The Unique Risks of Green Building


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A brief overview of the unique risks being created daily in the rapidly emerging green building marketplace.

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  • What do you think about when you hear the term “Green” Is it this?
  • Or this?
  • Shaw Development vs. Southern Builders MD state Specific green building tax credit program Submit your design to the MD Energy Authority; if approved, they will issue an Initial Credit Certificate (ICC) which indicates the maximum credit amount and the expiration date in order to receive a Final Credit Certificate (FCC) (only after construction is complete and an occupancy permit is issued). If the ICC expires prior to obtaining the FCC, all credits are put back into the pool and you have to re-apply Max amount is 8% of the project cost Contract documents essentially stated that the project was “designed to comply with a Silver Certification Level as determined by the USGBC LEED rating system. Builder was to deliver a Certificate of Occupancy within 336 calendar days from the date of the agreement (may indicate expiration date of ICC) Shaw’s $1.3 million countersuit to Southern’s $54,000 mechanic’s lien contends that Southern “[failed] to construct an environmentally sound ‘green building’ in conformance with the LEED rating system” No specs, but assumes that Southern failed to deliver a cert of occupancy prior to ICC expiration date, thus forfeiting the FCC of up to $635,000 Shaw also sought damages for non-conforming work and loan defaults with construction lender
  • First, let’s take a look at the state of the current “built” environment, what is already in place?
  • Also define sustainability: meeting the needs of the present without compromising the ability of future generations to meet their own needs
  • Responsible for organizing, advocating, registering and certifying green buildings Designs curriculum, trains and certifies green building professionals with LEED AP (criteria changing in 2009) Local / regional chapters across the US representing every major metropolitan area (71 total chapters)
  • Top 3 are 80% of total
  • The American College & University Presidents Climate Commitment is a high-visibility effort to address global warming by garnering institutional commitments to neutralize greenhouse gas emissions, and to accelerate the research and educational efforts of higher education to equip society to re-stabilize the earth’s climate. Presidents signing the Commitment are pledging to eliminate their campuses’ greenhouse gas emissions over time. This involves: -- Completing an emissions inventory -- Within two years, setting a target date and interim milestones for becoming climate neutral. -- Taking immediate steps to reduce greenhouse gas emissions by choosing from a list of short-term actions. -- Integrating sustainability into the curriculum and making it part of the educational experience. -- Making the action plan, inventory and progress reports publicly available. The college and university presidents and chancellors who are joining and leading the Commitment believe that exerting leadership in addressing climate change will stabilize and reduce their long-term energy costs, attract excellent students and faculty, attract new sources of funding, and increase the support of alumni and local communities.
  • Updated capital grants policy to address green buildings Notable Cleveland Foundation Capital Grants in 2008 Great Lakes Science Center - $200,000 Hanna Theater - $750,000 Hattie Larlham - $500,000 Magnolia Clubhouse - $385,000 DDC Clinic for Special Needs Children (Middlefield) - $100,000 Gund Foundation – The Cleveland Consortium For Science Technology Engineering and Mathematics (MC2STEM) - $500,000
  • Certified, 2/23/06, “Certified” Green building features: Energy Star compliant roof minimizes the “heat island effect” Retaining pond limits stormwater runoff Waterless urinals and motion sensitive faucets to reduce water consumption Motion sensitive lighting in low-occupancy areas Recycled 4,000 tons of concrete from previous site
  • This chart identifies the number of registered (we want to) and certified (we have completed) projects since the inception of the US GBC’s LEED Rating system
  • Identifies the massive increase in demand to register a green project; Graph shows registrations per quarter (blue bar) and total project square feet (red line) 2007 spike caused by USGBC offering free registrations for Existing Building certification of all existing LEED Certified NC and CS projects
  • Average span between registration and certification is 2.3 years
  • Map identifies all countries that have registered at least one project United Arab Emirates (Abu Dhabi & Dubai) have registered 431 projects. That would put them just below Ohio (484)
  • 1. A 30% reduction in energy use equates to a five percent increase in net operating income – roughly generating $25,000 annual bottom-line improvement for every 50,000 square feet of occupied office space. 2. Green buildings deliver 3.5 percent higher occupancy rates, and an average increase of 7.5 percent in building values. 3. Business operations in green spaces experience a 15 percent reduction in absenteeism 4. 16 percent increase in productivity for employees in green buildings 5. Retail sales can increase by as much as 40 percent in buildings with natural lighting 6. The top causes of property loss in commercial buildings are electrical fires, malfunctioning HVAC systems, and plumbing problems. ■ The certification process for a green building ensures that the electrical, HVAC, and plumbing systems are all working at the highest levels of efficiency, reducing the possibility of a loss.
