A study by the U.S. Green Building Council estimated that environmentally-friendly, or “green” construction, would grow at a compound annual rate of 9.5 percent between 2014 and 2019. Traditional property insurance products do not adequately cover these innovative construction methods and materials. In recent years, the insurance industry has unveiled new coverages to help cover environmentally-friendly buildings and property.
The Insurance Services Office (ISO), which publishes standard coverage forms used by many insurance companies, developed a policy change form that covers the increased costs of green upgrades and related expenses. It defines “green” as enhanced energy efficiency or the use of “environmentally-preferable, sustainable” materials, products and methods in design, construction, manufacture or operation. Something is green only if recognized as such by a “Green standards-setter,” which can be a private organization or government agency. The Leadership in Energy and Environmental Design (LEED®) program of the U.S. Green Building Council and the Energy Star program of the federal government are examples of Green standards-setters.
The form contains fields for entering the maximum amount of coverage that will apply to green upgrades for both buildings and personal property. It also has a field for entering an “Increased Cost of Loss percentage”. If a loss occurs, the insurance company calculates the cost of repairing or replacing without green upgrades (before subtracting the deductible) and multiplies that amount by the Increased Cost of Loss percentage. The insurer will then pay either the actual cost of repairing or replacing; the result of multiplying the loss by the percentage; or the maximum amount shown on the form, whichever is least.
The form also covers expenses such as waste reduction and recycling; design and engineering professional fees; certification fees and equipment testing; and the costs of flushing air out of the building and related air quality testing.
The American Association of Insurance Services (AAIS), a competing publisher of standard forms, offers a product that covers:
- Green buildings, so that they can be restored to standards required for certification. Covered costs include restoration of air quality; debris recycling; recertification; vegetative roofs; and replacement of water and electricity lost when onsite renewable energy generators or water conservation equipment are damaged.
- Upgrades to non-green buildings and personal property so that they can meet certification standards after a loss.
- Lost income when using green construction lengthens the time a business is shut down after a loss. Lost income from damage to renewable energy systems that provide power to public utilities is also covered.
Rather than using a formula to calculate the available amount of insurance, this form lets the property owner choose the coverage amounts.
Some insurance companies have developed their own green coverage products. They provide similar coverages with different arrangements for amounts of coverage. One provides 25 percent of the cost of the damaged property, up to amounts that vary by the policyholder’s needs.
Green construction is becoming more important to property owners. These new insurance products will enable them to pay the cost of erecting and repairing sustainable buildings.
The Andrew Agency
To learn more about insuring commercial buildings or to find out if your building qualifies for green insurance discounts, contact The Andrew Agency at 804.320.2886. The Andrew Agency provides insurance services to clients in Virginia, Maryland and D.C.