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Reactions to Green Building Industry’s First LEED Certification “Guarantee:” Implications for Insurance Coverage & Limitation of Liability Provisions

As you likely know by now, Atlanta-based Energy Ace, Inc. recently announced that it will offer what the company is calling the green building industry’s first LEED certification guarantee. According to Energy Ace CEO Wayne Robertson, the firm “can offer clients a certainty that their project is going to be certified and remove that anxiety.” The specifics of the guarantee are as follows: clients retain Energy Ace pursuant to a standard service contract under which the firm performs LEED administration, fundamental building commissioning, and energy modeling. It holds a LEED charette and, if everything is satisfactory, the contract will be amended to “guarantee” certification. That guarantee, though, actually reads in substance much more like a limitation on Energy Ace’s liability; if the project fails to earn its target level of certification (i.e. Gold or Silver) or is not certified at all, Energy Ace will refund its LEED administration fee to the owner (which is typically between 30 and 45 percent of its total fee). Although there are a number of additional facts that would be helpful in analyzing the implications of the Energy Ace initiative more comprehensively, I do think it provides us with a timely opportunity to review a number of important general construction contract and insurance coverage considerations, many of which we have considered here at GRELJ during the course of 2009.

First, I think it’s important to note at the outset that in most jurisdictions- including New York- there is no statutory obligation for a party to carry professional liability insurance, though of course most owners will insist upon it where that party is rendering architectural or engineering design services. Accordingly, absent additional information, we don’t know what type of insurance Energy Ace typically procures or the scope of any discussions it had with its carrier in considering the coverage implications of announcing its guarantee. These are critical inquiries because, as you know, most professional liability insurance policies exclude coverage for claims arising out of the breach of warranty or guarantee. However, the notion that a limitation of liability provision in a contract for LEED certification services is novel is misplaced; most LEED consultants will typically limit their liability for such services to the total amount of their fee (and do not carry a corresponding professional liability policy).

Second, I also thought that the following quote from Mr. Robertson, sourced by Andrew Burr in CoStar discussing the Energy Ace guarantee’s genesis at a meeting where local stakeholders reviewed Atlanta’s pending LEED ordinance, was particularly interesting: “[o]ne of the senior architects [who attended the meeting] was saying that these mandates are putting us in a position to offer a guarantee and we can’t do that. And I’m thinking, yes we can.” For design professionals or LEED consultants who do maintain professional liability insurance, providing an explicit guarantee of ultimate certification level or other performance is indeed problematic on that basis. However, the more troubling possibility is that a guarantee in this context might also give a professional liability insurance carrier grounds to deny coverage for any other negligence claim arising out of the project but not specifically tied to the guarantee. Moreover, the concept of a guarantee is essentially representing perfection; anything less is a breach of contract, claims for which are similarly not covered by a professional liability policy (though the insurer may still defend under the policy but reserve its rights). Guarantees also elevate the professional’s standard of care beyond what is imposed by law; again, potentially triggering another another form policy exclusion that could lead the insurer to disclaim coverage. In short, absent confirmation from the carrier that coverage will remain available, it will continue to be dangerous for parties that maintain professional liability insurance to make the types of representations implicated by the Energy Ace guarantee.

Finally, putting aside insurance considerations, the question remains as to the extent a court would uphold a limitation on liability provision for LEED certification services where the economic losses sustained by the plaintiff for the LEED consultant’s negligence were disproportionate to the fee. In New York, at least, courts will review limitation of liability clauses with heightened scrutiny, particularly if they purport to reduce a party’s exposure to damages for its own negligence. If Energy Ace (or any other LEED consultant) breached a guarantee, the project failed to obtain certification, and certain financial incentives were lost or other damages resulted, a court might be inclined to strike the provision. For example, in Shaw Development, the owner’s counterclaims against Southern Builders included two separate counts for breach of contract and negligence for Southern Builders’ “fail[ure] to construct the Project in conformance with a Silver level of certification according to USGBC’s LEED system,” with both claims seeking damages for the project’s failure to qualify for $635,000 in state-level green building tax credits. Although in Shaw Development the receipt of formal LEED certification was not a prerequisite to the owner obtaining the tax credits, the Shaw facts do suggest the kinds of damages that could flow from the breach of a LEED certification guarantee in a jurisdiction where applicable legislation is tied to formal certification. A discussion of green building consequential damages is beyond the scope of this particular article, but it is important to note the possibility that they may arise and be quite significant.

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6 Responses to Reactions to Green Building Industry’s First LEED Certification “Guarantee:” Implications for Insurance Coverage & Limitation of Liability Provisions

  1. Michael Gibbons August 27, 2009 at 3:31 pm #

    Energy Ace’s “guarantee” – All hat, no cattle.

    Though Energy Ace’s “guarantee” may be excluded from coverage under the professional liablilty policy, the amount of fees placed at risk falls within or is substantially less than the standard deductible applicable to such professional liability policies. Additionally, most professional services contracts contain a mutual waiver of consequential damages which further serves to limit the exposure of the professional in the event of professional negligence. Rather than this thin guarantee, I would like to see an Energy Air agree to be responsible for damages flowing from its negligence up to the available limits of any applicable insurance policy.

    Brilliant marketing but less than meets the eye.

  2. Christopher Hill August 27, 2009 at 9:45 pm #

    I think these are great thoughts. Unfortunately, to give a guarantee of any sort in this arena, the guarantor would have to do what Energy Ace has done. In short, in order to keep from the pitfalls of having a project decertified or worse, not approved for a certain LEED certification, the consultant almost has to water it down with caveat after caveat.

  3. Mark Rabkin August 28, 2009 at 3:09 am #

    Stephen,

    BEST. POST. EVER.

    Mark

  4. Stephen Del Percio September 1, 2009 at 1:31 am #

    Not sure I’d go that far, Mark, but glad you enjoyed it- thanks.

    Michael, your comments suggest one of the mantras that many of us have been repeating here in 2009 about the danger of relying on form construction agreements. Every green building project is different, and risk must be allocated accordingly.

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