  • Survey respondents were asked why they decided to invest in green
  • Financial injury due to negligence within the scope of construction
  • Includes Bodily Injury and Property Damage resulting from a pollution event (mold, mildew, fungus) Pertinent to contractors due to bi/pd exposure
  • Less waste being diverted to landfills = fewer claims at non-owned disposal sites Fewer claims by third parties for exposures to asbestos, lead, demolition dust Less sediment impact, less site runoff
  • Lack of appropriate experience and qualifications May not have the durability and longevity of their traditional counterparts Structural and water damage Performance and air quality issues
  • Or points lost due to a subcontractor not performing their duties to satisfy the requirements
  • Property insurance for materials and expenses in the course of construction Covers property on site, at a storage location, and in transit Rated based on estimated completed value or percentage of completion
  • Costs incurred due to project delays
  • Traditional replacement cost vs. upgrade to green potential Principle of indemnity – to get you back to where you were before the loss Top causes of property losses in commercial buildings are electrical fires, malfunctioning HVAC systems & plumbing problems
  • Provides a financial guarantee to the project owner that funds will be available in the event of insolvency
  • One of the hidden benefits of green building projects is that they are more attractive to potential lenders. We are in the midst of one of the tightest credit crunches in history. As a result, the few banks that are still providing financing secured primarily by real estate are able to be far more selective in project selection. Some of these lenders have greatly increased their commitment to providing financing to developers of green buildings. One prominent source of funds has been from Wells Fargo, which has provided more than $2 billion in financing secured by green real estate. In a time of great debate over the value of real estate, Wells Fargo appears willing to assume the risk that these new green buildings will not be subject to the type of expected depreciation of much of the commercial real estate market.
  • The Unique Risks of Green Building

    1. 1. Green Building Risk Management Presented by: Mark E. Rabkin, Director of Advocacy Northeast Ohio Chapter, United States Green Building Council An analysis of the high performance building industry and its unique risks
    2. 4. Shaw Development vs. Southern Builders <ul><li>The first case of Green Building Litigation – </li></ul><ul><li>The Captain’s </li></ul><ul><li>Galley </li></ul>Source: Stephen Del Percio, LEED AP,
    3. 5. <ul><li>Defining green building </li></ul><ul><li>What is it? </li></ul><ul><li>Who is building green? </li></ul><ul><li>Where are they building? </li></ul><ul><li>What are they building? </li></ul><ul><li>Why are they building it? </li></ul><ul><li>Green Building Risks </li></ul><ul><li>Design Professional Liability </li></ul><ul><li>Environmental Liability & Pollution </li></ul><ul><li>General Liability </li></ul><ul><li>Builders Risk </li></ul><ul><li>Property </li></ul><ul><li>Surety </li></ul>Overview
    5. 7. Commercial, residential, industrial & infrastructure construction = $1.77 trillion a year (13.4% of US GDP) <ul><li>37.9% of US primary energy use </li></ul><ul><li>38% of all CO 2 emissions </li></ul><ul><li>72% of all electricity </li></ul><ul><li>13.6% of all potable/drinkable water = 15 trillion gallons a year </li></ul><ul><li>40% of raw materials globally used in US (3 billion tons annually) </li></ul><ul><li>136 million tons of C & D debris (vs. 209.7 million tons of MSW) </li></ul>
    6. 8. What is “ Green Building ”? <ul><li>“ Green building is the practice of increasing the efficiency with which buildings use resources — energy, water, and materials — while reducing building impacts on human health and the environment during the building's lifecycle, through better design, construction, operation, removal and maintenance.” </li></ul>Source:
    7. 9. How does the industry define “ sustainability ”? <ul><li>“ Meeting the needs of the present without compromising the ability of future generations to meet their own needs” </li></ul><ul><li>(as defined by the 1989 World Commission on Environment and Development; </li></ul><ul><li>the Brundtland Commission) </li></ul>Sustainable Cleveland 2019 Building an economic engine to empower a green city on a blue lake Visit and join online at
    8. 10. L eadership in E nergy and E nvironmental D esign ( LEED ) <ul><li>New Construction </li></ul><ul><li>Core & Shell </li></ul><ul><li>Existing Building Operations & Maintenance </li></ul><ul><li>Commercial Interiors </li></ul><ul><li>LEED For Schools </li></ul><ul><li>LEED For Homes </li></ul><ul><li>Neighborhood Development </li></ul><ul><li>Retail (New Construction / Commercial Interiors) </li></ul>'LEED' and related logo is a trademark owned by the U.S. Green Building Council and is used by permission.
