Last week, Canada’s Daily Commercial News and Construction Record published an article suggesting that Canada’s green building experience to date has largely avoided any legal repercussions arising out of green building projects. The article’s conclusions rest on the fact that, at least according to a Toronto-based green building consultant, there are no construction-related green building insurance or surety products that “specifically target” projects seeking LEED certification.

According to the Record,

“[t]o date, no Canadian projects have failed to achieve the LEED status they were aiming for, either due to contractor or project team errors. But south of the border, several lawsuits have been launched against builders and developers because green features allegedly failed to perform as promised, or because a project failed to achieve the level of LEED certification the owners expected. “

Here, the Record appears to be referring to the Gidumal litigation in Battery Park City, as well as some of the insurance claims that were reported back in 2007 by Victor Schinnerer’s Frank Musica. What the article misses, though, are the issues that were raised by the Toronto Star earlier this year in its two-part piece about Ontario’s regulation of the local green building industry. As you’ll recall, that series included a discussion of a pending lawsuit in the Ontario courts against a developer who had converted a century-old building in downtown Toronto into a 4-unit, mixed-use building that was touted as one of the city’s top green building projects in 2006 by Now magazine. The developer is currently defending a suit for fraud brought by the purchasers of the units, who are seeking over $900,000 in damages for the project’s alleged failure to satisfy certain Ontario building codes, including those for its geothermal system.

(Also, and just for the record once again, if one of the suits the Record is referring to here is Shaw Development, the allegations there were not that the project failed to earn an anticipated level of LEED certification, but that it failed to capture state-level green building tax credits by receiving a certificate of occupancy by a certain fixed date under the program).

I mention this because I think it’s important to note that the liability issues associated with green building extend beyond LEED – and could ultimately be far more broad. Indeed, just because there are no insurance products currently available for purchase on the Canadian markets does not mean that there is no risk. In fact, what’s most interesting about the article is that it fails to even mention two major sources of risk that could result in LEED-related liability: the LEED 2009 Minimum Program Requirements and individual prerequisites under the various LEED rating systems. (For example, the lynchpin of the appellants’ allegations in the Northland Pines challenge was that the high school had failed to satisfy IEQ Prerequisite 1 and EA Prerequisite 2 of LEED NC version 2.1.)

Nevertheless, one of the reasons why Ian Theaker, the consultant quoted in the article, believes there have not been any Canadian insurance products released to date is that “the LEED process has been specifically set up to make planning decisions that avoid problems down the road.” According to Mr. Theaker, “the best insurance to achieve LEED certification is to actually overshoot the LEED guidelines by a few points. You can’t guarantee any particular number of points will be recognized by the CaGBC, so if you shoot higher than your goal, you can afford to miss one or two points along the way.”

While this may be true, I think these remarks miss the broader impact of the Northland Pines proceeding. Although we have yet to see a rash of litigation over projects’ failure to earn third-party certification on account of missing targeted credits, and although translating third-party goals will continue to remain a critical design and construction contract consideration, Northland Pines suggests that the more imminent risks may arise out of challenges that projects have failed to satisfy applicable LEED prerequisites and/or Minimum Program Requirements. Although it’s unclear after Northland Pines whether GBCI/USGBC will ever decertify a project, that risk still exists, particularly because there appears to be no limitation on who has standing to initiate a certification challenge under GBCI’s Certification Challenge Policy.

 These types of risks need to be fully vetted before the insurance industry – in Canada or elsewhere – can fully assess them. The Record quotes Mr. Theaker as stating that “insurance companies may find it initially challenging to evaluate the risk associated with novel building materials and building techniques, but that the market soon catches up as they become mainstream.” As Northland Pines suggests, considering novel building materials and techniques is only one small slice of a comprehensive green building risk management strategy.

