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By ERIN GAZICA, a freelance writer based in Pottsville, Pa.

Green building might be at the forefront of the construction industry's attention, but it comprises a very small percentage of the entire industry and is still a bit of an unknown from an insurance perspective. Without much claims data available on green building, construction company owners and contractors are faced with risks that have not yet been addressed by the market.

The goal of the forums was to aid Marsh and its insurance partners in developing insurance solutions to green building exposures.

One of the top five risks identified by participants in the forums was standards of care/legal issues. Standards for green building are, for the most part, voluntary. Take the forerunner, the U.S. Green Building Council's Leadership in Energy and Environmental Design program, a national rating system for developing high-performance, sustainable buildings. LEED focuses on strategies for sustainable site development, water savings, energy efficiency, materials and resources selection, and indoor environmental quality.

According to Catha Pavloff, the Green Building Team leader, LEED is beginning to be treated as a mandatory certification and is being incorporated into local building codes in some jurisdictions across the United States. Pavloff, a LEED accredited professional, said this is a "major risk for everyone involved."

Noncompliance with new regulations would impact all stakeholders--from the owner to the design firm to the contractors--especially because most insurance policies do not cover noncompliance with regulatory requirements.

The quirky thing is that the public sector is placing so much stock in the Green Building Council, which is a private entity.

"What's happening is because they've done so much work, the governmental agencies are adopting LEED as their de facto governmental requirement," said Michael Feigin, Marsh's Global Construction Practice leader.

Feigin said it's yet to be seen how this emerging risk will play out in the construction industry. He said he draws an analogy to the Americans with Disabilities Act, which initially disrupted the construction industry when it first became law.

"Now it's just part of what people do," he said. "It's been assimilated into normal construction practices, and eventually you are going to see the same thing in green design and construction, whether it's LEED or something else."

But the implications of making something like LEED mandatory aren't the only risks. Simply achieving LEED certification is a difficult undertaking, one complicated by the ability of third parties to conform to the standard.

"You can be well versed in what it takes to get a LEED certification, but if a consultant or subcontractor doesn't follow the process correctly or does something fraudulent or is not trained properly to recycle materials or use local materials, that can prevent a building from actually achieving LEED certification," said Pavloff.

Executives in the construction industry also have more to worry about than green standards. The forums identified another major risk, that of the reliability and performance of green building materials.

Feigin, a construction industry veteran himself who has been well schooled on sustainability and green concepts, said subcontractors, architects and engineers need to be able to use products and materials that are going to last.

"They need to have experience with these new systems, installing them properly, designing the details properly, and if they don't you'll, get all this stuff into a building that may be LEED certified but it's not going to perform how you want it to perform and you might have unhappy tenants or owners," said Feigin.

In addition to performance, financial risk was also a top concern of the green building forum participants. In particular, they worried about the sustainability of green initiatives in an economic downturn and the ignorance of lenders and financial institutions about green initiatives.

Pavloff said money for new construction has dried up, that "lenders are like ghosts at the table right now," and that any green building initiative out there is being funded by some sort of government program.

"It's no surprise that the focus is getting the economy back on track," she said. "We're going to be seeing more retrofitting of current systems to help save energy, but I'm confident that we will see a resurgence of overall green building once the economy rebounds."

From an insurance standpoint, most of the commercial market is in a wait-and-see mode when it comes to specialized green coverage and pricing.

Pavloff said the insurance market is just not ready for that new risk given the volatility of the economy today. However, she envisions that, in a more stable environment, an insurance carrier could introduce clients that meet several best-practice qualifications to a program that would cover the gamut of green building requirements.

Feigin said underwriters could gain a competitive edge by gearing their pricing and coverage toward green buildings, particularly if the construction industry's belief is verified that green building methods will in the long run be better performing than conventional building methods.

"The insurance markets are interested in this. This could be a real differentiator for them," he said.

Until that day, Pavloff said, the traditional property market can cover a lot of the green building risks that are shared with the regular construction industry. Insureds should pay close attention to the availability of appropriate limits for property damage, business interruption and extra expense.

August 1, 2009

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