ISO Products Perspective

Tim McDonnell


To potentially avoid an inadequate limit in a claims situation or the application of coinsurance penalties, care should be taken to include the actual value of green components in the limit of insurance.

GREEN BUILDING: WHY CONSERVATION CAN BE COSTLY

Understand the unique risks to the benefits of "going green"

The idea of “going green” has its roots in worry— the ever-growing worry about the environment. In recent decades, such concerns have sparked discussion about man-made pressures on clean air, water, and species, leading to laws and practices intended to better conserve natural resources. One practice involves green building, which introduces revolutionary ways of erecting, powering, and maintaining homes and commercial structures. But going green is far from worry-free and can bring a policyholder some unexpected gray hairs.

Although green building can yield structures that save energy and other resources and may cost less to operate than comparable buildings made with traditional methods and materials, going green can also create new risks and exposures. Because green building practices are relatively new, some features may not be fully covered under existing property policies.

Some insurers are concerned that the limits of insurance in policies should reflect the value that any green improvements might add. It can be easy to overlook the real value of the improvements because of tax incentives, rebates, or leasing arrangements that mask the initial cost. Such is the case with some photovoltaic (PV) solar panels, which are brought to market with help from tax subsidies and other incentives. To potentially avoid an inadequate limit in a claims situation or the application of coinsurance penalties, care should be taken to include the actual value of green components in the limit of insurance.

One goal of green building is to cut consumption of nonrenewable energy while making use of organic materials. For example, solar panels and energy-efficient lighting can reduce a building’s consumption of electricity from fossil fuel sources.

Vegetative roofs—roofs planted with a surface of grass or other living plants—and structural insulated panels (SIPS) typically reduce the need for heating and air-conditioning through better insulation. A broad aim of green construction is to minimize the resources used to raise a building. In terms of materials, lightweight engineered lumber (LEL) may be used because it’s usually made, at least in part, from recycled wood fibers.

With the goals of green building in mind, agents and policyholders should consider certain issues when additional coverages are needed beyond a traditional property policy. For example, green products may be more expensive than standard equivalents. In the event of a loss, a policy may not factor in the additional cost of replacement with green products. Coverage provisions should be reviewed to ascertain that the insured will be able to restore the building using green products.

After a loss, there could be other costs associated with rebuilding with green materials and techniques to minimize adverse effects on the environment. Will the insured want to recycle debris from a loss? Will specialized engineers, architects, or contractors need to be hired—at a higher cost— to restore green features of the building? Will there be fees for recertification or testing of equipment? Policyholders will need to consider:

• An additional limit of insurance fot loss settlement of damaged property using green materials, methods, and construction

• An additional limit to be applied to expenses
related to green upgrades, including recycling and green salvage costs, and professional fees for design and engineering of green upgrades

• An option to extend the period of restoration for business income coverage

Since the use of green building materials and methods is relatively new, there may be unforeseen risks associated with some of the materials and methods. Awareness of these risks can help in advising insureds and building clients’ trust. As an illustration, vegetative roofs add extra weight, including water from rain, so water penetration may pose another risk. Therefore, it’s critical to maintain good drainage and remove dead vegetation to reduce fire risk.

On the roof, solar panels may increase the risk of fire and magnitude of fire losses and can impede firefighters during an emergency. An article in Fire Protection Engineering noted that the fire spread in actual roof fires can far exceed the spread in laboratory tests of PV assemblies. An Underwriters Laboratories report noted numerous ways that firefighters could be shocked by PV arrays. Reports by the National Fire Protection Association (NFPA) have also noted that PV panels can be obstacles to ventilating fires. The NFPA described a disastrous warehouse fire in New Jersey in which PV panels prevented firefighters from reaching the center of the fire.

A report by the International Association of Certified Home Inspectors noted: “In the rare cases where PV modules have been implicated in house fires, the cause has been electrical arcing due to improper installation, faulty wiring, or insufficient insulation.”

Here are key questions that agents can ask policyholders who are considering solar panels:

• Will qualified professionals install the system? Will it be regularly Inspected by professionals?

• Will the PV system include a rooftop ensure that firefighters can identify critical elements of the system?

• Will the system include a rooftop shutoff valve?

• Will there be pathways between and around the PV panels to permit the movement of firefighters?

• Will a portion of the roof be left Vacant to permit ventilation of a fire?

Other potential fire risks may be associated with using LEL materials. Questions have been raised about whether LEL could collapse more quickly than conventional lumber when exposed to fire. For example, the NFPA has reported that, in one test, standard flooring collapsed within 18 minutes after exposure to fire, whereas LEL flooring materials collapsed within 6 minutes. This concern continues to be the subject of research.

There may be additional risks associated with SIPS that are not UL-listed. The Fire Protection Research Foundation notes that a fire that destroyed a high-rise in Korea may have spread because the building was clad with SIPS that were covered in flammable paint. To help an insured manage this kind of exposure, agents need to know that green building materials were installed using standard procedures by qualified professionals and that the product is UL-listed.

Green buildings offer an exciting opportunity to protect the environment with cutting-edge technologies. The efficient consumption of energy offers further financial benefits. Yet unique risks and coverage concerns accompany those benefits. A careful review of coverage and available options can help assure that an insured’s green building remains safe, functional, and adequately protected.

The author

Tim McDonnell is commercial property product development lead for ISO, a Verisk Analytics (Nasdaq:VRSK) business.