Insuring the Green Movement

Insuring the Green Movement

Facing increasing and unpredictable energy costs, buildings capable of significantly reducing energy consumption have become increasingly attractive to those in the market for real estate. The increased public awareness and concern for the environment, coupled with an increasing consumer demand for the cost savings generated by energy efficient buildings, have operated to propel the green movement into the real estate industry in the form of green buildings.

There are many benefits associated with constructing, retro-fitting, and occupying green buildings, beyond those involving the environment. Studies show that buildings certified by Leadership in Energy and Environmental Design (LEED), an internationally recognized green building certification system, have an almost four percent higher occupancy rate, as well as increased retention rates. Such buildings may also experience an almost 10 percent decrease in operating expenses, and a similar increase in building value. Subsidies, incentives, and tax credits may also be counted as potential benefits associated with green buildings.

All of these benefits have operated to grow the green building industry despite the otherwise underperforming real estate market. According to one study, construction of green office space has increased by approximately 25 percent over the past decade, with significant continued growth predicted for the near future. Moreover, according to the U.S Green Building Council, green building construction is expected to reach $60 billion, with approximately 10 percent of new commercial construction starts expected to be green. These numbers confirm that building green has become, and is predicted to remain big business.

Given the increasing popularity and value of green construction, the insurance industry has entered the field by developing policy endorsements geared specifically toward green properties. These policies recognize that green buildings contain unique features, in the form of materials and designs, which are typically more expensive than those found in traditional buildings. Thus, in the event of a covered loss, a typical insurance policy may not cover the extra expense and procedures ordinarily associated with green buildings. That is why it is important to understand the manner in which insurance companies are catering to those property owners seeking to become, or remain, green.

Given the relative novelty of insuring green buildings, many companies are routinely adjusting their products to accommodate this developing industry. Nevertheless, there are a few commonalities among the varying products in terms of coverages, including:

  • Green Rebuilding: Green coverage will cover many of the costs related to rebuilding a covered property to its budgeted level of green certification. Some companies offer policies that cover the costs of replacing standard materials with a green equivalent in the event of a covered loss.
  • Business Income: In the event of a covered loss, an insured may suffer a loss as a result of a suspension of business operations. If business interruption insurance was purchased by the insured, a green policy may pay for the additional suspension of an insured’s operations for the extra time required to make the green qualifying repair.
  • Certification or Recertification Expenses: For insureds desiring a green certification post-loss or who desire the continuation of a pre-loss green certification, policies may cover the reasonable certification expenses for the repaired or replaced covered property.
  • Accredited Professional Expenses: Obtaining or maintaining a green certification may require the services of green-accredited professionals, such as architects and engineers. The cost of additional professional services used in planning and designing the applicable green qualifying repairs may be covered by insurance.
  • Debris Recycling: Although most policies cover debris removal, obtaining a green certification often requires that the debris be properly recycled, often at additional expense. The increased costs of such recycling efforts can be covered by insurance.

In addition to these somewhat typical green coverages, some companies offer more specialized insurance products relating to obtaining or maintaining a green certification. For example, one company provides for the payment of additional costs incurred to replace or repair a damaged roof with a vegetative roof, which is a roof that utilizes plants and vegetation as an alternative to a conventional flat roof. Another reimburses an insured’s actual loss sustained in the form of lost tax incentives, cost credits, reduced loan rates, or other financial incentives as a result of a loss of green certification.

In light of the variations in policy forms, maximizing the benefits afforded by green insurance is best accomplished by matching the appropriate form with a specific need. Thus, property owners must evaluate their risks and then purchase the green insurance protection from the insurer providing the best form.

For those in the business of leasing real estate, choosing the best policy form is just the first level of protection. Such property owners should clearly outline insurance requirements, specifically green insurance requirements, in the lease. If a particular company or policy form is the best fit for a specific location, then landlords should consider making the purchase of precisely that type of insurance an express requirement in the lease.

Alternatively, landlords can detail the precise minimum green insurance requirements in the lease. For example, if a particular building has obtained a specific green certification, such as a gold or platinum LEED rating, then the lease should expressly require each tenant to purchase a particular green insurance policy that would ensure the continuation of such rating in the event of a covered loss.

The effort and expense required to construct and operate a green building can be significant, and the numbers show that property owners are willing to invest the extra money to reap the many benefits associated with an environmentally sound structure. Given the unique risks involved in maintaining a green building, it is important for owners to properly insure their investment in order to enjoy the benefits of green ownership despite a covered loss.

For more information about obtaining green insurance, please contact us.