Is Your LEED Certified Building Adequately Insured?

You invest a lot as a developer/owner in building LEED-certified projects. Your broker has discussed the possible gaps in traditional property insurance policies versus policies that include the “green” endorsement. Many carriers now offer this option.

Many people in the real-estate industry are familiar with LEED certification status and what is required for it to be achieved. You may not realize the impact that LEED certification status has on your insurance program. It is possible that insurers will offer credit or reduce premiums for LEED-certified buildings because they are built to their strict standards. Because the insurance industry relies on historical statistics to predict losses and create premiums, many don’t feel that there is sufficient data to offer credit or reduce any loss.

There is increasing pressure to convert or build existing properties into LEED-certified buildings. You, as developers and owners, should be able to see how insurance companies respond to this issue and what it means in the case of a property damage. The majority of property carriers have either developed a green policy form or an endorsement that addresses items not covered in the traditional form over the past few years.

Your broker should at a minimum discuss the following issues with you during any regular discussions. Traditional property policies are designed to restore the structure to its original condition, using traditional construction methods. It is more costly to use LEED-certified materials and construction methods than traditional construction projects. This is the challenge when dealing with LEED-certified buildings.

If the policy has not been modified, insurance adjusters might not agree to cover the more costly materials or methods. These additional costs may include:

  • Increased construction costs due to the use of ‘green’ materials or LEED-certified construction methods.
  • Additional costs for Energy Star appliances, lighting, and electrical systems, as well as low-flow plumbing fixtures, and other energy efficient systems and sensors, will be added.
  • The cost of using environmentally-friendly materials for carpets, floor coverings, furniture and cabinets, as well as interior paints and primers
  • Costs of replacing vegetative roofs
  • Materials that are sustainable, such as bamboo and eucalyptus (or materials containing recycled content), can be expensive.
  • It is more expensive to dispose of damaged materials in an environmentally-friendly and sustainable manner.
  • Increased fees to hire a LEED Accredited Pro to oversee the construction of a LEED-certified building.

Two issues are being addressed by insurance companies: 1) rebuilding an LEED-certified building to meet the same or higher standards; and 2) rebuilding an older building to upgrade to LEED status. Some insurance companies have introduced a sublimit in order to reduce exposures. This is adjustable depending on how much premium you want to pay and what coverage you purchase. Other companies will only offer a green endorsement to buildings that have LEED certification prior to a loss.

We are also working closely with pollution carriers to create endorsements that address the LEED certification issue in their policies. In 2009, we expect that most pollution carriers will add a quote to include their “green” endorsement to their proposals. This endorsement can be used to reduce both the contractor’s and owner’s pollution liability.

Except for one carrier, both property and pollution underwriters will be required to charge an additional premium in order to add this coverage on to existing policies.

Although the insurance industry generally believes that LEED-certified buildings are beneficial from both a social and ecological perspective, they don’t have sufficient data to adjust their rates at the moment. As construction defect claims related to LEED certified buildings increase, we expect this trend to change. We will see premiums drop. This topic is still of great interest to the insurance industry, which has attempted to find creative ways to deal with the higher costs associated to LEED certified buildings.

We recommend that you talk to your carriers about these issues when renewing your contract. Parker, Smith & Feek can help. Our Real Estate Practice has extensive ‘green’ knowledge and is ready to assist you in these special situations.