appropriate coverage for buildings that are built, repaired or renovated using green building design and construction techniques.

This applies not only to the "brick-and-mortar" first-party coverage issues, but also requires consideration of third-party liabilities that may arise for design professionals and contractors deploying new technologies and techniques in the field.

Green building efforts did not achieve broad market acceptance when first introduced. The U.S. Green Building Council and its Leadership in Energy and Environmental Design (LEED) system helped change that a few years ago when its standards in commercial building design were widely embraced.

Today, many federal and state government buildings must meet LEED requirements, and large cities are increasingly supporting the requirements established under the LEED rating system.

Following the devastating tornado that leveled the town of Greensberg, Kan., in May 2007, town leaders decided not only to rebuild the town but to become a model green community, employing green technologies and techniques for everything from building construction to energy independence.

From an underwriter's perspective, there may be advantages to construction and design techniques that might be applied under the LEED standards (see accompanying infographic), or other standards that have emerged under similar programs that should help mitigate risk.

o Energy-efficient lighting creates less heat and can reduce fire hazard.

o Vegetative rooftops reflect sunlight and reduce energy consumption needed for cooling building interiors.

o Grid-independent solar power systems limit business interruptions.

o Energy-efficient windows resist shattering from heat and breakage by thieves.

o Low-VOC (volatile organic compound) paints and adhesives improve indoor air quality.

The certification process itself can be attractive to underwriters. For example, the process can help verify that electrical systems are working at efficient levels, reducing the possibility of a fire loss.

The impact is not only on commercial buildings. The U.S. Green Building Council recently implemented a certification system for residential properties that is likely to have an impact on residential construction.

For example, the city of Annapolis, Md., will require that certain new single-family residential construction be LEED-certified, or the equivalent, after July 1, 2009.

Whether it's because of the growing trend of city, town and municipal ordinances to require green building construction, the emergence of more environmentally conscious insureds, or marketing and competition, underwriters are expressing interest in providing consumers with appropriate coverage for green buildings.

An insurer can accomplish this by tweaking existing insurance programs or by developing brand-new coverage options. In either case, certain potential risks need to be considered carefully and addressed before such coverages and programs can be implemented.

A vegetative roof could become dangerously dry during an unexpected drought. There could be an increased risk of water damage and mold if excessive rain or watering of the vegetation occurs and the water leaks through the roof. Replacement of vegetation and landscaping after a loss is also likely to increase costs.

In addition, many of the construction products and techniques that may be considered green-certifiable are relatively new and therefore unproven. This can lead to potential new risk and loss exposures down the road.

For example, better building-ventilation intended to improve indoor air quality could draw excessive moisture into a building and possibly increase mold exposure, especially if the building is located in a humid climate.

Rebuilding delays after a loss have also been cited as a potential drawback that could increase costs.

Lack of availability of green products because of increased demand could lead to building project delays. Such shortages may impact various coverages under property forms, such as loss of use, business interruption and business income expenses.

From a liability perspective, design professionals may be found liable if a project intended to meet certification standards fails to do so. This may deter designers from becoming involved and discourage them from promoting green building design.

Because the green building trend is relatively new, there is apprehension about the availability of experienced and qualified contractors, subcontractors, architects and design specialists.

Design and building contracts do not always address the green responsibilities and expectations of the various parties, resulting in the potential for finger-pointing when certain performance expectations go unmet.

Insurers are carefully considering the extent and type of exposures that may evolve from the green movement. But the trend continues to grow, and underwriters will want to offer their customers appropriate options to meet coverage needs.

The green movement is continually evolving. We can anticipate a steady increase not only in the acceptance of green technology but in the development of new, exciting green ideas and alternatives.

Insurers will need to evaluate this important issue and determine the best way to meet their consumers' needs, as the green building trend undoubtedly will continue to grow.