As green buildings become the norm throughout the country, industries that support real estate development are developing strategies and products that complement and promote sustainable design. One industry, the insurance sector, has quickly learned the benefits of green construction.
I recently sat down with Scott Hye, vice president at Hilb, Rogal and Hobbs (HRH) in Connecticut. HRH is the eighth largest insurance brokerage firm in the United States and Scott is HRH’s New England green guy and we had a discussion regarding the insurance economics of building green, the industry’s response to sustainable design and how to effectively protect your investment.
Adam: What coverage issues are raised when a building is being built to green or LEED certified standards?
Scott: Good question Adam. Many building owners and property developers that are considering or have built green buildings in the past understand that the cost of building to LEED standards will cost slightly more than it would to build to traditional standards, but tell that to an insurance adjuster after a loss and he or she will point to the insurance contract which says the insurer has the obligation to rebuild the building with “like kind” material and quality. This means that should the building owner have installed a sophisticated gray water reclamation system, the company is not obligated to replace it. The same thing goes for cool roof systems, high efficiency HVAC systems. Additionally, the use of low VOC paints, sealants, adhesives, and carpeting; energy efficient lighting systems etc… all come under the heading of “like kind and quality” and rest assured, the company won’t be that “kind” when it comes to settling a large claim.
Adam: That’s interesting. What are some of the other hidden costs that a company might not otherwise pay?
Scott: Well for one, if they have a vegetated roof, the most the company would pay is typically $100-500 for each tree, plant or shrub subject to an aggregate limit which is generally about $1,000. Then there are other associated professional expenses that the carrier has no obligation to pay. The cost of re-certifying a building to LEED standards can be quite costly. Not to mention re-commissioning fee’s; post construction flush out costs; and recycling debris removed from the damaged portion of the building. These costs and fee’s are not covered under a traditional insurance policy and can typically run in the tens and thousands of dollars.
Adam: Wow! Is the insurance industry as a whole doing anything about this?
Scott: Yes, we are starting to see a response by the industry. Insurance carriers recognize that there is a unique value proposition that is created when they insure these types of risks and that there is an opportunity to profit and benefit from the rewards of reduced carbon emissions. Insurers as a whole understand that a green building will command higher cash flows, increase operating income from efficiencies which ultimately improve asset values all around. In short underwriters view green buildings as good risks. The bigger payoff for the industry is that reduced carbon emissions and green house gases will reduce weather driven natural catastrophe’s. It’s really as self serving for them as it is for the building owner. Really, it’s a win win for the policy holder, the population and the planet…Hey, there’s a different take on the 3 Ps right?
Adam: HRH is a national insurance broker. As an organization that is plugged into the insurance market place, can you site some carriers that are taking a proactive approach in meeting the needs of the green building owner?
Scott: Well, as is typical of our industry, we are probably about 30 years behind the technology but carriers are beginning to recognize that green initiatives in the future will improve both the top line and the bottom line of our industry’s balance sheet. Some carriers like Chubb and AIG are beginning to talk about coming out with green property endorsements and I think over the next few years you will begin to see a trend toward providing these specialized coverage’s. That time horizon will be shorter as we build greener and enact more environmentally conscious legislation. The company doing the best job at addressing these needs now is The Fireman’s Fund. They are the only carrier that we know of that has a filed endorsement designed to address the coverage needs I’ve outlined today. And, they actually offer a discount for LEED Certified buildings. Others will eventually follow but they are setting the gold standard for real estate risks that have this need.
Insuring Green Buildings - To learn more about this author, visit Adam Ney's Website.
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