Insurance Industry Heavyweight Lloyd's Pushes Regulation of Carbon

In a bold new risk publication out today from Lloyd's of London, entitled Sustainable Energy Security: Strategic Risks and Opportunities for Business,  the insurance heavyweight states in no uncertain terms that businesses that fail to prepare for short and long term energy crises face potentially catastrophic risks:

Energy security and climate change concerns are unleashing a wave of policy initiatives and investments around the world that will fundamentally alter the way that we manage and use energy. Companies which are able to plan for and take advantage of this new energy reality will increase both their resilience and competitiveness. Failure to do so could lead to expensive and potentially catastrophic consequences.

Lloyds notes the importance of government regulation in managing the energy crisis.

Without an international agreement on the way forward on climate change mitigation, energy transitions will take place at different rates in different regions. Those who succeed in implementing the most efficient, low-carbon, cost-effective energy systems are likely to influence others and export their skills and technology. However, the lack of binding policy commitments inhibits investor confidence. Governments will play a crucial role in setting policy and incentives that will create the right investment conditions, and businesses can encourage and work with governments to do this.

The insurance industry makes it costly--through raising the price of insurance--to do business in risky ways.  If Lloyds prices insurance for carbon dependent businesses much higher, it could force businesses to reevaluate their stance with respect to greenhouse gas regulation.  Where the insurance industry leads, businesses will likely follow.

Insurance, Guarantees and Performance--Oh my!

Although many green building experts have been discussing the issue of whether green buildings are performing up to their claims for some time, the mighty grey lady spoke on the issue this week and set the blogosphere humming. The New York Times article comes in the wake of the USGBC's announcement that it would begin to track the performance of LEED buildings after they have been certified, and potentially to revoke the certification of those buildings which failed to perform, which also kicked up a lot of discussion. On top of all this, ACE announced that it would begin to guarantee the certification of green buildings it was involved with.

These events have an important nexus--risk of liability.  If the USGBC tracks building performance, failure to perform up to the requirements now brings with it the threat of decertification.  In the past, no one was really tracking the claims and there was no consequence for failure, except PR embarassment. Now that design professionals guarantee achievement of certification, failure to do so brings enhanced contractual liability as well (although ACE seeks to limit its liability to a refund of its LEED administration fee, it remains to be seen if this limitation would hold, especially if the failure to acheive certification were due to the professional negligence of ACE).

To protect against the risk of liability, professionals turn to insurance.  As I reported here on Monday, Argo Insurance Brokers and Lloyd's of London are looking to fill this niche by bringing to market the first green professional liability policy for architects and engineers.  Among other things, the policy includes technical consulting, site selection, water efficiency, and other sustainable services as "covered services" under the policy. In addition, it "specifically includes coverage for guarantees and warranties of achievement of green certification."  Thus, through the Argo policy, architects and engineers can now manage their risk. 

On the whole I think the Argo policy is progressive and a great tool for design professionals looking to go green.  If I were an owner, I would want the professionals I engage to have this coverage.  However, I would like to see more explicit language in the policy regarding the "coverage for guarantees and warranties of achievement of green certification," particularly as it relates to performance after certificate of occupancy.  The Argo/Lloyd's policy is probably just the first of its kind in this area, and it will be interesting to see the policy language develop over time.

Attention Architects & Engineers--Green Professional Liability Insurance Has Arrived

Argo Insurance Group of San Francisco has developed a green professional liability policy designed to protect architects and engineers involved in sustainable projects.  Information about the policy is available here.  What is unique about the policy, which is underwritten by Lloyd's of London, is that it specifically includes sustainable services in the list of covered professional services which the policy covers, including services:

provided as an accredited/certified professional in the areas of sustainable site development, water savings, energy efficiency, materials and resource selection, indoor environmental quality, and computer aided drafting and design services

In addition, USGBC members get a 5% discount on premiums. 

I had the opportunity to speak to Bill Feree, Vice President at Argos and Nate Brzovich, an Argos
Commercial Producer about the new program. Check back on Wednesday for my take on the Argo policy and what's next for the future of green insurance!

GBLB: What is the background behind the development of the green professional liability policy?

ARGO: We have a very large real estate and construction practice. We saw the development of the Fireman’s Fund green building loss policy. Then we started to work with USGBC creating USGBC chapter D&O insurance. When we went out to do marketing, a lot of the stakeholders were architects, engineers and LEED APs working on the buildings. They asked how their professional liability policies responded to green building issues. We looked at policies and saw holes. The real deficiency was not having heightened standard of care language in professional liability policies, and coverage for failure to acheive LEED accredidation, tax or energy savings. We tried to put specific language in our policy to achieve those goals. Now we are promoting it.

GBLB: Who are the underwriters?

ARGO: Lloyd’s of London is the insurer. We approached quite a few. Insurers tend to take a hands off approach and then respond. The main factor was to find an insurer that was as proactive as we are in developing a product for this industry.

GBLB: What are the components of the Green Pro Endorsement?