Finally, notwithstanding a perceived lack of Canadian green building risks, the Record also reports that Chartis intends to introduce its Green Reputation Coverage product – which covers legal costs and crisis consulting to manage the adverse publicity that may arise if a building fails to earn third-party green building certification – to Canadian markets sometime in the near future. This is a product which we have not discussed previously here at GRELJ, but would “cover the legal cost of defending a lawsuit in which the insured’s reputation would be damaged for failing to achieve a promised green standard,” according to Chartis vice president Joseph Fobert.

So, does the Canadian construction industry face a lower risk profile when building green? If so, why? I look forward to your thoughts in the comments.

Just before the July 4 holiday, Fireman’s Fund, which launched the green building property insurance market back in 2006, released what it is calling its “next generation” of green building policy endorsements. Calling it a “significant enhancement to what’s currently available in the marketplace,” Fireman’s Fund’s Steve Bushnell also introduced a “Green Financial Incentive Coverage” policy that provides policyholders with protection from the loss of green building-related financial incentives, including tax credits and deductions, utility rebates, and loan discounts, for a period of two (2) years after the loss.

According to Mr. Bushnell, the new endorsement evinces Fireman’s Fund’s “deeper understanding of evolving green building construction and insurance issues.” David Cohen, the company’s senior director of real estate, called the policy “a powerful incentive as many new green buildings are built with these cost savings factored in. Every day, new incentives are introduced – both from the utilities and the government at the local, state and federal level – incenting property owners to build green and losses could get in the way of that.”

This latter point, of course, is one we make frequently here at GRELJ in the context of design and construction agreements and leases; the pace of regulatory activity continues to make translating legislative requirements into contract documents a major challenge. The new endorsement also appears to be – at least implicitly – an acknowledgment of the $600,000.00 in lost tax credits which the developer suffered in the Shaw Development litigation, though it is unclear whether – under the terms and conditions of the endorsement – the developer’s loss would have been covered.

In addition to the new endorsement, Fireman’s Fund simultaneously announced that it has made further refinements to its existing line of green building coverage, including:

• Broadening eligibility for post-loss green upgrades to include all real and personal property that more efficiently uses energy or water, improves human health or reduces environmental impact (such as alternative energy generating equipment and water systems or green roofs);

• Combining four of its endorsements – three commercial and one manufacturing – into a single endorsement, which also includes coverage for building commissioning;

• For certified buildings, coverage now allows the insured to attain certification at one level above the certified green building level that the insured had prior to the loss or damage (i.e. LEED Gold instead of Silver);

• Vegetated roof coverage has now been extended to vegetated swales and other vegetation that reduces the heat island effect, including vegetated walls. This coverage now applies to both certified and traditional buildings (previously it was only for certified buildings); and

• Coverage has also been expanded to include porous paving – water permeable paving that allows water to drain into the ground to help manage water flow.

Perhaps what’s most interesting about the press release is Fireman Fund’s acknowledgement that, to date, approximately 1500 commercial property insurance policyholders have purchased one of the company’s green building endorsements (though there is no information on how many claims have been asserted against those policies).  It goes without saying – as always – that you should review your policies of insurance – property, professional liability, builder’s risk, or otherwise – with heightened scrutiny in connection with your green construction project to confirm exactly what additional insurance – if any – you may need to procure.

One area of the property insurance market which has seen an increase in green building policy endorsements over the past year is the builder’s risk market. This article will take a look at exactly what builder’s risk is meant to insure, and then review some of the available green building endorsements to such policies that are currently available.

Because the risks for property damage, loss, or destruction are quite different for a building under construction versus a building that’s already been built, standard property insurance policies will not provide coverage for damage to or destruction of the former. This is because the owner’s insurable interest is constantly changing; title to material and equipment may change daily, and the overall value of the actual project itself increases from zero as the building itself takes shape, which makes it more or less impossible for the insurer to determine the appropriate premium. Enter builder’s risk insurance, which generally refers to a property insurance policy that will remain in place while the project is under construction. Unless specified by endorsement or otherwise, once the project is completed, builder’s risk coverage terminates, and the owner will need to make sure that a standard property insurance policy is in place to cover accidental losses, damages, or even total destruction of the building or property in question. Determining exactly when that termination takes place can be tricky, and is a good reason to review both the terms and conditions of the construction contract, as well as the terms of the policy and law of the controlling jurisdiction.

