In a two-part series that was published last weekend, Diana Zlomislic of the Toronto Star reviews the green building landscape in Ontario and concludes that although “[s]hoddy building is not unique to the green sector . . . with governments aggressively promoting green construction and green building still an emerging practice, consumers who opt for more eco-friendly homes and renovations are more vulnerable.” Zlomislic specifically identifies the over $1 billion in financial incentives that have been distributed to date by Canada’s provincial and local governments as having “few quality-control standards to protect consumers from incompetent ‘eco experts’ looking to cash in on the booming [green building] industry.”

For example, Zlomislic tracked down 26 homeowners who paid over $600,000 in deposits to a now bankrupt geothermal contractor. Several of these homeowners saw their energy bills double after the geothermal system was installed, while many others never even received a completely operational system. Among other things, Zlomislic points to the contractor’s rush to sign up customers and capitalize on a $10,000 provincial and federal rebate for qualifying HVAC replacement systems as a basis for the contractor’s misrepresentations.

Of particular interest to us here at GRELJ, Part 1 also identifies a pending lawsuit in the Ontario courts against a developer who 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. In a litigation that alleges fraud, the purchasers of the units seek over $900,000 in damages from the developer for the project’s failure to satisfy certain Ontario building codes, including those for its geothermal system – a highly publicized green selling point for the project.

Part 2 of the series starts out by concluding that Canadian governments “have created what some describe as a ‘Wild West’-like situation by urging homeowners to go green when they renovate or build from scratch. Green government grants and other incentives have boosted the building sector but few guidelines or quality-control standards exist, and those that do are not policed.” In support of her conclusions, Zlomislic profiles a Toronto-area couple who retained an architect that drastically overstated her green building design expertise, recommended a “green builder” for their 2200-square-foot renovation project, and left the couple with a house that’s only 60 percent complete and still contains over 60 individual building code violations.

What I found so interesting about these two articles is that they suggest a different type of risk growing out of government activity, while simultaneously shedding light on how that that activity has created an opaque regulatory structure on both sides of the border. The articles also build on many of the green building-related insurance claims which Frank Musica reported almost 3 years ago at the 2007 AIA National Convention in San Antonio. I also think that the Toronto fraud litigation is a major shot across the bow for owners and other marketing professionals who fail to accurately represent a project’s green features; this is one specific area of green real estate risk which continues to be insufficiently addressed by many industry professionals.

In any event, Zlomislic’s two pieces are must-reads and demonstrate practical applications of the many theoretical green building risk issues which have been discussed here at GRELJ and elsewhere over the past few years. Part one is here; part two is here.

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)

In this first piece, Mr. Murphy concludes that “[t]here has been concern with the LEED rating system relative to energy and CO2 since its inception. . . . LEED has failed to lead in the important areas that are measurable. Initially, [USGBC] adopted a weak status relative to energy consumption. [It] did not recognize and incorporate accountability and verification, unfortunately wasting years that could have providing important feedback relative to energy use. [It] has also not clearly and honestly communicated that LEED is not an exemplary indication of energy performance.” This final thought, of course, is of particular note in the context of many green building legal issues and why Mr. Murphy’s piece will likely serve as a critical backdrop to associated risk management strategies for stakeholders moving forward.

I encourage you to print off this first article, review it, and share your thoughts below in the comments; we’ll be adding the entire series to our Resources section here at GRELJ once it’s available.

• LEEDing From Behind (Community Solutions)

The station first interviewed a number of Washington’s larger school districts, who reported their experience to be a green building premium between 3 and 7 percent, not the 2 percent claimed by the state. In the video, a Spokane School District spokesman states that one particular elementary school in Lincoln Heights would save $40,000.00 annually in operating costs. KING 5 followed up by interviewing this same spokesman, who said that this amount was an “incorrect projection” and the school is actually saving around $15,000.00. Finally, the video contends that “[o]ne California district has seen scores increase close to 30 percent in buildings with abundant daylight. While other districts may see increases of lesser magnitude, the conclusion is still the same: better light equals better scores.” KING 5 reports that this claim is “based on just one study done by a California architecture consulting firm ten years ago. WASL scores [that the station] looked at from three local schools did not show any noticeable improvement once the students moved into a new building.” This last point is particularly interesting to note given the weight that many green building advocates accord to the alleged soft benefits of sustainable design (i.e., increased worker productivity, reduced absenteeism, etc.). According to the station, representatives from the state refused to appear on camera with KING 5 to discuss the results of its report.