    10. 12. Who is building green? <ul><li>Education </li></ul><ul><li>Office </li></ul><ul><li>Government </li></ul><ul><li>Hospitality </li></ul><ul><li>Healthcare </li></ul><ul><li>Residential </li></ul><ul><li>Industrial </li></ul><ul><li>Retail </li></ul>80% of total
    11. 13. Higher Education American College & University Presidents Climate Commitment 628 Total Signatories to Date
    12. 14. The Non-Profit Community <ul><li>The Cleveland Foundation </li></ul><ul><ul><li>Awarded over in grants in 2008 </li></ul></ul><ul><li>The George Gund Foundation </li></ul><ul><ul><li>Awarded in grants in 2008 </li></ul></ul><ul><ul><li>Capital grants will be limited to US GBC’s “LEED-Silver” (NC) or “LEED-Certified” (EB) or higher. </li></ul></ul>$85,000,000 $16,385,101
    13. 15. The Cleveland Foodbank Energy Star roof Retaining Pond Waterless Urinals Motion sensitive lighting 4,000 tons of concrete recycled
    15. 17. Worldwide LEED Registrations and Certifications (Through August, 2009) Rating System Registrations Certifications Certified Silver Gold Platinum New Construction 16,704 2,097 631 688 660 114 Existing Building 3,815 334 115 102 91 23 Commercial Interiors 3,097 726 172 236 271 44 Core & Shell 3,039 279 36 120 106 14 LEED For Schools 942 12 3 2 5 0 Homes (Single Family) 313 0 0 0 0 0 Retail (NC & CI) 296 208 170 20 10 3 Neighborhood Development 238 12 3 3 6 0 Homes (Multi-Family) 100 0 0 0 0 0 LEED 2009 NC/CI/EB/Schools 996 1 0 0 0 1 Total 29,540 3,669 1,130 1,171 1,149 199
    16. 20. United States Registered Projects
    17. 22. WHY BUILD GREEN ?
    18. 23. How going green can keep you in the black <ul><li>Green buildings may cost less to operate and have an increased ROI </li></ul><ul><li>Green buildings could command higher rents and occupancy rates </li></ul><ul><li>Green buildings may have reduced absenteeism </li></ul><ul><li>Green buildings could increase productivity </li></ul><ul><li>Green buildings may be more attractive to tenants </li></ul><ul><li>Green buildings should have fewer risks </li></ul>Source: Fireman’s Fund Insurance Company
    19. 24. Motives for undergoing a green retrofit Source: Deloitte & Charles Lockwood,
    21. 26. Design Professional Liability <ul><li>Also called Errors & Omissions </li></ul><ul><li>Protects an insured from claims of negligence arising out of professional services rendered </li></ul><ul><li>Excludes Bodily Injury and Property Damage Liability </li></ul><ul><li>Includes (but not limited to): </li></ul><ul><ul><li>Architects </li></ul></ul><ul><ul><li>Engineers </li></ul></ul><ul><ul><li>Designers </li></ul></ul><ul><ul><li>Consultants </li></ul></ul>
    22. 27. Exposures & Risks <ul><li>Contractual & Ethical requirements </li></ul><ul><li>Lost profits, increased energy costs, lost business opportunities, increased tax burden </li></ul><ul><li>Warranties on outcomes </li></ul><ul><li>Lack of proper green experience and qualification </li></ul><ul><li>No control over subcontractors </li></ul><ul><li>Setting expectations too high </li></ul>Source: Marsh, Inc., “The Green Built Environment in the United States”
    23. 28. Other recent notable cases <ul><li>Developer sues architect for failing to achieve LEED Gold </li></ul><ul><li>Water infiltration from Green Roof </li></ul><ul><li>Cork Flooring resulted in water retention and sprouted mold </li></ul><ul><li>Lack of product availability caused delays </li></ul><ul><li>Health problems of tenants increased despite warranties that indoor air quality would improve </li></ul>
    24. 29. Environmental Coverage Pollution Legal Liability & Contractor’s Pollution Liability <ul><li>Pollution Legal Liability </li></ul><ul><ul><li>Bodily Injury, Property Damage and Clean-Up Costs caused by pollution conditions on a covered property </li></ul></ul><ul><li>Contractor’s Pollution Liability </li></ul><ul><ul><li>Bodily Injury, Property Damage and Clean-Up Costs caused by pollution conditions resulting from covered contracting operations </li></ul></ul>
    25. 30. The Market’s Perception <ul><li>Potentially less risky </li></ul><ul><ul><li>Recyclable materials </li></ul></ul><ul><ul><li>More attention to health and safety </li></ul></ul><ul><ul><li>Decreased environmental impact </li></ul></ul><ul><li>Airtight structures increase the potential for mold liability claims </li></ul><ul><ul><ul><li>source – Liberty Forensics, Inc. , Orlando, FL; “The Hidden Risks of Green Buildings” </li></ul></ul></ul>
