Concern Over Green Building Claims Causing Many to Revisit Risk Management Procedures

While green building claims have yet to materialize in any significant fashion, the insurance industry is bracing itself for what it believes will be the inevitable onslaught of green claims over the next five to ten years.

Green building claims are generally economic in nature with a lack of “damages” that would be covered under traditional commercial general liability policies.  To date, the focus has been on claims arising from failure of projects to achieve certain levels of certification under programs such as LEED (Leadership in Energy & Environmental Design) or Build It Green, and the damages that may flow from such failures such as loss of tax credits, reputation repair, and delays.  For the most part, these types of claims were not covered by traditional insurance policies and there has been little in the way of development of new policies to address such claims.

Now, the focus has shifted away from these types of claims to focus more on claims related to functionality of the building as it relates to the promised or mandatory standards.  For instance, on net zero projects (i.e. projects that use renewable energy only and do not require purchase of energy from the grid), what happens when an owner looks at its operating costs after the building has been commissioned for three years and determines that the building is not operating at net zero, but in fact is purchasing energy to meet its needs?  A similar analysis could be used for water use and efficiency of building systems such as HVAC systems.  A driving force behind the green building movement is the economic advantages that green buildings offer owners, and part of that benefit comes from smaller operating costs due to the use of efficient and sustainable systems.  If those systems are not functioning as designed and/or promised, the result is added costs for the owner, which in legal terms means damages.

After speaking on this very subject at a recent construction industry conference held by Axis Consulting and Construction in San Francisco, it was clear that the construction industry is now focusing its attention on these types of claims as the next wave of construction-related claims.  On their own, these claims are not appealing to plaintiffs’ attorneys as they are mostly economic in nature and therefore insurance is generally is not available.  However, when included in traditional construction defect matters, claims such as these can increase the potential value of a claim tremendously and put pressure on parties to resolve matters for a value greater than it otherwise would have.

As plaintiffs’ counsel become more knowledgeable about these types of potential claims, they likely will become a mainstay in construction cases in California involving projects constructed after 2011 (the introduction of CalGreen to Title 24) or projects that are LEED certified or required to be LEED equivalent.  This will lead to coverage disputes with carriers, as well as potential personal exposure for insureds for noncovered claims.  However, with pressure by insureds to resolve claims within policy limits, and potential exposure for bad faith, the ultimate result of the inclusion of green claims will be higher than normal settlements for plaintiffs.

Image courtesy of Flickr by U.S. Army Environmental Command