Green Risks - Should they be a red flag for your agency?

by Curtis M. Pearsall, CPCU, CPIA
Special Consultant to the Utica National E&O Program

I was recently approached by an agency asking if I would write an article on insuring “green” risks. No problem. As I began my research, however, it was apparent that this was an exposure I was not up to speed on. While I had a general impression of what “green” meant, this industry has truly exploded. Fortunately, there are many excellent Web sites which helped educate me on where this industry is and where it is headed. Simply google “green buildings” and you, too, can access more information on this subject than you probably thought imaginable!

Since there is no doubt this industry is here to stay, this presents a tremendous opportunity for your agency to increase its knowledge to more adequately serve this building segment, both on the personal and commercial sides.

This industry is projected to grow over the next five years, according to the consulting firm McGraw Hill Construction, to a $96 billion to $140 billion market – and that’s despite current negative market conditions. This firm further notes that today the global green building market is around $36 billion to $49 billion for residential and non-residential buildings, compared to the 2005 total of $10 billion.
This article will not delve into why this is occurring. Its primary goal is to shed some light on some potential issues your agency might face as it looks to insure “green” risks. Because your community most likely has some personal or commercial buildings being renovated or built “green,” this is a critical time to invest in increasing your knowledge level.

Take Time Now
Essentially, “green buildings” heavily involve increasing the efficiency with which buildings and their sites use and harvest energy, water and materials. In addition, they protect and restore human health and the environment throughout the building’s life-cycle: siting, design, construction, operation, maintenance, renovation and deconstruction.
There are many issues surrounding this industry as well as potential insurance implications of which you should be aware. E&O claim activity in this area has been minimal – if there’s been any at all – but it’s fair to say that it is only a matter of time.

Potential issue: the placement of the risk. With respect to your homeowners carriers, are they receptive to these risks? If so, do you have authority to bind the way you do for a more traditional home construction risk? Speak with your carriers to determine their appetite as you might find they get a little uneasy when you state you have a customer looking to insure a “rammed earth home” or a home constructed of straw bales. Or what about ICFs – insulated concrete forms described as essentially Lego® blocks made from Styrofoam? If you find your carriers are not receptive to these risks, research companies that are.

Another potential issue: coverage afforded. Is the carrier using the standard homeowners policy? If so, be alert to gaps for such items as cisterns, underground storage tanks and storm systems to collect water. I suspect that carriers serious about writing these risks will develop a customized form addressing the uniqueness and the exposures. For example, a contractor you insure has a significant exposure in making sure the risk meets the necessary certification standards. Does the GL form cover that? You need to know.

Determining the value of the structure. Valuation is a key issue to both your customer, in the event of a loss, and your agency in properly protecting your customer. Each home may be so unique that they may struggle to adequately address these risks and determine the proper factors for valuation. There are probably parts of the risk for which you will be able to determine a value and others which may require the assistance of a contractor or professional appraisal service. This is where you will benefit from the expertise and understanding of exposures of a company committed to dealing with “green risks.”

OK, the coverage is placed … now the customer suffers a loss. How confident are you that the loss will be adjusted fairly? One of the Web sites I visited raised some questions and points worth repeating: Is the cost for a LEED (Leadership in Energy and Environmental Design) accredited professional to consult on the repair covered? Are recertification fees covered? The question of “like kind and quality” will come into play if the lumber used was extremely rare or unique. These and other questions need to be addressed and resolved before a loss, not after.

It’s probably only a matter of time before you have a customer – personal or commercial – involved with a “green risk.” Don’t wait! Take time now to better understand these risks as well as the exposures and issues. This will keep your agency from raising a red flag when it’s asked to insure a green risk.