Marsh Finds Insurers Often Cautious with Green
- Jul 30, 2008
A new report from Marsh Inc., an international insurance broker and risk advisor, finds many insurance companies remaining on the sidelines as they work to determine the extent and types of exposures that might evolve from green building projects.
As the number of these projects grows throughout the United States, many leading commercial property and casualty insurers have been reluctant to provide the specialized coverages or program enhancements this construction may require or warrant. According to the Marsh report, the property and design professional liability insurance markets have been the first to develop enhanced coverages or provide specific risk management advice around the green-built environment.
When reached by CPN this morning Catha Pavloff, a senior vice president in Marsh’s construction practice and leader of the firm’s green building risk management initiative said, “It’s too early to predict what the financial impact will be. In certain areas premiums may increase and underwriters may impose coverage restrictions. In other areas we may see broadened coverage for less premium. It will be a function of how underwriters perceive the developing risk and what claim activity there is.”
“By and large, insurance companies are carefully monitoring the progress of green construction, the evolution of the contracts that define roles and allocate risks on these projects, and the reliability and durability of green materials and systems,” said Pavloff in a release accompanying the report. The report describes how insurers are responding to the Green Building trends across several lines of coverage.
For instance, while professional liability insurers have yet to develop new insurance policies or coverage enhancements, many currently provide clients with related risk management advice. Meanwhile, in light of the fact that the American Institute of Architects has supported the U.S. Green Building Council’s LEED Certification, insurers are watching this sector to determine whether the certification may be an effective risk differentiator for architects and engineers involved in green projects.
At the same time, professional liability insurers already have received claims brought against architects and engineers involved in green building for a range of issues, including failure for a building to achieve desired LEED certification, leaks associated with green roofing, indoor air pollution and mold associated with cork flooring.
With respect to property coverage, Marsh advises businesses seeking insurance for green facilities to be sure they determine proper values to avoid being underinsured or being charged too much premium. For instance, valuing the cost of vegetative roofs and alternative water and energy systems may be difficult because they usually involve new materials and technologies.
Notably, property insurers have been the first to offer special coverage for green and LEED certified buildings. “Despite concerns about green roofs and the potential for water damage and structural problems, many property underwriters are beginning to recognize the potential benefits of green buildings,” said Pavloff. “For instance, the green building certification process helps to verify that the electrical, HVAC and plumbing systems are working at high levels of efficiency, thus reducing the possibility of a loss.”
In the builder’s risk line, underwriters are leery of risks related to project delays because of extra time that may be associated with procuring special equipment, the time and the cost associated with flushing out a reconstructed space with fresh air and adding new filtration media to conform to LEED standards. Meanwhile, among insurers providing environmental coverage, one has introduced premium credits for LEED-certified construction and others may offer similar credits or provide coverage enhancements in the future as they begin to recognize the potential benefits of green construction and gain a better understanding about possible mold exposures.
Casualty underwriters reportedly have the most significant concerns about green building exposures, with most viewing such projects as potentially more risky than traditional construction. Their concerns range from the lack of appropriate qualifications and experience of contractors and subcontractors, which could result in faulty workmanship and construction defect claims; to the use of new and untested products, materials, and processes, which could lead to an increase in products liability and completed operations claims, and new roof systems and the related potential for structural and water damage claims. They also are uncertain about new HVAC handling systems and related performance and air quality issues, and the possibility that inadequate maintenance could increase liability risk for construction contractors.
The insurers plan to track loss data and ask more questions about green projects, primarily regarding contractor and subcontractor qualifications, experience and quality control programs during the construction and maintenance phases. Among surety underwriters, concerns about green building revolve around onerous contract provisions and the risk of inadvertently guaranteeing a specific performance or efficacy for energy usage, water consumption, and LEED certification.
“Looking ahead, what happens in the surety market is likely to depend on sureties’ actual experience, the experience and qualifications of the firms working on green projects, and the contractual allocation of risk,” Pavloff noted.
According to Nick Whitfield of Businessinsurance.com, more insurers are offering tailored coverage to make the transition to more green buildings. ”At least five insurers already offer products designed to fund rebuilding damaged properties to meet certain environmental and building standards. While the products are in their infancy, insurers and brokers say the huge interest in environmental issues will increase demand,” Whitfield noted.