Green building design teams face increased exposures

Source: http://www.businessinsurance.com, Issue: June 20, 2011
By: Joanne Wojcik

An architectural firm agrees to design an office building to achieve Leadership in Energy and Environmental Design gold certification, the second-highest level of the U.S. Green Building Council’s sustainability design scale.

Meanwhile, the developer that hired the architect advertises the project as having significantly reduced operating costs and a healthier work environment than traditional office buildings, hoping to charge higher rent.

However, when budget and time constraints prevent achievement of the desired LEED certification level, the developer sues the architect for negligence, breach of contract and breach of warranty based on the architect’s “guarantee” of LEED gold certification.

On an unrelated project, a team of architects agrees to design a condominium complex using sustainability attributes necessary to qualify for the state’s green building tax credit program. But when the project’s completion is delayed past the deadline for obtaining the tax credit, the project owner sues the design team and the developer for the loss of the tax credit, citing negligence and breach of contract.

Both of these actual claims scenarios could have been prevented had the design professionals not promised the achievement of specific LEED certification levels, experts in construction risk management say.

Fortunately, some insurers, such as Boston-based Lexington Insurance Co. and Bermuda-based XL Insurance Co. Ltd., have amended their architects, engineers and contractors professional liability policies to respond to claims associated with projects seeking LEED certification.

In addition, New York-based Chartis Inc., Lexington’s parent company, recently introduced Green Reputation Coverage, which helps mitigate the impact of adverse publicity and defense costs should a building fail to meet green industry standards.

Legal disputes growing
Although the economic downturn has slowed all construction during recent years, green building-related legal disputes are expected to grow as high energy costs and new building codes increase demand for LEED-certified and other types of energy-efficient buildings, professional liability experts predict.

As of May 10, there were about 8,900 LEED-certified building projects in the United States encompassing 1.3 billion square feet, according to Susan Dorn, general counsel of the Green Building Council.

“Everything is being built with energy conservation in mind,” said Frank Musica, senior risk management attorney at Victor O. Schinnerer & Co. Inc. in Chevy Chase, Md. “As governments start hinging more benefits, such as tax credits, on third-party certification programs like LEED, the risks increase,” he said.

Already, 34 jurisdictions have made LEED certification a mandatory requirement for certain buildings in their community.

For example, under Washington’s 2006 Green Building Act, developers of nonresidential buildings exceeding 50,000 square feet after Jan. 1, 2012, will be required to post a bond that their projects will meet or exceed LEED certification.

This requirement will be difficult, if not impossible, for developers to meet, Mr. Musica said, because no surety bond underwriters will offer such guarantees. Moreover, even if such bonds become available, any financial commitment will be absorbed by the design firms and contractors, he said.

Unlike professional liability insurance in which an insurer pays claims, the entities performing the work are required to repay the bond guarantor the full amount, plus an additional fee based on a percentage of the contract’s value, when a surety bond is triggered, Mr. Musica said.

“So if a project does not meet the LEED certification for any reason, such as the reviewer doesn’t feel like certifying the final project or the developer runs out of money to pay for the certification or the contractor screws up the construction, huge costs will be passed on to design firms,” he said.

Avoid guarantees
Because of the potential for liability, the Washington-based American Institute of Architects recommends that design professionals not guarantee that their projects will meet any type of LEED certification standards, said Edward B. Gentilcore, a partner at Duane Morris L.L.P. in Pittsburgh, who chaired a panel at the institute’s April sustainability summit, which was held in conjunction with the Associated General Contractors of America. He also helped craft the Green Building Addendum, or industry-specific contract terms, that institute members can use.

In fact, guaranteeing LEED certification upon completion of a project would void coverage under most professional liability insurance policies, Mr. Musica said.

“Over the last few years, some architects have shot themselves in the foot. They’d rush in and sign contracts for a warranty for green design,” he said.

Fortunately, the vast majority of such lawsuits also cited negligence or breach of contract, so there has been some coverage, said Stephen T. Del Percio, an attorney at Arent Fox L.L.P. in New York who focuses in such litigation.

“We strongly recommend that they never warrant or guarantee a certain expectation of a client, specifically LEED certification,” said Albert Rebasca, director of industry relations at XL Group P.L.C. in Bloomfield, N.J.

Heeding the advice of his professional liability insurer, XL, “we don’t warrant or certify that we’re going to give them a LEED building. We simply say our goal and our best efforts are to get them the LEED certification they request,” said Michael Kaufman, a partner at building design firm Goettsch Partners Inc. in Chicago.

“The label of “green’ is being thrown around with such ubiquity that, in some respects, it’s getting lost that there is some responsibility associated with representing that these buildings are going to be the best, the brightest, the most energy efficient,” Mr. Gentilcore said.

Moreover, under the latest LEED certification standard, which requires that building performance data be reported to the Green Building Council each year for three years after completion, building owners and operators could be put in the same precarious position as architects and contractors.

Whenever there’s a green project, “everyone’s responsibility is enhanced,” said Robert Stanton, vp-risk management at Willis Group Holdings P.L.C. in Chicago.

Contractors also could face additional liability if they decide to substitute building materials to cut costs or because the green components included in the design are not readily available, Mr. Stanton said.

“We have had a claim for a building specifying a new product not yet available,” said Bob Rogers, vp at Lexington in Boston. The claim sought reimbursement for the increased cost associated with obtaining an alternative product, he said.

“There’s also an associated risk with using green materials that may not have proven effectiveness or durability,” Mr. Stanton said.

“Right now, one of the best things design firms can do is keep their professionals on the cutting edge in terms of continuing education and also make sure they coordinate with their legal departments about the potential liabilities they face,” said De’andre Salter, CEO of Professional Risk Solutions, a wholesale broker and risk management consultant based in Warren, N.J. He also recommends that design professionals be careful in selecting the independent contractors and subcontractors they use.

“If you don’t thoroughly vet them and (you) put them on a project and something goes wrong, you’re going to be pulled into the lawsuit,” Mr. Salter said.

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