Professional liability risks grow with green construction

Source: http://www.businessinsurance.com, July 24, 2011
By: Judy Greenwald

Challenges facing risk managers and insurers in developing errors and omissions coverage for “green” construction projects are similar to but also different than standard construction risks.

The difference generally is found in new technology and materials, which are untested and often experimental, and can lead to unfounded expectations, observers say.

Despite recent attention on the subject, “green building sustainable design has been around for decades,” said Paul Ablan, Minnetonka, Minn.-based senior vp and managing director of professional liability at OneBeacon Professional Insurance, a unit of Hamilton, Bermuda-based OneBeacon Insurance Group Ltd.

Professionals long have sought to operate more efficiently and economically while taking the environment into account, but it is only in the past several years that sustainable design has gained more governmental and public focus, Mr. Ablan said.

“There are lots of buzzwords that are thrown around on these projects,” including that they are “healthier, more energy efficient more environmentally friendly,” said Edward B. Gentilcore, a partner at Duane Morris L.L.P. in Pittsburgh. “Translating those buzzwords into contractual language and then performance reality proves to be a challenge.”

Mr. Ablan said the green construction focus “has brought to the table for us a whole new set of problems regarding what kind of damages may arise from green building projects, all the way from how do we define them in our insurance policies” to coverage of damages and the services provided.

“As I like to put it, green construction is regular construction risk with a twist,” said Shari Shapiro, an associate with law firm Cozen O’Connor P.C. in Cherry Hill, N.J.

“In many cases, the risks that we’re seeing for green construction are very similar to other risks that we see for nongreen construction, but there are some unique exposures that are starting to emerge,” said Lori Bailey, Boston-based head of professional liability for Zurich North America Commercial, a unit of Zurich Financial Services Group.

“The first is managing client expectations, particularly around the usage of new materials” and their life cycle has yet to be determined. “So just managing client expectations around that is certainly a challenge,” Ms. Bailey said.

“One of the challenges that happens is you don’t want the designer overcertifying, overguaranteeing something” that may be more the “builder’s responsibility and vice versa,” she said.

The standard of care that will be applied to the architect or design professional is an issue “if they’re holding themselves out as certified under the (Leadership in Energy and Environmental Design) program,” Ms. Shapiro said.

Observers note that architects and engineers professional liability insurance expressly excludes coverage for warranties and guarantees (see story, next page).

Another issue concerns product specifications for the construction, and using a standard product rather than a green product could result in an E&O claim, Ms. Bailey said.

Rod Taylor, New York-based managing director of Aon Risk Solutions’ environmental services group, a unit of Aon Corp., said one potential problem is whether bamboo, which is used on walls, floors and elsewhere, is in fact obtained from fast-growth forests as claimed.

Mr. Taylor said another risk specific to green buildings is a vegetative roof, which involves installing a layer of dirt and planting grass. From a construction viewpoint, this is “fairly challenging” because the materials used are fairly heavy and require proper structural design and, once installed, must have a watering system in case of no rain, he said.

There have been problems in particular with irrigation systems causing leaks because of improper design, “and they end up being much more expensive than people thought they were going to be to maintain,” Mr. Taylor said.

Ms. Shapiro said “to the extent that the green building incorporates new technology,” that technology could become a product liability issue.

Robert Stanton, Chicago-based vp-risk management at Willis Group Holdings P.L.C.’s strategic outcomes practice, said the biggest obstacle facing contractors and design professionals in green construction “in a lot of instances” is owners who do not “truly understand what they want.”

While some owners embark on green construction for public relations reasons and others seek operational savings, “a lot of times green design requires a higher upfront cost,” Mr. Stanton said.

“Will the owner want to carry such costs until such time as they recoup the additional cost upfront?” he asked. This could lead to claims because of the “disconnect” between the parties’ expectations, he said.

There may also be a misunderstanding about the owner’s higher duty relative to upkeep of the property to ensure it continues to be a more efficient building to operate, he said.

Another factor that could lead to claims is that “some people still have the idea that they’ll get a better class of tenant, or their employees will be more productive if they have a green building,” Mr. Stanton said.

Another possible issue is “the potential for overreliance” on computer modeling to evaluate how much energy a building will use over time, said Bion D. Howard, a consultant with Building Environment Science & Technology in Valley Center, Calif. While there are disagreements over which computer model is best, “the real issue” is whether the consultant or engineer entering the data has “all the information, and do they know what they’re doing?” he said.

The cost to replace a system is another potential coverage issue, said Mr. Stanton. For example, if “you have what is considered a prototypical, truly revolutionary” heating, ventilation and air conditioning system and it is damaged or breaks down, “what is the replacement cost of a prototype?” he asked. There also is the issue of systems that do not perform as well as initially expected.

Using an innovative system removes “one of the typical defenses that most designing professionals would usually use (during litigation), which is, “We’ve used this on other projects without a problem,’” Mr. Stanton said.

Ms. Bailey said insurance challenges “can be overcome with a careful underwriting of the particular risk, and making sure our underwriters are asking the appropriate questions of our insureds and are really digging into the particular risk.”

While Zurich’s underwriters have “significant” construction expertise, none focuses exclusively on green risks, Ms. Bailey said. The insurer views it “as a subset of our construction practice,” she said.

Ms. Bailey said in setting rates, there is “really no measurable difference between green and nongreen. Any variance in pricing or terms is generally going to come down to the scope of the risk itself and involves various areas of practices, size and scope of project.”

Insurance options
About 40 insurers underwrite professional liability risks in this sector, said Jeffrey Coe, Atlanta-based national practice leader for Marsh USA Inc.’s design industry group. About 80% of policyholders are small design firms that may buy $1 million or less in E&O coverage, he said. “But there are certainly many very large design firms and architectural firms and contractors that buy much more in the way of limits.”

Most insurers that write E&O coverage for architects, engineers and contractors “can at least offer $5 million and many can go upwards in the $20 million range,” Mr. Coe said.

Owners can rely on what the architects and engineers “bring to the table,” buy excess coverage such as owners protective professional indemnity insurance, or buy a project-specific dedicated policy “that in effect replaces” the architects and engineers coverage, said Mr. Coe.

Capacity is “generally available,” said Ms. Bailey. “It somewhat depends on the type of policy that you’re looking for,” she said. The available capacity “does tend to keep pricing rather competitive,” although losses will have an impact on rates. She said up to $25 million in limits is available, with $25,000 being Zurich’s preferred minimum retention.

“There’s some discussion among the insurers that they’re able to hold their rates a little better than they had been able to,” but design firms with good experience can still find a competitive program, Mr. Coe said.

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