ARGO: We added to the standard Lloyd’s policy for architects and engineers professional liability insurance. It takes the definitnion of professional services and includes as usual and customary services those services that are encompassed by sustainable services. We wanted to make it more broad. Technical consulting, site selection, water efficiency, are all covered services.  We also specifically include coverage for guarantees and warranties of achievement of green certification.

GBLB: Is anything specifcially excluded from coverage?

ARGO:  Environmental engineers doing phase I and Phase II are not included. The carrier did not want to underwrite these services. As soon as we get this policy launched, we will be going to carriers to write specialty policies.

GBLB: When was the program launched?

ARGO: The policy became available 3 months ago. We have generated a lot of interest, there is a bit of a sales cycle because people have ongoing policies, so there is a sales cycle that has been a minimum of 12 months.

Marsh Report On Assessing The Risks of Green Building

Marsh issued a report today on finding from a survey of 55 construction industry participants in different geographical locations on the risks associated with green building.  The survey can be downloaded here

Some interesting findings:

1. Financial risks and standard of care/legal risks ranked highest in terms of threats to green building projects. p. 7

2. The insurance industry continues a "wait and see" approach to covering green risk. p. 15

3. Firms involved in one or more aspects of green building shouold seek the services of an attornet with experience in green risks. p. 15


ACE Launches New Green Contractor Insurance Product

ACE announced last week that they have created a Green Contractor Insurance Program.  People in the green building risk world have speculated that insurance companies would begin to offer green professional liability products.  The ACE product does not cover professional liability issues, but instead is a pollution liability insurance product. According to ACE

Contractors Pollution Liability program, which addresses the growing risks and potential exposures faced by contractors as they begin to access federal stimulus dollars and experience increased construction activity. This green-specific insurance program is designed to cover contractor and sub-contractor environmental and pollution-related exposures. The product can also be tailored for Leadership in Energy and Environmental Design (LEED)-certified building projects as an Owner-Controlled Pollution Insurance Program (OCIP); a Contractor-Controlled Pollution Insurance Program (CCIP); or a standalone Contractors Pollution Liability Project placement.

The world is still waiting for a professional liability policy to cover green services by architects, contractors and engineers, but the insurance industry may be closer to determining the parameter of risk that green represents.  I have been in contact with ACE, and will find out more about the parameters of this new product.

Greening the Standard of Care

This post was co-authored by Shari Shapiro and Christopher Hill

Contractors and design professionals have long been held to a standard of care to provide services in a “workman like” or “professional” manner. The general test, subject to some detail below and absent contractual language to the contrary, is “Will the building built by the contractor and contracted for by the owner stand up and work to the purpose intended?’ In short, will the building fall down and do the lights turn on? If the answer is “Yes” and the building meets minimal guidelines, a contractor meets this standard.

What are the components of this standard? A contractor or design professional is required to have an understanding of the historical standards of workmanship in its segment of the industry—in other words, to design or build as a reasonable professional in his/her area of expertise would do. These include knowledge of building codes, some expertise in its field, and the methods by which work is performed.

Most insurance contracts and standard building contracts assume this type of standard of care. A project owner can assume, for legal purposes, that the contractor it hires (and any other workmen on the project) meets this standard. While this can be of comfort to owners and contractors, unfortunately, without a contractual provision setting the standard of care, the state court system gets to decide what the standard is and whether that standard is met. In other words, everyone at the site may believe that they know the standard and what is necessary, but a court or insurance company could look at it differently.

Determination of all of these factors is difficult enough when the parties to the building contract are the only ones setting the standard of care. Enter LEED and green building where a standard is set by a third party, incorporated into some municipal and state building codes and interpreted by yet another third party. The question which is on the lips of lawyers, insurers and design professionals is whether and how green changes the standard of care.

Many insurers say that while they are keeping a close eye on whether green projects present risks above and beyond the traditional claims made by construction projects, they have not yet recognized green buildings as a unique category of risk. This is good, because it means that a design professional’s liability insurance probably covers their green building endeavors.

However, the answer is not as clear for professionals who hold themselves out as a LEED Accredited Professional, or who provide additional green services, like commissioning and energy modeling. There is a credible argument to be made that a LEED AP should be compared with what a reasonable LEED AP would have done with respect to building a green building, not just what a reasonable architect or other design professional would have done under the circumstances. Further, it is not clear that a professional liability policy which covers specific design or contracting services covers negligence in providing additional green services like commissioning and energy modeling.

So what is the beleaguered design professional to do? First, don’t overpromise. Ensure that you are able to provide the services you are asked to do in a reasonable and workmanlike manner. Second, communicate with your insurance provider. Ensure that your green services are included in the list of covered services for liability. Finally, to the extent that you employ subcontractors to provide green services, ensure that they are properly qualified and obtain adequate liability coverage, as well.

Article on State of Green Insurance

Interesting article with quotes from industry leaders Marsh and Aon on the state of green insurance, predicting a two year lag before professional liability policies for green building practictioners are available.