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.

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


Shining Light and Truth On The Harvard Green Building Law Study



I reworded my original post on this subject to clarify my intent. In my original post I noted that most of the conclusions of the Harvard study had previously been made by other commentators in the field. Similarly, the post noted that important sources appear not to have been considered by the authors of the study. I stand by those criticisms. My post also suggested, however, that the presentation of the study's conclusions seemed "to be nothing short of plagiarism." That was an unfortunate choice of words. I did not mean to impugn the academic honesty of the authors or their supervisors or the institution that published the study. To the extent that my words conveyed that impression, I apologize to each of them.

On May 29, 2009, Green, Inc., the New York Times' green blog announced a truly startling revelation--"Building green can open the door to plenty of legal pitfalls, a new study warns." 

To readers of this blog, this may seem to be...old news.  But not to the blogosphere and the Twitterverse.  News of the Harvard revelation spread fast and furious, as though Clarence Darrow himself had spoken on green building law from beyond the grave.

And what pearls of wisdom were revealed from the venerated halls of Cambridge? Frankly, nothing that had not been written about in hundreds of blog items and articles before. What was astounding, however, was that there was not a single reference to any of those articles or blog postings.  The Harvard piece was written as if the insights and conclusions were original.  This is not the case.

Here are a few examples:

AHRI v. City of Albuquerque

From the Harvard study at 5:

[AHRI v. City of Albuquerque] illustrates potential conflicts between municipal regulation of green building and green building efforts at the state and/or federal level. 

From my article on AHRI v. City of Albuquerque in July, 2008 at

 Local laws seeking to set higher green standards will be struck down if the federal government has exclusive authority to regulate energy efficiency.


From the Harvard study at 6:

Project Owners

Failure of project to achieve certification or an anticipated level of certification

Failure to qualify for tax credits

Failure to meet loan or incentive program requirements

Increased soft costs due to delays

Failure to meet anticipated or state claims in marketing or promotional materials

From Greenbuildinglawblog July 1, 2007

Finally, although the green building movement is in its halcyon days, new expectations will inevitably lead to conflict. A multimillion-dollar development project will fail to gain the LEED credits required to secure a government grant, and litigation will doubtless ensue.

From Custom Home Online February 15, 2008

Some mistakes to beware of committing in your marketing of green homes include overstatement of benefits or performance; misrepresentation, non-disclosure, or outright fraud (intentional or unintentional); and making vague, misleading claims or subjective, unverified statements.

From Construction Monthly, 2007

Suppose, for example, that an architect’s LEED Silver building, designed to such a level for the purpose of securing some type of state or local tax incentive, only received LEED Certified because of a credit rejection from USGBC due to insufficient documentation? It is not difficult to imagine the owner looking to the architect or engineer responsible for that particular part of the design for some sort of redress, particularly if documentation responsibilities were not clearly identified by contract.

From the Harvard study at 6:

Design Professionals

Higher standard of care resulting from participation in the building process as LEED Accredited Professionals

Design defects that result in failure to achieve certification or a specific level of LEED certification

Liability due to the failure of systems or components to perform adequately over the structure's lifecycle

Exclusion of warranties and services in the green building context from insurance policies or added insurance costs

From Greenbuildinglawblog, March 9, 2009:

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.

From Sustainable Land Development Today, December, 2008:

Accordingly, the contractual language in the design contract could provide the insurance company with ample opportunity to determine that the architect gave the owner a guarantee or warranty that the building would achieve a particular rating and to possibly deny coverage for claims arising out of the building’s failure to obtain such rating.

I could literally go through the entire publication demonstrating that each and every component has been said elsewhere before.  The Harvard team could have alleviated this situation with the liberal application of footnotes.  Instead, a compendium of a total of 15 articles are listed at the back of the publication, giving the impression that the article contains new insights into green law from Harvard. Shining a little light discovers the truth--the Harvard report is regurgitation from leading scholars in this field almost three years after we started discussing these issues in earnest.

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.