While sustainability advocates push the benefits of green construction, more designers, contractors, owners and insurers are now confronting the risks behind those claims. Potential risks associated with emerging green demands have represented a gray area but as more claims and lawsuits land in court, details are becoming clearer.

Although risks are often project- and location-specific, owners, constructors and designers of green buildings are finding some consensus, says New York City-based insurance broker Marsh in a new report. The study, “Green Building: Assessing the Risks,” identifies and ranks 10 key areas of green-building risk, five of which could be the most costly and occur most frequently. The analysis is based on responses from 55 industry executives polled at company forums in 2008 and early 2009 in New York City, Chicago, San Francisco and Washington, D.C.

“Although money is tight in the development community, there is continued demand for green building,” says Michael Feigin, Marsh global construction practice leader. “A lot of companies have to get smart on these issues quickly.”

The study identifies the five biggest risk areas as financial, standard of care and legal, performance of green products or systems, roles and responsibilities of consultants, subconsultants and subcontractors, and regulatory issues. Other risk areas cited by participants include staff education and experience, return on investment in building green, supply-chain issues related to vendor competence and materials, green impact on technology and building information modeling, and im­pact 0n reputation (see chart below).

Looking at Green-Building Risk Concerns Across the U.S.*
Rank Chicago Washington, D.C. San Francisco New York City
1 Financial Financial Financial Performance
2 Performance Education Regulatory Standard of care/legal
3 Standard of care/legal Consultants, subconsultants and subcontractors Performance Consultants, subconsultants and subcontractors
4 Supply chain Return on investment Education Technology
5 Regulatory Technology Return on investment Return on investment
* Rankings based on surveys of marsh forum participants in 2008 and 2009; brand and reputation risk was also identified by participants but not ranked as a top-five concern
source: Marsh

Financial risks, potentially impacting costs, profitability and budget, concerned most respondents, says Marsh. While green buildings are touted for potential life-cycle cost savings, upfront costs remain an issue, such as for insurance, commodities and the green certification process. There also is a perception of in- creased risk of delay and fear of losing incentives or grants if a building does not meet requirements. Many of the stickiest issues relate to standard of care, says the report. Although green buildings are often expected to meet certain standards, such as achieving a specific rating, parties don’t always properly identify who is at risk.

“What you’ve got is a scenario where a developer is counting on a building achieving [green] certification for regulatory reasons or because they are looking for tax breaks or a reason to charge higher rents,” says Frank Musica, senior risk management attorney for Victor O. Schinnerer & Co., Chevy Chase, Md. “There’s a lot of pressure for them to achieve that rating.”

In some cases, such as with energy services companies, firms can make contractual guarantees based on the future energy performance of systems. As a result, Musica says designers or builders can end up making guarantees that don’t fall within their existing professional liability coverage. With new products and systems hitting the market that claim to be green, building performance is also cause for concern. Catha Pavloff, Marsh green-building team leader, says firms specifying products and materials are anxious about “green washing.” She says, “A lot of materials are new and untested, so there are questions of durability and longevity.”

As green practices are adopted by firms of all sizes, key players in green projects express concern about subs not having appropriate training or expertise, says the report. Regulatory issues also are a potential issue if owners seek warranties and guarantees to recapture costs.

Few insurance products are available to address specific green liabilities. Feigin says most exposures can be covered within existing programs if terms are properly negotiated and contracts are clear.

In perhaps the first case involving failure to achieve a green certification, a lawsuit was brought in Maryland over a project that didn’t achieve a Silver LEED rating, which the developer needed to gain tax credits. At the heart of the case, Shaw Development v. Southern Builders, a standard contract was used that did not specify liability over failure to achieve certification. The case was settled in 2008.

The Associated General Contractors is now working on a green-building addendum to its ConsensusDOCs that it expects to release by year’s end. Until more clarity is commonplace in contract language, Musica expects to see a significant rise in green-building claims.