I think KING 5′s investigation suggests a number of important points that have been discussed previously here at GRELJ, both in prior articles and in the comments. First, as we move forward through this horrible economy, claims about projected green building performance and the benefits associated therewith that are used to buttress support for state- and local-level policymaking will be viewed with heightened scrutiny, particularly where taxpayer dollars may be used to fund such programs. Second, questionable performance issues with respect to green buildings will continue to demand strong contract language for all construction stakeholders, as well as carefully crafted marketing or other materials representing a property’s green design features and projected operating expenses. Finally, if other major media outlets follow KING 5′s lead in terms of investigating green building claims made by public entities in support of legislation, it could go a long way towards disseminating better performance data and, in turn, drive projects to achieve the higher efficiences and lower operating expenses that every industry stakeholder is pushing for.

• Investigators: Green School Claims Oversold (KING 5)

In his opening remarks, Mr. Gifford discussed both his problems with the LEED system generally, as well the basis of the critiques in his paper. “The first study we heard was in ‘07, and even before that, it was becoming law. The study came out and said that LEED-rated buildings save 25-30 percent compared to a national database. Well, I did a radical thing. I read the study, and I think there’s nothing in the study that supports, related to, or even references the conclusion. I think the conclusion was invented and stuck on. They found a 24 percent difference between two numbers, mean energy used by the national database and the median of the LEED buildings. Mean to mean would have shown that LEED did 29 percent higher.”

Mr. Owens responded by agreeing with Mr. Gifford that “before this research was done, there was a leap of faith involved, but the characterization of this as a scandal and a con is really unfortunate. I’ve never found anyone other than Henry saying that these buildings are using more energy. LEED is an assessment of potential for a building to perform. That’s all it is. We could do better to educate the public that the model isn’t good enough, yet. We haven’t really gone through and said ‘this is the first step in a 6 or 7 or 8 step process.’”

Fred Unger, a former board member of NESEA, challenged Mr. Owens and USGBC from the floor “to commit to not putting LEED or USGBC on any legislation” and called it a “scandal” that “LEED is being put into building codes when it still has these bugs to work out.” Mr. Owens responded by saying that although “the USGBC has never advocated putting this into law, it’s not the best use of this rating system.” According to Mr. Prager, Mr. Owens said USGBC would not make that commitment to keep LEED out of any legislation. He did, however, state that perhaps USGBC should have been more of an advocate in terms of articulating that LEED was not meant to be used as a legislative tool. Just as a side note, as recently as approximately one year ago, USGBC did have a statement on its home page that LEED was not intended for adoption into legislation or local building codes, but I am not certain whether it’s still there in any capacity or not.

I think it’s important for USGBC to engage building scientists like Henry Gifford at events such as these and, for that, I give it and Brendan Owens credit for attending the NESEA forum; indeed, one of the major disappointments of this past year’s Greenbuild event was USGBC’s failure to acknowledge LEED performance failures and other risk implications of building green. In a post at gbNYC that discussed the event, I wrote, with respect to building performance, that “[m]obilizing the industry is important, and creating green good will is great too, but I think the USGBC is missing a big opportunity here by not embracing these types of leaders who can help improve the energy performance of our buildings- we can’t lose sight of that ultimate goal.” Hopefully that’s what’s beginning to place here.

I also think it’s encouraging that green building performance issues are beginning to receive more media attention, particularly in the context of LEED. If anything, the NAIOP study and Henry Gifford’s ongoing efforts have stakeholders on both sides of the aisle considering the merits of predictive energy modeling more vigorously; hopefully that debate will continue as USGBC prepares to release its LEED 2009 system. In the interim, the construction and real estate attorney’s role in the context of building performance will continue to be- as Mr. Owens hinted at during the NESEA panel- educating clients that the LEED model “isn’t good enough, yet” and may present liability implications that they have not previously had to consider.

I am certain there will be much more to say about both this forum and the NAIOP study in the coming weeks and I look forward to hearing your thoughts and reactions in the comments below. I also encourage you to check out the comments to BuildingGreen.com’s article discussing Mr. Gifford’s “Lies Damn Lies” paper, where folks like Fred Unger, Rob Watson, and Mr. Gifford himself have left a tremendously interesting series of responses which I think that you’ll find to be quite insightful.

• Lies Damn Lies (BuildingGreen.com)
• LEED Controversy (Michael Prager)