    26. 31. Commercial General Liability <ul><li>Bodily Injury and Property Damage caused by the insured’s negligence to a third party </li></ul><ul><li>Includes Products & Completed Operations Liability for damages incurred after work has been completed </li></ul>
    27. 32. Key Risks <ul><li>Faulty workmanship and/or construction defect claims </li></ul><ul><ul><li>Lack of appropriate experience </li></ul></ul><ul><li>New & untested products, materials & processes </li></ul><ul><ul><li>May not have the durability of traditional material </li></ul></ul><ul><li>New roofing systems </li></ul><ul><ul><li>Structural damage and water infiltration </li></ul></ul><ul><li>New HVAC systems </li></ul><ul><ul><li>Performance and air quality issues </li></ul></ul>
    28. 33. Contractor’s E&O <ul><li>Documentation to earn LEED Credits </li></ul><ul><ul><li>Standard of care doctrine </li></ul></ul><ul><li>Misrepresentation of qualifications </li></ul><ul><li>Points could be denied due to improper documentation </li></ul><ul><ul><li>Resulting in failure to achieve desired certification level </li></ul></ul><ul><li>Claims of economic loss and financial injury </li></ul>
    29. 34. Builders Risk
    30. 35. Soft Costs Costs incurred due to project delay <ul><li>Additional interest expense on construction loan </li></ul><ul><li>Realty tax and assessments </li></ul><ul><li>Advertising and promotional expense </li></ul><ul><li>Additional legal, accounting, architectural, artisan, or consulting expense </li></ul><ul><li>Lease renegotiations </li></ul><ul><li>Building commissioning </li></ul><ul><li>Restore indoor air quality </li></ul><ul><li>Divert debris for recycling </li></ul><ul><li>Registration and certification fees </li></ul>
    31. 36. Property Insurance
    32. 37. Insuring your building <ul><li>Determine proper values reflecting current, actual replacement cost </li></ul><ul><li>Building ordinance & law coverage </li></ul><ul><ul><li>Upgrades per new building codes </li></ul></ul><ul><li>Business interruption and extra expense </li></ul><ul><ul><li>Alternative power generating equipment </li></ul></ul><ul><li>“ Upgrade to green” endorsements </li></ul>
    33. 38. Green Upgrade Coverage <ul><li>Interior finish materials (wall & floor covering) with lower emissions, are sustainably produced, rapidly renewable, or include recycled content. </li></ul><ul><li>Interior plumbing systems to increase water efficiency </li></ul><ul><li>Lighting & HVAC systems to increase energy efficiency </li></ul><ul><li>Additional coverage for: </li></ul><ul><li>Vegetative roofs </li></ul><ul><li>Alternative power generating equipment </li></ul><ul><li>Alternative water systems </li></ul><ul><li>Recycling expenses </li></ul><ul><li>Reconstructed space flush out </li></ul><ul><li>Certification, commissioning and professional expenses </li></ul>
    34. 39. Surety <ul><li>Financial Stability, Experience </li></ul><ul><li>Performance-based contracts </li></ul><ul><ul><li>Guarantees of energy efficiency and LEED Certification </li></ul></ul><ul><li>Notable legislation: </li></ul><ul><ul><li>Green Building Act of 2006 (Washington, DC) </li></ul></ul><ul><ul><li>Arlington County Green Building Policy </li></ul></ul>
    35. 40. The Top 5 Legal Issues to Consider on Green Construction Projects <ul><li>Negotiate and draft contracts that reflect each stakeholders role in the process </li></ul><ul><li>Utilize professionals that are familiar with sustainable design, green rating systems and the certification process </li></ul><ul><li>Verify the availability and performance of materials, systems and products </li></ul><ul><li>Review all federal, state and local legislation </li></ul><ul><li>Identify new, non-traditional challenges for all stakeholders </li></ul>
    36. 41. There’s hope on the horizon… Some commercial lenders recognize the increased value of sustainable construction and have committed to giving preferential treatment for “green” buildings
    37. 42. People Prosperity Planet Consider the triple bottom line as your performance calculator
    38. 43. Sustainable Cleveland 2019 Building an economic engine to empower a green city on a blue lake Visit and join online at
    39. 44. Presented By: Mark E. Rabkin, Director of Advocacy US Green Building Council Northeast Ohio Chapter Working to help clients protect their short-term shareholder value and maximize their long term stakeholder value.