Risk Management

Construction contractor business

IRMI Conference examines insurance implications of green building,
contractual risk transfer and wrap-ups

By Donald S. Malecki, CPCU

There is little doubt that the color “green” has emerged as the most frequently referred to color as we settle into the 21st century. It has long been the color that symbolizes money, which is a frequent source of daily conversation, particularly when financial conditions are bad, as they are today.

“Green” is also being used these days to describe environmentally friendly products such as green cars—namely hybrid autos, and to some extent, clean diesel vehicles—green roofs and green holiday lights. Insurance companies also are labeling some of their recent product innovations as “green,” such as coverages that deal with the way buildings are constructed.

“Green building” is a term that connotes the design and construction of a building that takes into consideration materials, equipment and operations that can be not only energy and environmentally efficient but also more functional in its operation than a traditional building in terms of comfort, health and safety of its occupants or users. A “green building” can also be described as a sustainable or high-performance building.

This was a subject explored in depth before 1,500 project owners, general contractors, subcontractors, agents, brokers and others who attended the 28th annual Construction Risk Conference of the International Risk Management Institute (IRMI) in Las Vegas in October 2008.

Speaking on this subject of green building was Sean P. Dwyer, Esq., partner, Havkins Rosenfeld Ritzert & Varriale, Mineola, New York. Green building, Dwyer explained, brings together a vast array of practices and techniques to reduce and eliminate the impact of buildings on the environment.

Building materials typically considered to be “green,” Dwyer said, include rapidly renewable plant materials such as bamboo, straw, stone, recycled metal, and other products that are non-toxic, reusable, renewable and/or recyclable.

Low-impact building materials are used wherever feasible, Dwyer said, for example, insulation made from low volatile organic compound emitting materials, such as recycled denim, rather than today’s common insulation materials that include toxic materials. Salvage and reclaimed materials also are used whenever possible, he said, such as materials reclaimed from old buildings that are demolished.

Green building methodology is supposed to reduce waste of energy, water and materials, Dwyer explained. During the construction phase, one goal is to reduce the amount of material going into landfills. From the standpoint of water preservation, Dwyer stated that “greywater,” wastewater from such sources as dishwashing or washing machines, can be used for non-potable purposes to flush toilets, and water lawns.

Compliance with codes

If a construction project is going to be considered “green,” Dwyer said, it must abide by one of several voluntary codes that outline how construction will proceed and how the building will function. The codes, he explained, provide a rating system for sustainability; the greener the building, the higher the rating.

On that score, Dwyer stated that the most widely recognized standard is the Leadership in Energy and Environmental Design (or “LEED”) rating standard, developed by the U.S. Green Building Council. He stated that LEED provides a measurable impact by recognizing performance in the five key areas of (1) sustainable site development, (2) water savings, (3) energy efficiency, (4) materials selection, and (5) indoor environmental quality.

A key component of the LEED rating system is documentation and verification at every step of the construction process, Dwyer explained. A formal application and certification must be filed before construction begins to verify compliance and obtain LEED certification, he added.

The LEED certification is obtained by maximizing the total points allowed in each category—the higher the point the better, he explained. Currently there are levels of LEED certification: “Certified,” the basic level; the Silver; Gold; and finally the highest level is Platinum.

The green building movement, Dwyer added, not only is affecting new construction but also is having an impact on existing buildings when remodeling and upgrades are being considered. While the private sector is embracing green, the federal, state and local governments also are pursuing and implementing green initiatives, he added.

Insurance issues

So with “green” being in, what does this mean for the insurance industry? Dwyer explained that despite the benefits of green building, there are questions about whether current property insurance forms adequately protect the sustainability features of a green building. Since green materials and components can be more expensive than their traditional counterparts, one must consider the adequacy of insurance limits, he said, and whether insurance will also give any green code upgrade coverage.

He said the following questions should be considered:

• Given that green materials and components can be more expensive than traditional counterparts, will the limits be sufficient?

• Is coverage broad enough to meet predetermined green risk management objectives?

• Does the policy offer any green upgrade coverage?

• Is there any coverage for the recertification costs following an insured loss?

While the green building concept is more than a fad and is likely to become increasingly popular as it develops—offering opportunities for builders, insurance companies and producers—it has enough trips and traps to also be a fertile area for attorneys.

Contractual risk transfer

Two speakers tackled the fundamentals of contractual risk transfer. They were William H. Perkins, instructor for the Florida Association of Insurance Agents, and W. Meade Collinsworth, president of Collingsworth, Alter, Fowler, Dowling & French Group, a commercial insurance and bonding agency located in Miami, Florida.

While construction contracts can be a valuable tool or a deadly trap for the unwary, it was the opinion of these two speakers that many contractors accept onerous contractual provisions without complaint and often without even noticing the provisions, particularly when the business climate is very competitive. This blind acceptance of risk, they said, exposes contractors to potentially catastrophic losses, such as having to pay damages without the aid of insurance.

One of the reasons why contractual risk transfer remains a vital risk management tool today is that contractual liability insurance can provide broader coverage than many of the additional insured endorsements being issued. It therefore is important, from the perspective of these two speakers, that project owners, contractors and producers understand the underlying principles.

Among the principles singled out by these speakers were the categories of indemnification agreements: broad, intermediate and limited. These are still permitted in some states. Also, when an indemnitor agrees to hold harmless the indemnitee, the indemnitee still remains accountable to the third party who is injured. The indemnitor, they explained, is responsible for the damages that may be assessed against the indemnitee. This is a principle many people overlook, they said.

Wrap-up considerations

For all of the good reasons wrap-up projects—also known as consolidated insurance programs (CIP), owner-controlled insurance programs (OCIP) and contractor-controlled insurance programs (CCIP)—are purchased, very little is said about what happens when claims arise.

According to Jill B. Berkeley, Esq., an attorney with Howrey, LLP, Chicago, the biggest problem with the defense provided by a wrap-up insurer is the gap in the relationship between the OCIP or CCIP insurer and all the parties insured. There should not be a problem, Berkeley told the IRMI conference audience, because each insured is provided with an attorney who has the responsibility to “zealously” defend the client, even if all parties are represented by the same counsel. The problem, she said, lies in the fact that the defense lawyer may devise a strategy that will protect the named insured and CIP insurer, but the result may, in fact, adversely impact another insured.

The main impact of the wrap-up on claims, Berkeley said, is the elimination of cross-claims among parties on the project. Without the distraction of having to prosecute a case against other defendants, the defense can be handled more vigorously, she added.

The second impact is the elimination of the need to procure additional insured coverage, Berkeley said. The owner and general contractor do not have to spend the transactional time and expense of securing certificates of insurance, verifying additional insured status, tracking updates, tendering and pursuing coverage, she added. The advantage of the wrap-up is the “buck stops here,” Berkeley said, a refreshing change from the insurer attitude of “anyone but us.” *

The author
Donald S. Malecki, CPCU, has spent 49 years in the insurance and risk management consulting business. During his career he was a supervising casualty underwriter for a large Eastern insurer, as well as a broker. He currently is a principal of Malecki Deimling Nielander & Associates L.L.C., an insurance, risk, and management consulting business headquartered in Erlanger, Kentucky.