Considering the purchase of various endorsements is important because standard commercial builder’s risk coverage will insure only one thing: the building under construction, and not associated soft costs (such as those incurred with third-party green building certification). Standard builder’s risk policies will cover damage or losses to the building’s foundations, scaffolding, construction forms, other temporary structures at the project site, fixtures, machinery and equipment used to service the building and intended to become part of it, and materials and supplies at the site which will also become part of the building. Typical endorsements include those for “floater” coverage; i.e., damage to equipment used to build the project, or materials and supplies in transit from point of manufacture or supply to the project site, as well as the costs and expenses that the owner may incur if completion of the project is delayed.

According to the most recent Marsh survey (from December of 2008), several insurers now offer specific green building endorsements to traditional builder’s risk policies which owners and their contractors should consider carefully on green construction projects of any size. Fireman’s Fund, for example, offers a “Delay of Occupancy or Use – Green Amendment” to its builder’s risk product. The endorsement provides coverage for the soft green building-related costs that an owner may incur after a covered loss, such as the recycling of construction debris, flushing out the reconstructed space with clean air, commissioning repaired or reconstructed building systems, and re-registering the project with USGBC to continue pursuit of LEED certification. In addition, the policy may provide coverage for the owner’s loss of net earnings from alternative energy or water efficient installations if those systems were operational prior to the loss. Travelers, Zurich and Ace now offer similar endorsements to their builder’s risk policies as well.

As new construction starts (hopefully) increase as the economy slowly lurches around, look for more comprehensive endorsements to builder’s risk policies from a broader range of insurers to emerge; as always, we’ll be keeping an eye on such trends and follow up here at GRELJ accordingly. In the interim, if anyone out there has purchased any of the available endorsements, I’d be interested in getting your feedback in the comments.

First, the design professional who functions as an advocate, extolling the promises of increased energy efficiency, asset values, and rental premiums of LEED-certified buildings is creating a corresponding high expectation in the eyes of his or her client. As we noted over at gbNYC in the aftermath of a BIM/green building panel held here in New York City nearly two years ago, insurance industry professionals will almost always observe that claims start with violated expectations. As architect and attorney Fred Butters points out in his seminal Real Estate Issues article, Greening the Standard of Care: Evolving Legal Standards of Practice for the Architect in a Sustainable World, “[i]f the architect does not clearly and sufficiently indicate the positives and negatives [of green building installations, technologies, or certification programs], the client will be looking to the architect to make him or her whole. Becoming an advocate for many types of sustainable approaches may cause the design professional to overlook the messy reality for the sake of being a good advocate.”

Butters also points out that “[i]f the architect is serving as an educator, the client’s decision to ‘go green’ may be only that- the client’s decision. However, if the architect is ‘encouraging’ or ‘advocating’ for the incorporation of green features, his or her advice is implicated in the design decision. In that instance, the possibility that the architect can avoid the effect of the client’s unmet expectations is low.” Advocating for LEED or other green design features may also implicate standard of care issues, potentially elevating that standard beyond what prevails for architects and engineers in their particular geographic location. As we have noted previously, this amounts to an assumption of liability above what is imposed by law; most professional liability policies will exclude coverage for claims where the design professional has failed to satisfy that heightened standard.

