Be aware of issues and risks of green buildings

Oct. 1, 2010
As a risk advisor to leading firms around the world, my firm sees a variety of issues and risks emerging for contractors and owners of green buildings. This article outlines some of the issues and practical steps to deal with these new challenges.

The U.S. Environmental Protection Agency describes "green building" as the practice of creating structures and using processes that are environmentally responsible and resource efficient throughout a building’'s life cycle. As these building delivery methods evolve, the construction industry continues to evaluate the potential exposures that may stem from the construction and design of these type projects.

As a risk advisor to leading firms around the world, my firm sees a variety of issues and risks emerging for contractors and owners of green buildings. This article outlines some of the issues and practical steps to deal with these new challenges.

Green building construction and design are built to conform to an identified industry standard. However, there is currently no single universal accepted standard that applies to all green building construction. In addition, the existing standards are expected to change as both the available green products and technologies evolve and improve.

The U.S. Green Building Council is one recognized private nonprofit organization on green buildings. The LEED Certification Building Rating System point system determines the certification level and creates expectations of the building performance, including sustainable site development, water savings, energy efficiency, materials selection and indoor environmental quality.

Liability exposures
Contractors and owners face potential losses in green building projects from three main theories of legal liability.

  • Negligent Misrepresentation Claims — Typical losses may stem from the nonperformance of the building or the owners' inability to obtain the represented "savings" on its performance. For example, a building owner may allege that the installed HVAC system was to provide a 30% savings in their overall electrical costs when this green product was recommended for utilization.
  • Negligence Based Claims — Contractors and architects may face allegations that they did not meet standards of care in the design and/or the construction elements of the building and its components. A claim might involve issues with a certain building product that may not have been intended for use in a certain geographical climate.
  • Contractual Claims — Broad contractual agreements between a project owner and general contractor may result in potential breach of contract claims. This could arise from the inability of the completed project to obtain certain standards or certifications. For example, if an owner contracted for a “platinum level” green building, and the structure does not obtain this certification, a breach of contract claim may be made against the contractor.

Damages resulting from the above theories may include both construction and design-based elements. Some potential allegations against the contractor may also involve unknown causes of loss.

The costs of investigation alone to determine the source of the building nonperformance may be extraordinary, rising into hundreds of thousands of dollars. These investigative costs may not immediately be covered under the contractor's general liability or professional liability policies.

Minimizing the risks
So far, the insurance industry has been slow in responding to the potential exposures that may result from green building projects. Although there have been some limited solutions offered within the available coverage markets, many identified exposures could result in an uninsured loss for a contractor. In order to manage these risks, contractors should consider the following practical steps to help reduce their potential exposures.

Be aware of contractual requirements. Contracts that promise to achieve a stated building efficiency, LEED certification level or other performance criteria, may lead to broad-based allegations from the building's end users. Contractors should be mindful to the liabilities that may arise from contractually agreeing to any performance-based standards. In addition, the contract should be clear as to which party is responsible for leading the certification process.

Owners should consider using contractors that have experience with green building processes, procedures and products. Experienced contractors may help identify potential issues in a timely and efficient manner. They will also be invaluable resources during the pre-planning project phase.

Given the complexity of green building projects, consider extra time and money for completion. Availability and installation of new or unfamiliar building products can lead to project delays. Consider the use of proven products and technologies and attempt to manage the subcontractors' choices of green products.

Evaluate the use of one individual to organize and assemble all green requirements on the project. An experienced single contact will provide a needed resource for all contractors on the project. This process will also help manage and organize documentation that may be needed to defend future allegations or claims against the contractor.

Consider the use of an outside consultant to document and inspect the green components of the project. This resource would help identify potential noncompliant aspects of the project in an efficient and timely manner. The organization of this information and the familiarity of the work, may also streamline the certification phase of the completed project. The documentation would also potentially reduce the future costs of identifying the cause of the building nonperformance and/or proactively manage claims that may be presented.

Preparing for change
The building of green construction projects is increasing and so are the exposures associated with it. The construction industry will continue to evaluate the exposures from these types of projects and identify avenues to manage the risks. Contractors must be mindful that the standard of care used for green building projects today will continue to evolve and change. As claims from current projects arise, many contractors may be unfairly judged and critiqued on newer standards that potentially apply when these losses arise in the future.

Now is the time for contractors to work closely with well-informed risk management advisors.

Paul Primavera is senior vice president - claims for Lockton Inc. Kansas City, Mo.-based Lockton is the world's largest privately held insurance firm. He can be reached at [email protected].

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