In two previous articles, Viewpoint analyzed the potential impact of “green” construction on the principle of indemnity in property insurance, and on loss adjustment under builder’s risk policies.
(See, respectively, Summer 2008, “The Greening of Property Insurance,” and Summer 2009, “‘Green’ Coverages Come to Builders’ Risk Insurance.”)
This article seeks to round out Viewpoint’s coverage of green coverage issues by exploring the potential impact of green construction on general liability insurance.
“Green” construction refers to the fast-growing trend among property owners, designers, and builders to create structures with specific features designed to make them more energy efficient with a beneficial impact on the natural environment.
Developers of green projects generally seek to have them certified as “green” by organizations that use point systems to establish levels of green certification. Two of the best known of these certifications are the:
- Leadership in Energy and Environmental Design certifications granted by the US Green Building Certification Institute, which certifies buildings as meeting a “silver,” “gold,” or “platinum” standard.
- Green Globes rating system used by the Green Building Initiative, which awards structures one, two, three, or four Green Globes.
Points under these rating systems are awarded for major structural features and for other amenities, such as the presence of bicycle racks. A building’s rating depends on the total number of points earned across several categories.
States and municipalities are contributing to the green construction trend by incorporating green features into building codes or offering tax incentives for property owners to earn a green certification.
The role that the green rating systems play in the valuation of green buildings is central to the liability insurance issues arising from green construction.
Observers agree that third party certification for green buildings will contribute to vastly expanded professional liability for architects and contractors.
According to Chicago attorney Gary Cole, himself a licensed architect, “unfulfilled expectations” will be the leading cause of green-related litigation between project owners, on the one hand, and those who design and build green structures, on the other.
“‘Unfulfilled expectations’ is a simplified way of referring to some manifestation as a breach of contract,” Cole writes in his “Green Goblin” web series. “Breaches of contract can arise by violations of expressed terms or implied terms.”
According to Cole and others, a casual statement or ambiguous contract provision that expresses a commitment to produce a green building can be interpreted as a warranty that it will meet the standards for a certain level of green certification.
In some cases, a certain level of green certification is required for a project to earn tax credits or other benefits. Failure to attain the rating would result in an economic loss.
The best-known liability case to date arising from green construction is Shaw Development v. Southern Builders, in which the former sought compensation for $635,000 in state tax credits lost after a project to build a LEED silver-level building was delayed. The case was settled out of court.
Professional liability policies generally exclude coverage for breach of a warranty or loss of economic damages.
However, according to Cole, there may still be an exposure for the professional liability carrier if an architect or contractor holds himself out as a specialist in green construction, and that assertion is used to hold them to a higher standard of care.
Negligence in failing to meet a standard of care is more commonly covered under professional liability policies.
Meeting such a standard is complicated by the fact that green certification involves the use of innovative materials and innovative processes for installing them. What’s green today won’t necessarily be green tomorrow, or at least the same level of green, as the standards change.
While the potential for professional and contractual liability claims arising from green construction is real and growing, observers are less sure that green construction will lead to appreciable growth in exposure under commercial general liability policies.
“It’s hard to envision how green construction would result in any type of bodily injury claim that would not be otherwise covered under a standard CGL or workers compensation policy,” says Richard Cohen, a Buffalo, N.Y., attorney who addressed green construction liability and other issues at this year’s CPCU Annual Meeting in Denver.
“If a contractor uses a ‘green’ material such as bamboo and it collapses, causing injury, this could be covered under a CGL policy and arguably, results from green construction,” Cohen says in remarks to Viewpoint. But, he adds, that is no different from a bodily injury claim resulting from any other type of construction.
“This is not the type of ‘green’ claim we are normally thinking of, such as breach of contract for failure to obtain LEED certification, or loss of marketability,” he says. “It is difficult to envision a true general liability claim [between property owners and contractors] because the claims and damages are economic and contractual in nature, limiting the applicability of a CGL policy.”
As for contractual liability, Cohen says that CGL coverage for contractual liability is generally limited to insured contracts where a policyholder assumes the tort liability of another party.
“Even if you assume that a contract claim from failed green construction constitutes a tort claim, there is a strong possibility that ‘your work’ or ‘your product’ exclusions would apply to preclude coverage,” he says.
General liability for damage to green property is potentially a different matter, however, as green property has value not only for its physical properties and mechanical operations, but for its beneficial impact on the environment.
“What if something physical happens to a green building that compromises its green design or green materials, but the property may still be usable in the traditional sense?” asks Cole. “What are the legal and insurance ramifications, especially if the property was certified and that certification was required for tax breaks?”
Similarly, someone may try to claim personal injury if their use or enjoyment of a green property is impaired by the actions of another.
“There could be claims like that,” says Linda Giffin, senior vice president of Argo Insurance, which has developed proprietary policies for insuring the professional and general liability exposures of architects, engineers, and contractors involved in green construction.
According to Giffin, anyone found liable for damaging green property would have to pay to restore it with “like kind and quality,” and that “quality” could include meeting a green certification standard--even if that standard had been changed since the damaged property was first installed.
“It could be just like the liability for meeting building ordinance costs,” she says.
“That’s certainly a legal argument you can make with a straight face,” says Shari Shapiro, a Philadelphia attorney and a LEED-accredited professional who serves on the Delaware Valley Green Building Council.
“Still, I do not believe green building practice will create new forms of property damage,” Shapiro says. “You’ll find novelty in [construction] practices and products, not novelty in the type of property damage claims.”
That could change, says Shapiro, if green property damage claims lead to other types of companion claims.
“Could you claim that a loss to green property included a loss to reputation?,” she asks.”That’s where a real novelty of claims would come in.”
Claims like these are still in the realm of speculation. Should they become real, however, all general liability insurers, not just those writing green projects, could be subject to the exposure.
“It’s too simplistic to say that [property damage liability] is all going to be the same as it was,” says Cole.”There are too many things in play.”
“It’s all unknown,” says Giffin at Argo Insurance. “That’s part of the problem. It’s all so new.”
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Green liabilities 