What makes this issuer thornier, though, is that the architect actually does, in fact, have an obligation- both in the 2007 version of the AIA contract documents, and the new AIA Canon of Ethics- to promote sustainable design practices. For example, Canon VI, Obligations to the Environment, requires the architect to “advocate the design, construction, and operation of sustainable buildings and communities.” (Ethical Standard 6.2). In performing design work, the architect “should be environmentally responsible and advocate sustainable building and site design.” (Ethical Standard 6.1). As Mr. Butters also points out, and as we’ve noted here at GRELJ previously, the B201 (2007) Owner – Architect Agreement contains similar requirements:

§ 3.2.3 The Architect shall present its preliminary evaluation to the Owner and shall discuss with the Owner alternative approaches to design and construction of the Project, including the feasibility of incorporating environmentally responsible design approaches.

§ 3.2.5.1 The Architect shall consider environmentally responsible design alternatives, such as material choices and building orientation.

The National Society of Professional Engineers’ Code of Ethics contains a similar obligation under Professional Obligations, III.2.d: “[e]ngineers are encouraged to adhere to the principles of sustainable development in order to protect the environment for future generations.” The design professional is thus placed in a delicate position; professionally, it has an obligation to promote sustainability, but at what potential perils?

Mr. Yudelson’s remarks are also important to note in light of our recent article here at GRELJ about the insurance coverage implications of the Energy Ace LEED certification “guarantee.” Unbridled green building advocacy could also provide an insurance carrier with the argument that the design professional has provided the functional equivalent of a guarantee- either LEED certification, performance, or otherwise- that might give the carrier grounds to deny coverage for negligence claims arising out of the project. For example, and as we noted previously, “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). 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.”

I think it’s therefore worth repeating that while the analysis of green building legal issues related to standards of care, professional liability insurance, and LEED building performance continue to play out, architects and engineers should be particularly careful when making the types of representations that Mr. Yudelson suggests when participating in the design of green construction projects.

• Green Building Consultant Challenges San Antonio City Groups to Welcome “New Green Era” (PR)
• Green Insurance Law: Thoughts on BIM and LEED Coverage for Design Professionals (gbNYC)

The much more practical research that I turned up was the following except from an article by Kelly Luckett, the self-proclaimed “Green Roof Guy” who writes a column for greenroofs.com. In a column from the very end of 2008, Mr. Luckett describes how uneducated project teams may unwittingly expose themselves to unanticipated risks stemming from the maintenance requirements of green roof installations. His remarks also reflect a number of key points we’ve made consistently both here at GRELJ and over at gbNYC with respect to the additional risk management strategies demanded by new green building technologies and third-party certification programs.

It is also interesting to note that, for the particular project that he describes below, LEED certification requirements resulted in the green roof’s irrigation system being disconnected after the initial green roof establishment period, which resulted in a roof that did not appear as anticipated by the owner. One last important thought- Mr. Luckett hints that this project was located in Toronto, which, as you’ll recall, recently passed a green roof mandate. I think this is a great example of how legislation is fueling the types of liabilities that we grapple with here at GRELJ, and why, as always, contract language will remain paramount for green building project teams.

I would like to turn the focus now to an issue that continues to plague the green roof industry: the maintenance-free green roof myth.  Some in the media continue to espouse this nonexistent characteristic of green roofs resulting in many of our customers being painfully uneducated about realities of critical green roof maintenance!

Pretty strong language, I know, but the problem doesn’t seem to be getting better.  Let me tell you a story about my company’s largest project.  It’s a government owned project in the city that has become the nation’s green roof capitol; you know the place.  I sat in on a meeting where the general contractor, the architect, and the roofing contractor removed all mention of maintenance guidelines and the Plant Health Alert System from my submittal package!

For those of you outside the construction industry, a submittal package is a gathering of documents and drawings the subcontractor submits to the architect and owner to demonstrate compliance with the specifications for products or portions of the construction project.  When I questioned why they were removing critical pages of information from my submittals, I was told that they eliminated the irrigation system for this 96,000 square foot green roof based on a tour a green roof provider took the owner on during the preceding spring.  I asked if they had told them about the drought that killed green roof plants all over the region the summer before, to which I only received blank stares.  I practically had to threaten to hold my breath until I turned blue, or at least threaten to walk away from the project to get them to issue a change order to put the irrigation system back in.

