Green Buildings

May/June 2008

Risky Business

Green construction can expose project teams to unreasonable expectations and a new set of risks

By Mary Buckner Powers

As architects, engineers and contractors go green to meet the ever-increasing demand for sustainable projects, they could well be increasing their exposure to risk, including claims they have never encountered before, insurance company executives say.

The Patrick Dollard Health Center in New York had to be competitively bid, which complicated the LEED certification process. Most subcontractors are not used to the intensive paperwork or procurement strategies necessary, but the contractor and architect rallied behind the school’s sustainable mission. (Photo courtesy of USGBC, by Davis S. Allee)

“The construction exposures are diverse and widespread,” says Todd Bateson, president of the construction surety business unit of Travelers Cos., Hartford, Conn. “Green buildings are designed to accomplish something, whether it’s a 50% reduction in electricity or a 30% reduction in carbon emissions. The question now is whether the building will line up with expectations.”

Another issue facing the industry is the novel construction techniques now being used, which in some cases are outpacing building codes. Building materials are new, and often it’s not clear how durable they are, how compatible they are with other materials or how well they perform in different environments. “It may have worked in Europe, but will it perform the same way here in a damper, hotter climate?” Bateson says.

A contractor’s or subcontractor’s experience level, depending on their familiarity with new materials or technologies, can be an issue, he adds. “Everything is interdependent, so any mistake is magnified,” Bateson says.

Larry Liu of Turner & Liu, a law firm headquartered in Los Angeles, agrees there are risks to building green. For one thing, there is the traditional risk of construction defects, inherent in all projects, he says.

“There is nothing truly unique about that except when pursuing LEED certification,” he says. Because the system, which was developed by the U.S. Green Building Council, is driven by earning points based on certain objectives, meeting the objectives can involve pushing the envelope. “In order to obtain the point, it may call for using products that not everyone is familiar with,” he adds.

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The U.S. Green Building Council has checklists of all categories and credits needed to obtain the different levels of LEED certification. Contractors are often responsible for coordinating the documents submitted for LEED credits.

An example is the use of an adhesive that is low in volatile organic compounds to secure a floor to a concrete slab. The adhesive works only if there is no moisture in the concrete. The concrete needs longer drying time to cure, but the contractor may not know that, so the adhesive fails and another has to be used. The LEED point is forfeited.

“In that situation, who is responsible? The subcontractor who applied the adhesive, the architect or the LEED-accredited professional?” asks Liu.

The unusual aspects of risk involving green projects come at the front end of a project. “It’s the promises and expectations,” Liu says.

Often, the selling point for green projects is the promise of performance, whether it is energy savings or indoor-air quality. “The tendency is to sell the benefits, so clearly defined, achievable objectives are needed,” he says.

That requires a meeting of the owner, the architect and contractor to determine exactly what the owner expects and whether it can be achieved. “This integrated design process starts early on, but it must continue throughout the design and construction with all parties involved to manage expectations,” he says.

There also must be a way to determine how expectations are measured. Liu suggests developing a performance service agreement to help manage the risk. It could give specific expectations of energy savings over five years, for example, and incorporate the contingencies if those objectives are not met, he says.

Owners have become sophisticated about the value of being green in today’s marketplace, says Les Lo Baugh, a partner with Fulbright & Jaworski, an international law firm based in Los Angeles. “There is a significant economic value to an owner or developer to seek LEED certification,” he says.

If a building does not achieve the specified LEED rating, the owner is facing significant economic losses, Lo Baugh says. “This is not just about the business of making the world a better place,” he says. “It’s a matter of not doing what was promised. The larger the prospective gains for being green, the larger the consequences of not achieving the goal.”

Issues concerning the accuracy of new, high-temperature hot-water meters were discovered after construction was completed at the U.S. Environmental Protection Agency’s National Computer Center. Corrections had to be made. (Photo courtesy of USGBC, by O’Brien/Atkins Associates)

Contractors play a lead role in how a building performs, especially when it involves material substitution or faulty workmanship, and to some degree they are liable, Lo Baugh says. Still, there is a lot of naiveté surrounding the risk of failure to reach a LEED certification, so architects and builders need to be careful about creating risk and working outside the scope of their insurance coverage, Lo Baugh says.

“Insurance won’t cover guarantees, promises or warrantees to achieve levels of certification,” he adds.

London’s Willis Group Holdings has begun to see claims on the design services side for the failure of a facility to deliver the benefits that the client expected, says David Grigg, senior vice president and national director of the company’s professional liability group.

“The allegations have triggered the warrantees and guarantees exclusion, so it could be uninsurable,” he says. The claims have appeared during the past nine months and are the first the company has seen involving LEED certification, he says.

Uneven Standards

One of the problems with green construction is the fragmented set of standards, which puts an unreasonable burden on contractors who fine-tune a building, Grigg says. “It’s outrageous what some designers expect contractors to research and identify,” he adds.

It took a team of world-class consultants to provide the technical assistance for energy modeling and construction waste and demolition recycling to qualify for those LEED credits at the David L. Lawrence Convention Center in Pittsburgh. (Photo courtesy of courtesy of USGBC)

Contractors in turn have to ask for additional documents, which often leads to change orders and increased costs. “That leaves the contractor responsible for assessment and coordination of documents to be submitted for certification, and I’ve never seen that as part of a contractor’s work,” Grigg says.

Marsh, a global insurance broker and strategic risk firm based in New York City, is developing a report on the state of the insurance marketplace for the green-built environment and will hold a risk-mapping session for owners, developers, designers and contractors in Chicago in June and Washington, D.C., in September, says Catha Pavloff, senior vice president for the company’s construction-industry practice.

Pavloff is working on a survey of markets and how participants perceive the risk of building green. “The number one issue is determining how much risk to assume and how much you can shift to others,” she says. The question really is, what is the standard of care for green construction? she wonders.

As the green building market evolves, there are ways to avoid risk, says Travelers’ Bateson. Before any work is initiated on a project, the contractor needs a complete set of drawings that have been approved.

Litigation can be avoided if no work is done until those documents are received, and all employees and subcontractors should be trained in new methods and have a thorough understanding of manufacturers’ procedures for installing materials, Bateson says. Owners need to fully understand how to operate and maintain a building to achieve the desired effect, he adds.

“And if all that doesn’t work, make sure you have the proper insurance and that you understand the exclusions,” he says.