Is The Grass Greener For Insurers On The Sustainable Side Of The Fence?

LEED certification provides an extra level of risk management to cover the following nontraditional exposures.

o Vegetative roofing–using soil and plants to insulate a roof–minimizes the loss of heat in the winter and reduces cooling expenses in the summer. However, the additional weight of soil and vegetation creates structural integrity and collapse potential. Rainwater accumulation adds additional weight to the roofing structure.

Traditional insurance coverage may not readily cover vegetative roofing, presenting the insured with a significant, potentially uncovered loss.

Coverage for roof collapse may become contentious with carriers, as these claims usually revolve around whether the proximate cause of the loss was due to the weight of the rain, snow or ice, or due to an existing structural defect that predated the weather-related loss.

Discussion of the vegetative roofing system during the underwriting process should result in the appropriate green endorsement wording, which would avoid any future contentious claim.

Specific green endorsements are designed to cover the replacement of water-proof membranes, in addition to the total cost of re-planting the vegetative roof after repairs have been made.

o Rainwater runoff in green buildings is often collected in cisterns used for on-site cooling and gray-water systems (that is, waste water–including rainwater–often used for irrigation). But properly channeling the water collection from the roof to the holding tanks might provide challenges beyond traditional gutter systems.

If a leak occurs, mold exposure will present an additional challenge, given the tightly sealed nature of green-building construction. Since mold contamination has been a favorite target of plaintiff attorneys, it is important to control and monitor air quality in green building real estate.

Due to these challenges, insurance coverage for these systems is not typically available in the standard market. It might, however, be available in the excess and surplus property market.

o Alternative energy generation systems common in green real estate–such as solar panels, wind turbines and geo-thermal heating systems–need to be insured properly. Whether property insurance coverage is provided under a commercial property or a businessowner's policy, specific covered property should include damage to these alternative energy systems.

Unless alternative energy generation systems are specifically listed under the definition of "covered property," coverage may be contested or valuation issues may erupt during the course of a claim.

In addition to the direct damage exposures identified above, the following indirect business interruption and extra-expense exposures should also be thoroughly evaluated and addressed during the placement of a green real estate insurance policy:

o Alternative energy systems coverage should cover the loss of income due to onsite wind or solar energy production that is sold back to the local utility.

o Re-ventilation of the building after a loss–also known as re-commissioning–generally isn't included in standard business interruption and extra-expense forms. Specific green insurance policies often cover re-ventilation of the building.

o Rebuilding with green building materials to meet new zoning requirements may add additional expense to construction costs. Additionally, LEED certification requires that any metals be recycled by certified building material recycling companies.

According to Reed Construction Data (www.reedconstructiondata.com/news/2009/03/the-cost-of-building-green/), on average, green construction costs run 2-to-5 percent higher than traditional construction techniques, and availability of "green" building materials will largely determine the speed of any rebuilding effort. Therefore, this can impact the resulting business income loss.

o Special Energy Star-rated equipment may also be difficult to replace, especially if made by specialty manufacturers with limited production facilities. Such factories often have a backlog of orders.

It is therefore critical that a company using these highly efficient machines create contractual relationships guaranteeing expedited dispatch of machinery parts or total replacement in the event of a loss, and that the additional cost for this be covered as "expediting expense" on the policy.

Ensuring that suppliers can readily deliver highly efficient replacement machinery will help guarantee restoration of operations within the period of restoration specified in your business income coverage.

Proper valuation through a full-featured business income worksheet should be completed in concert with an insurance agent or broker that understands green property valuation exposures in an effort to mitigate any gaps in coverage.

GREEN BENEFITS CITED

Despite the added exposures presented by green construction and operations, there are several benefits to the greening movement in building construction.

Electrical, heating, ventilation and air-conditioning, and plumbing systems receive a thorough review as part of the LEED certification process, and therefore are much less likely to generate a loss for the company.

Additionally, LEED certification does require that machinery be replaced with Energy Star or equivalent energy saving equipment when available. Carriers specializing in green coverage often cover the increased cost of this new energy-efficient machinery, even if the existing machinery is not classed as energy saving.

Building green can present unexpected challenges that go beyond those presented by traditional property policies for both insurers and producers. Property and business income valuations will require knowledgeable advisors in green-building material replacement and vendor responsiveness.

Although no one can predict the ultimate path of green initiatives, there is no doubt that "greener" policies are here to stay for the insurance industry and will become more common as green construction takes root over the next several years.

Doug Richter (drichter@deloitte.com) and Kevin Bingham (kbingham@deloitte.com) are with Deloitte Consulting and Deloitte's Enterprise Sustainability Group. Robert Wendel (robertwendel@verizon.net) is a risk management consultant based in Westfield, N.J.