The green roof was planted in June and July, 2007, and required routine irrigation throughout the establishment period, a task that could not be accomplished over 96,000 square feet using a garden hose.  After alleviating concerns over the irrigation system conflicting with LEED certification requirements by agreeing to disconnect the system after the establishment period, the change order was issued.  However, I insisted that the irrigation system remain in place as insurance should drought conditions require its activation to keep the $250,000 worth of plants alive.

Now fast forward two years. The phone rings; it’s the roofing contractor.  The ownership is requesting a walkthrough to discuss the condition of the green roof.  I asked our horticulturist to accompany me to the autumn meeting on the rooftop. We were greeted by the general contractor, the architect, the roofing contractor, and a clearly unhappy owner’s representative.  The condition of the green roof?  Starving sedums due to absence of the fertilizer that was supposed to have been applied the previous spring, per the maintenance guidelines that the ownership never got to see.

Also, since the plants did not receive the food required to grow and cover the surface of the growth media, the weeds moved in.  The good news –  the weeds will die over the winter and an application of fertilizer next spring will allow the plants to thrive.  The bad news – the project lost the opportunity for the plants to grow in one of the wettest growing seasons on record.  As you can imagine, there was a round of discussion about who was supposed to have provided the maintenance, a discussion that may wind up being continued in a court room.

However, the owner’s representative asked why the irrigation system was still there.  When the general contractor started to speak he was stopped by the owner’s representative who said the question was directed to me.  Before I could answer, another question was posed, “Do you tell your customers that they need to provide irrigation for their green roof?”  To which I replied, “Absolutely yes, every single one of them.”

The owner’s representative, clearly not expecting this answer, became even more agitated.  That’s when I began to appreciate how serious this problem has gotten for the green roof industry.  The owner’s representative placed in charge of one the city’s largest green roofs, in arguably the most green roof educated city in the nation, was utterly surprised by the fact that plants need food and water.  The building code issue evoked an urgent call to arms that brought about action by many and opened lines of communication among perceived adversaries, while lack of proper green roof maintenance poses far more serious threat to the green roof concept yet the green roof industry remains largely quiet.

Admittedly, nobody uses discussing maintenance during the green roof sale as their go-to closing strategy, but it’s a lot healthier for a green roof business in the long run to address this issue upfront rather than standing in the middle of a problem on a green roof facing an unhappy and uneducated customer the following season.  I’ll keep working on the code issues on behalf of the industry, but it’s time the industry start working on this much larger problem.

• The Green Roof Guy (greenroofs.com)
• Green Roof Archive (GRELJ)

The top five risk categories that were identified during the forums were finance, standards of care and legal, building performance, project consultants and subcontractors, and green building regulations; each of these fell either in the “likely” or “moderate” risk profiles (finance, standards of care, and performance were the top three, all of which were in the “likely” profile, which translated into “likely to occur at least once every three years.”). The lowest risk category? Brand and competitive edge or reputation (which is interesting given the new product from AIG that provides coverage (in the form of a lump sum payment and counseling services) for loss of reputation if a green building project fails to achieve third-party certification).

Within each of the top five risk categories, Marsh asked participants in each forum both to identify specific risks and challenges and propose some general solutions. Many of those risks will ring familiar to you, particularly in the standard of care/legal category. However, there were several that I thought were worth repeating, particularly because we have not mentioned them explicitly here at GRELJ previously.

