The Color of Money

Adjusting claims on environmentally friendly policies can make you green around the gills if you’re not up to speed on ratings, codes, materials, and the eemingly innumerable details in green building claims.

August 26, 2010 Photo
So-called "green" construction had been the term for unique buildings that made an architectural statement using solar collectors or wind turbines. These days, however, any building—new or old—can be given the green label if it meets certain energy or sustainable-material-use goals. This raises questions for all future losses: Is this a green building, and are there any specific green coverage issues? You can't just drive up to a building and tell anymore. Even existing buildings as iconic as the Empire State Building are environmentally friendly.

Color by Number
Green building rating systems began more than 20 years ago when developers and owners wanted to be able to compare their energy and sustainability improvements against one another. The fairest way to do that was to establish some type of point system. This point system was to keep track of such things as energy and water use, building materials, and limiting site locations to those places that would have the least impact on the environment.

The government then applied these same programs to improve the huge inventory of publicly owned buildings—federal, state and local. Federal agencies have appointed energy managers and require that their buildings conform to one of the green point systems. Building codes are now also being reformed to reflect environmental friendliness. California was the first to act, with its "CalGreen" codes which will be in force this year. The International Code Council followed suit, releasing its International Green Construction Code (IGCC) for public comment. The IGCC has not been formalized or adopted by any jurisdiction, but that is sure to happen soon since the U.S. Conference of Mayors recently endorsed it.

The most common point-counting programs are Leadership in Energy and Environmental Design (LEED), Green Globes, and the Environmental Protection Agency (EPA) Green Star. There are other programs that are growing in popularity as well, such as the National Association of Home Builders' Green Building Standard and the international BRE Environmental Assessment Method, or BREEAM.

One of the most popular programs in the United States is LEED. Introduced in 2000, it has evolved to include many variations—new construction, core and shell, commercial interiors, and remodeling. Its standards apply to different types of buildings, including homes, schools and retail businesses.
Each of the environmental-building rating programs uses a point system that keeps track of dozens of different items, assigning progressively higher points for better performance. LEED uses a 1-100 scale, which converts to Certified, Silver, Gold and Platinum rankings. Green Globes uses a comparable range, with performance levels depicted by one to four globes. Energy Star scoring systems mainly deal with energy use in buildings and appliances, also on a 1-100 scale.

Typically, all of the programs, with some variation, will focus on five main areas of sustainable performance: (1) site selection—locating a building to minimize the environmental impact; (2) water management—designing a building to minimize the amount of water used and recycling gray water for other purposes such as flushing commodes; (3) energy use—minimizing the amount of energy used and having that energy come from renewable sources such as wind or solar; (4) material use—recycling, minimizing the amount of new material used, and minimizing the energy consumed in producing that material by using local products; and (5) indoor environmental quality—improving air quality by using products that give off fewer volatile organic compounds such as formaldehyde.

Green Fees
The insurance industry has recognized a budding market for coverage for the green building movement and is offering various policies, including replacement coverage for green upgrades and insurance for added costs due to time delays associated with acquiring green products. Most of the policies are still fairly new, with the oldest having been around just over two years. There are many variations on coverage, and many interpretations are still untested. At current count, there are at least 38 carriers offering some type of this coverage.

Handling a claim on these policies is not unlike handling any other building claim; you just will be dealing with a unique green policy, unique green materials and a green point system that can seem confusing at times. Otherwise, the claims handling is the same.

The catch is often in estimating costs. One concern is the cost differential between normal construction and rebuilding with environmentally friendly materials and to new codes. Some estimating software vendors are beginning to include automated calculation for this specialty area. Another aspect to consider is the additional cost of recycling demolished materials. The green point system gives credits for recycled segregated debris removal. This will likely increase the cost of the claim, but it also could be a credit for the salvage value of the materials recycled. Then there are the energy-producing solar collectors and wind turbines; policies often allow for reimbursement for the lost value of the electricity these devices produce. An adjuster will need to carefully monitor all these extra costs.

The sector is also rife with quality-control problems that could result in erroneous or unjustified payments for supposed green construction. Current standards for so-called green building materials and qualified installers are a bit vague. False advertising that promotes products or services as "green" is becoming an increasing problem—so much so that the Federal Trade Commission is getting involved.
There are ways to guard against overpaying on green claims, but you need to keep a few things at the top of the checklist. First is knowing what materials actually qualify as environmentally friendly. While many manufacturers, builders and insureds claim the materials involved in a loss, repair or restoration are green, not all are true or accurate. Check the certification of materials, systems and contractors to ensure all meet environmental quality benchmarks. Some manufacturers advertise their products as green, but they don't provide any outside verification of quality. Better are manufacturers and installers that belong to a professional group, a second party which—through its entrance criteria—somewhat affirms the validity of its members. Perhaps the best approach is confirmation by an independent third party organization that performs tests or creates criteria for the various products and their advertising claims.

Just as you might hire an expert to determine if the needed modifications are code-compliant, you might also consider consulting a specialist when estimating green claims. There are several types of professionals that an adjuster could use, depending on the point system that is being employed. For example, the USGBC LEED program offers access to LEED-accredited professionals. For Green Globes, there are Green Globe auditors. The EPA Green Star program uses home energy raters, professional engineers and registered architects who hold various certifications, such as Green Building Engineer and Certified Energy Manager. Just make sure the professional is well qualified in the area of building science that applies to the loss (e.g., a structural engineer for a structural loss).

Proceed with Caution
Litigation of green claims is in its infancy with only two lawsuits having been filed so far, but rumbles of many more are beginning to be heard. The first lawsuit, Shaw Development v. Southern Builders, occurred near Baltimore, Md., in 2008 and involved a condominium project which was designed and built with the hope of attaining the LEED silver level. The project failed to attain the rating in a specified time, so the owner sued for $635,000 in lost tax credits. The parties settled for an undisclosed amount. A second lawsuit involves the owner of a condominium in New York City's Riverhouse One Rockefeller Park, who is suing for $1.5 million in damages. It was filed this spring and argues that the project was not green enough and, therefore, did not live up to marketing materials. This one is just getting started and bears watching.

Another matter of concern is the possibility of "decertification" if the building doesn't meet the projected energy savings. In 2009, the LEED program decided to monitor buildings that were certified to see if they lived up to the energy savings they declared when they first registered. By the way, anyone can challenge assertions of green program compliance, so be careful that your client does not fall victim to a decertification because of your actions (or inactions) during an insurance claim.
Jeffrey H. Peters, P.E., LEED AP, is vice president overseeing the Green Building practice group for Rimkus Consulting Group, an international forensics engineering company focused on the insurance industry.
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CLM’s Insurance Fraud Committee identifies, analyzes, and offers education on emerging fraud schemes and tactics; monitors and reports on developments in case law, state fraud statutes and applicable regulations; collaborates with other anti-fraud industry organizations and associations; and seeks to provide amicus support in matters of importance in the fight against insurance fraud.

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