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Thursday, July 16, 2009

LEED De-Certification Raises Insurance Concerns : Green Building Law Update

[Today, I am bringing you a guest post from Mark Rabkin. I have been on Mark for awhile to write a guest post. He is doing a tremendous job looking at the insurance and surety concerns related to green building. Back when I was looking at alternatives for the D.C. Green Building Act bond requirement, I leaned on Rabkin's knowledge of the surety industry. You may recognize Rabkin's post, which highlights surtey and insurance implications from LEED de-certification, because it was originally a comment last Friday. Check out other posts from Rabkin over at Konstructr.com.]

Ok, time for me to finally chime in, here. As you attorneys begin incorporating new contractual requirements of energy performance to address LEED 2009's Minimum Project Requirements, please make sure to keep in mind that reporting the usage of natural resources and the subsequent efficiencies create unique risks and liabilities that my (insurance) community has yet to address.

As I have mentioned on numerous occasions, surety providers of performance bonds are underwriters based on the assumption of no losses. Should a contract contain language guaranteeing energy or natural resource performance/efficiency, the surety will exclude that language from their performance bond. In the event that a building fails to perform to a specified level of resource efficiency, should the surety be required to compensate the owner to rebuild the structure? That is not what they are in business to do and will not bond contracts guaranteeing efficiency and performance specifications.

The next question is if there is a situation in which a building is de-certified for either failure to report usage data or lackluster performance (should the program requirements change), than is their a potential for liability by a third party to the operation and maintenance of the building and has the owner incurred a financial injury due to de-certification. The plaintiffs will most likely argue that in fact, the building has lost value, but commercial general liability may not deem this as an occurrence caused by the negligence of their insured. Many professional liability contracts contain exclusions pertaining to guarantees and warranties, so who will provide the defense, what are the damages and what will the plaintiffs argue as their incurred damages?

The point is that we need to be proactive as our contractors enter the realm of performance contracting and they need to be clear as to how their liability insurance will and WILL NOT respond. Guarantees of building energy performance are not new, but they are UN-insurable. If you as a contractor or architect make these claims, you will be ON YOUR OWN if the building fails to meet the owners expectations.

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