First, the danger that “more aggressive” design may lead to an increased risk of errors or omissions in contract documents. I think that this risk ties in with many designers having little experience with green building technologies, yet specifying certain materials or systems without performing sufficient due diligence; we’ve already heard of claims arising out of this scenario. Next, potential claims for attractive nuisance from low-rise green roofs that are easily accessible- particularly on schools- as well as graywater collection ponds. While we’ve noted insurer attitudes about green roofs generally from the perspective of potential arson, the idea of the green roof or collection pond serving as an attractive nuisance is troubling (though a quick Westlaw search did not identify any reported decisions involving a green roof in this context), and this Marsh report is the first place that we’ve seen the concept identified. Finally, the report mentions that executives were concerned about the possibility that contractors may be assuming liability for professional design services, yet not procuring professional liability insurance coverage for those efforts. This scenario may arise where a contractor performs LEED certification or building commissioning services but is not obligated by contract (or statute) to procure such coverage. Note our recent article here at GRELJ discussing aspects of this important issue.

I thought it was also interesting to note that the top categories as identified by participants in each city varied widely. In New York City, for example, the top two risk categories were performance and standard of care/legal; in Washington, D.C. they were financial and education. With respect to New York City, it was also interesting to note that the panel considered regulatory risks as low-risk; given the Mayor’s Greener Greater Buildings Plan and the pending mandate for energy efficiency benchmarking and retrofits for every building in the city, this will likely change. Moreover, I have written extensively, both here at GRELJ and over at gbNYC, about how critical it is for project teams to survey and understand the regulatory requirements that may apply to a particular project. In that respect, I was a bit disappointed to note that the report’s composite risk map ranked regulatory risks as “unlikely.” As we noted in the context of the Shaw Development litigation, the issue in that particular lawsuit was the parameters of an applicable green building tax incentive program. As the Marsh report points out, most insurance policies will exclude claims based on non-compliance with controlling laws, codes, or regulations. Although claims- at least in negligence- for failure to comply with controlling green building regulations may be asserted as negligence per se, the idea that insurance may not be available for allegations that a designer (or a contractor) failed to comply with those regulations should be considered seriously by green building project stakeholders.

Finally, I think it is also important to quickly point out that insurance risks will change drastically under the LEED 2009 system if the specter of decertification proves as sinister in practice as many have suggested.

The report is a quick read and sums up many of the key issues that the green building legal community has been wrestling with over the past two years rather succinctly. A link to the registration page on the Marsh website from which you can download the report is set forth below.

• Green Building: Assessing the Risks, Feedback from the Construction Industry (Marsh- Register)

I think that this latter point is critical- as I wrote previously here at GRELJ, most professional liability insurance policies contain an exclusion for assumptions of liability that are not imposed by law (i.e., because the LEED AP Fellow designation implies that the design professional will perform at a higher level than the prevailing common law standard, the design professional may not be covered for any resulting claims of negligent design services arising out of disputed green design services). It seems to me that if the LEED AP fellow designation implies a higher standard of care than is prevalent in the industry, this type of form exclusion would come into play. Accordingly, I am very curious to see if there is any reaction from insurance industry professionals on this crucial issue.

Nevertheless, although the idea that programs like LEED and green design techniques generally are changing the standard of care for design professionals is nothing new, the Schinnerer report is the first time I have seen a major insurer pointing to the new tiered LEED AP program as playing a role in that uptick. The report also emphasizes the importance of a “mutual understanding on designing for sustainability and certification,” and offers two form contract provisions that should serve as a good jumping off point for design professionals concerned about risk management on green building projects.

The same section of the report discussing the new LEED AP program also identifies the “successful marketing of the LEED program” and state and local governments’ tying of certain project-based incentives to private certification as a potential source of “significant financial repercussions if a project is not granted a desired level of LEED certification” (likely a reference to the Shaw Development litigation). The report rather ominously suggests that “[g]overnmental enticements to support the pursuit of these LEED accredited projects and their environmentally conscious goals represent a level of risk that approaches a project-level warranty.” The danger here, of course, is that any claims alleging a breach of such a warranty would likely be excluded by a design professional’s controlling errors and omissions policy, and the notion that legislation may be creating the equivalent of a warranty is certainly interesting to consider.

