By now, most construction insurance specialists are aware that major writers of builders’ risk insurance are offering “green” coverage endorsements that cover exposures arising from efforts to build structures that are energy-efficient and environmentally “friendly.”
Fireman’s Fund led the way in 2007 with an endorsement that covered, among other things, loss of earnings, loss of rental income, and “soft costs” incurred because of delays after an insured loss due to the processes and procedures needed to maintain a project’s certification as a “green” project by major environmental building organizations.
Zurich, ACE, and other carriers followed suit with their own “green” builders’ risk endorsements, and AAIS introduced standardized ones in the Builders’ Risk section of its Inland Marine Guide in July 2009 (see sidebar on page 16).
Most recently, Lexington Insurance Co., a Chartis (formerly AIG) carrier, introduced an “Upgrade to Green” builders’ risk endorsement.
Among other things, the Lexington endorsement covers the added costs of attaining a certain level of “green” certification if the certification standards change between the time a project is initiated and the occurrence of an insured loss.
(For more on the development and implications of “green upgrade” coverage, see “The greening of property insurance” in the Summer 2008 edition of Viewpoint, available online at http://www.aaisonline.com/viewpoint/2008/08sum3.html.)
Some builders’ risk practitioners have asked, however, and not unreasonably, whether green endorsements are really needed for the class.
They ask, in essence: Shouldn’t all the features of a construction project be insured under a standard builders’ risk property form? Why should green features be insured differently from any other features?
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AAIS has developed new builders’ risk forms that provide coverage for loss exposures related to the “green” certification of an insured project. The forms appear in the Builders’ Risk section of the AAIS Inland Marine Guide.
This AAIS initiative consists of two new endorsements and related schedules and underwriting information.
One new form, entitled “Green Building Coverage,” is a coverage part that can be endorsed onto a standard builders’ risk form. The green coverage part provides four additional coverages increasingly sought by insureds seeking to build structures that are environmentally sound and energy efficient:
- “Indoor Air Quality” pays costs to restore the air quality in a damaged structure to the standard set in an “air quality management plan” (to the extent that standard was achieved prior to the loss);
- “Recycling Debris” pays costs to divert debris of a damaged property from a landfill to a recycling facility;
- “Recertification” pays costs for recertification of a structure as meeting “green” standards of one of the leading environmental building organizations (up to the level of certification achieved prior to the loss); and
- “Electricity and Water Replacement” pays costs to purchase replacement electricity or water from a public utility due to insured loss to renewable energy generating equipment or water conservation systems.
Each of these coverages is triggered only by an insured loss covered under the base builders’ risk form, and each carries its own limit indicated on an accompanying “Green Building Schedule.” The green coverage limits apply separately from any limits in the underlying builders’ risk form.
The second of the two new forms is a “Delay in Completion Coverage Part - Green Building Form” which can be used in place of a standard delay in completion form.
The new green delay in completion form incorporates the innovations introduced by AAIS in 2008 to clarify questions regarding what were loosely called “soft costs.” The AAIS 2008 Builders’ Risk forms established a distinction between additional “construction expenses,” such as fees, that are incurred in a lump sum, and additional “soft costs,” such as interest and taxes, that grow with time.
The green delay in construction form retains that distinction, and adds “Green Coverage Extensions” to pay for additional construction expenses, additional soft costs, loss of rental income, and loss of net income. Those extensions pay the added costs when a construction delay is extended because of additional procedures and processes required to meet the level of green certification that was incorporated into the project design before an insured loss.
In addition, the green delay in construction form provides a coverage extension for “Energy Generating Income.” That coverage pays for loss of income due to lost sales of surplus power during the delay period if an insured loss renders an insured’s renewable energy generating equipment inoperable.
Robert Guevara, AAIS vice president of inland marine, has developed a narrated PowerPoint® presentation on the AAIS green delay in completion form. The presentation is available on AAISdirect to companies that access the Inland Marine Guide through that service.
Insurers that do not currently use the Guide can inquire about accessing the presentation by contacting Rick Maka, AAIS director of marketing, at rickm@AAISonline.com, or by calling 800-564-AAIS, ext. 222.
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“The value of green construction under a builders’ risk policy is in fact in the price of the project, but there are other aspects beyond the project specifications,” says Sue Stein, a vice president of claims for General Reinsurance who monitors trends in insuring green construction.
“For the most part, our green coverages are included in the basic policy limit,” says Steve Bushnell, director of emerging industries at Fireman’s Fund and one of the principal developers of its green coverages.
“However, recognizing that buildings built to green standards are more involved than traditional buildings,” he says, “our Green Builders’ Risk form provides additional limits to meet some of the green requirements that are over and above those for traditional buildings.”
Among the unique exposures of green construction cited by Bushnell are the additional costs to recycle debris and flush fresh air through a rebuilt structure, and additional fees required to re-commission and recertify a structure.
Along that line, green builders’ risk endorsements to date have identified specific green exposures that are distinct from traditional builders’ risk exposures and, for the
most part, provided separate limits for them.
Straightforward as it seems, even that approach provides plenty of opportunities
for contention between insureds and claims adjustors.
For example, how exactly does one segregate clean-up costs between the separate limits for “debris removal” and “recycling debris?” How is income coverage for the loss of self-generated electricity, a feature of some green forms, segregated from other income losses?
Apart from questions about those specific, defined types of coverage, construction to green standards is adding a whole new dimension to construction costs and the insurance for them.
Insureds expect a standard builders’ risk policy to cover all aspects of a project that are specified “within the four corners” of a building project, including the green features, says Thomas Taylor, general manager of Vertegy, a St. Louis firm that consults on green construction.
Where the costs can really add up, says Taylor, is in the additional steps needed to prepare materials properly for a restoration that meets green standards.
“The scary thing is that most of these processes and requirements are implied but not delineated in the contract document,” he says.
Green construction standards, both for the materials to be used and the manner in which they are prepared and installed, constitute a factor that is both outside of a construction contract yet integral to it.
To fully insure a green project, builders’ risk underwriters will have to take into consideration that a third party might change the terms of what needs to be constructed following an insured loss, and how that construction needs to be carried out.
“The value of a green project is already higher than a conventional project going in, and each loss is going to be bigger,” says Pat Teterus, a vice president and senior consulting underwriter for Gen Re.
“If the qualifications for a certain standard get higher, then insureds will ask for something that is better than what the insurer initially insured.”
Clearly the green building trend is going to force far more fundamental changes in builders’ risk underwriting and forms than those introduced with the industry’s initial builders’ risk green endorsements.
For now, at least, “one has to be very careful before adding a green endorsement onto a standard builders’ risk policy and thinking that all your bases are covered,” says Ronald Thornton, president of the Inland Marine Underwriters Association (IMUA). “There are all kinds of nuances.”
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‘Green’ coverages come 