Finally, on page 5, the report proposes two form contract provisions for design professionals to consider incorporating into green construction contracts. The first reflects the situation where an owner may want certain green building materials or systems incorporated into the design, and the second where the Owner intends to seek third-party certification. These provisions are merely form language and should be treated as such by design professionals; the report does explicitly note the important of assessing risk on project-by-project basis, as well as retaining counsel to draft provisions that reflect the circumstances of a given project. As the Shaw Development litigation teaches, this is the threshold consideration for a green building project team. Each of the provisions is reprinted below for your reference:

When Owner Wants the Design to Meet Specific Sustainability Criteria

Owner has made Design Firm aware that Owner wants a specific level of sustainability incorporated into this Project and that Design Firm shall use the standards published by [specific design guidelines or certification standard] for this Project. Design Firm shall research the applicable sustainability requirements and design the Project with the intentino of having the Project meet the requirements. Owner recognizes that a project designed to meet a specific sustainability standard might not perform as designed because of the construction, operation, and maintenance of the Project and therefore agrees that it shall bring no claim against Design Firm if the project does not perform as intended, unless the negligence of the Design Firm is the sole cause of the performance deficiency.

Owner also recognizes that during the design of the Project, Design Firm shall use professional judgment in the selection of materials, products, and systems for the Project but that Design Firm cannot and does not warrant the performance of any specified material, product or system. Design Firm will identify for Owner any material, product, or system that, in the Design Firm’s judgment from the Design Firm’s examination of available performance information, might provide Owner with a benefit on this Project but does not have adequate information on its performance in actual construction or operation. Owner acknowledges that it shall look solely to the manufacturer, supplier or installer of materials, products, or systems if their performance does not meet expectations.

When Owner Wants Third-Party Certification of Sustainability

Owner has made Design Firm aware that Owner intends to pursue [specific certification standard] for this Project. Design Firm shall research the applicable certification requirements, design the Project with the intention of having the Project meet the requirements, and document the design of the Project for submission by the Owner to the certifying organization. Owner recognizes that certification is not based on design alone but also on the construction, operation and maintenance of the Project and therefore agrees that it shall bring no claim against Design Firm if the Project is not certified as intended unless the negligence of the Design Firm is the sole cause of the Project not being certified.

Owner also recognizes that during the design of the Project, Design Firm shall use professional judgment in the selection of materials, products and systems for the Project with the goal of meeting certification criteria but that Design Firm cannot and does not warrant the performance of any specified material, product, or system. Design Firm will identify for Owner for any material, product or system that, in the Design Firm’s judgment from the Design Firm’s examination of available performance information, might provide Owner with a benefit on this Project but does not have adequate information on its performance in actual construction or operation. Owner acknowledges that it shall look solely to the manufacturer, supplier or installer of materials, products or systems if their performance does not meet expectations.

The full report is available via the link below for your review.

• Victor O. Schinnerer & Company, Inc. – Guidelines for Improving Practice (No. 3, 2009)
• LEED AP = Higher Standard of Care (Real Life LEED)

First, in the MPR preamble, the LEED v3 program expressly provides GBCI with the ability to revoke LEED certification “upon gaining knowledge of non-compliance with any applicable MPRs.” It is thus crucial that project teams consider and comply with each MPR, particularly if the project seeks to take advantage of a state- or local-level LEED-driven incentive program that is keyed to the receipt of formal certification. While we have yet to see LEED-certified project have its certification revoked, an interesting question could arise here if a state or local government that had provided a project with an incentive upon certification sough to recoup those incentives if the project was de-certified by GBCI. Even thornier would be the scenario where a project that was required to earn certification under a legislative mandate loses certification. The corresponding liability-related issues would of course flow downstream and impact each member of the project team. MPR 1 actually obligates every LEED-hopeful project to “be designed to comply with all applicable USA federal, state and local environmental laws and regulations in place where the project is located and at the time of design and construction.” Comprehensive legislative surveys and strong contract language emphasizing regulatory compliance will thus be a priority for project teams under the LEED v3 regime.

From a legal perspective, MPR 7 is perhaps the most important to consider: “all certified projects must commit to allow USGBC to access all available actual whole-project energy and water usage data in the future for research purposes.” Moreover, “[t]his commitment must carry forward if the building changes ownership.” For attorneys, it will be an interesting challenge to draft such a covenant that will bind subsequent purchases of real property (or, in the context of LEED-CS and LEED-CI 2009 MPRs, subsequent tenants). For owners and project teams, it will be imperative to recognize that such language must be translated into purchase agreements or leasing documents such that GBCI cannot revoke a project’s LEED certification. More generally, it will be interesting to see if any private owners balk at granting USGBC access to such data, and whether there are any local legal obstacles (in terms of building codes, utility regulations, etc.) that may make it difficult for owners to provide the data as required by LEED v3.

Applicable MPRs are set forth below as printed in the text of the New Construction and Major Renovations rating system. Note that I have also set forth MPR 6 below, which lays out certain timeframes that project teams should remain aware of. I anticipate that there will be much more analysis of these and other provisions in LEED v3 as more project teams become familiar with the terms and scope of the program; please feel free to suggest any additional legal issues that we may have missed in the comments below.

Minimum Program Requirements (“MPRs”) – LEED 2009 – New Construction and Major Renovations

• LEED Version 3 (USGBC)

The surety industry’s specific objection to the legislation as drafted is its requirement that projects post what is defined as a “performance bond” equal to 4 percent of the project’s total cost in advance of construction. If the project fails to meet certain levels of LEED certification, the bond is forfeited into a green building fund (which is administered by the same organization that evaluates compliance with the Act- also problematic as an obvious conflict of interest). This bond is, of course, not the traditional sort of construction performance bond but rather essentially a penal sum that is assessed in the event that a project fails to meet the requisite LEED rating.

Mr. McCallum makes the quite salient point that, as drafted, the performance bond requirement “does nothing to put the building in compliance. It simply serves as a funding mechanism for the bureaucracy.” More significantly, the owner or developer of the building, who will likely be responsible for posting the bond, is not necessarily the party that is ultimately responsible for achieving the LEED certification. Accordingly, the surety industry is extremely wary of insuring a risk that it cannot assess with sufficient accuracy. It follows that, if owners and developers cannot obtain the bond as required, they would likely need to post a letter of credit or find some other way of satisfying their obligations under the Act. The more likely scenario is that such owners will simply choose not to build in the District until there is more clarity with respect to these bonding requirements and which parties- if any- will be required to procure and post the bond.

Still, it is a positive development that the City Council is listening to the surety industry and attempting to address its concerns, though it is curious that we are still exactly where we were a year ago with respect to resolving these issues; given that the legislation is set to take effect in a couple of weeks, the City Council could certainly have moved a bit more quickly in terms of addressing Mr. McCallum’s original letter from over a year ago. As the Journal notes, “[t]he surety industry’s opposition is limited to the performance bonds issue. The march toward green building standards does not pose a problem.”

• Surety Groups Fear Risks in Green Building Act (WBJ)
• Understanding the Business of Green (GRELJ)
• Surety Industry Raises Red Flags Over D.C. Green Building Act (gbNYC)

• Marsh Report: At Least One Insurer Considering Green Endorsement (gbNYC)
• The Green Built Environment in the U.S. (Marsh, register to obtain copy)
• Need for Green Counsel Becoming Increasingly Salient (gbNYC)
• Contract Language Remains Key (gbNYC)
• Thoughts on BIM and LEED Coverage for Design Professionals (gbNYC)
• Liability Archive (gbNYC)

• Green Roofs a Hidden Risk for Insurers (gbNYC)