Consider the introduction of the high-rise building. Not only were there fears as to whether these buildings would stand up, but their usefulness depended on the new technology of elevators, which in turn depended on the still new technology of electricity. A failure of any of these technologies could be deadly, and any miscues could result in financial ruin. Yet, these buildings are commonplace today, and the risks associated with these technologies have been addressed in product changes, operating procedures, contract provisions, due diligence and insurance policies. The risks associated with green building, while different and probably not as serious, are managed using the same tools to avoid, minimize and allocate the risk.[1]

Risks associated with green building are diverse. Those involved in the building industry face changing standards of care, unknowns associated with new technologies, new tenant and landlord obligations, and new expectations of building performance and/or certification. Plus, the risk landscape constantly changes as market demand evolves and governments of all levels adopt various standards.[2]

Standard of Care

For architects, the professional standard of care appears to be rising. AIA ethics and form contracts call for promoting sustainable design and considering environmentally responsible design alternatives, so ordinary care is already shading green. Many architects have added their LEED AP credentials to their marketing materials. Once an architect holds his or herself out as a green building specialist or once a firm is designing green buildings, the baseline for “ordinary care” has likely risen. The AIA contracts propose language to address the process of designing green buildings. Firms must clearly manage client expectations and project implementation in order to deliver the project as promised. Additionally, designers and clients must consider the rights to instruments of service and implications for LEED submissions.

Warranting outcomes is a hot-button issue for green building. With evolving market demands and increasing governmental requirements, building owners require some level of guarantee. Meanwhile, professional liability insurers warn that such warrantees may not be covered by insurance. For designers, a standard AIA agreement between owner and architect, B101-2007, Section 3.4.2 already provides that “The Architect shall incorporate into the Construction Documents the design requirements of governmental authorities having jurisdiction over the Project.” Thus, the current language already creates certain contractual obligations in a locality or state where building codes already incorporate green building requirements. As government codes expand the specifications for building performance or certification, the required performance of designers expands as well.

Building and Product Performance

Meeting such requirements for building performance and/or certification depends on an array of factors. Projects incorporating such requirements demand precise contracts for designers and builders. The contracts must be clear in scope, differentiating between required certification levels and actual performance requirements. Provisions must address the role of third-party certifiers, the measure and time of certification or performance, any failure to achieve certification or performance, corrective actions, and liquidated damages, to name a few.

Builders may need to adjust other contract provisions as well. Projects may require later points in time — beyond the standard “substantial completion” — to evaluate green elements or building performance. Owners may demand that the builder warranty begin at final completion rather than substantial completion, or they may ask for a longer warranty on green components. Insurers have begun adding green building endorsements to builder’s risk products, aimed to mitigate builders’ potential financial risk associated with changes in environmental standards, repairs using green materials, additional debris-removal expenses and loss of tax credits.[3]

New products and technologies bring their own set of risks, but those may be addressed with information and agreement. Through product evaluation or manufacturer warranty, designers need assurance that a new product will perform properly. Builders must understand products and installation before incorporating them into a project. Moreover, building professionals must educate the owner of the risks, benefits and ongoing operation of the new product. A fully educated owner could give informed consent for the use of the new products.[4] Or, alternatively, the designer, builder and owner may contract a means of shared risk. One insurer has introduced Indoor Environment Coverage with protection from claims of bodily injury originating from a green building’s specialized equipment.[5]

As green building matures, actual building performance will be a central concern for buyers, owners and tenants. California has already adopted building performance reporting requirements. Performance depends on design, construction, product effectiveness, occupant usage, climate and more. Thus, designers and builders need precise contracts that address actual building performance. For example, such contracts might establish a performance baseline, set the time and means of measure, outline the role of modeling and consider the role of occupant usage.

It is easy to focus on the immediate issues of green building risk — in this case, designer and builder concerns. But the process of innovation and risk allocation is happening across the broader market. Landlords and tenants are working through innovative leasing provisions and cost allocations for green build-out, operations and upgrades. Developers and homebuyers are arranging neighborhood documents to accommodate LEED-ND. Building owners and operators are seeking ways to retrofit existing buildings as green buildings, a process with different challenges from new buildings. Builders and utility providers are exploring distributed sustainable infrastructure technologies. All of these efforts face distinct challenges, but they are also interconnected with the risks and opportunities of designing and constructing green buildings.

To be clear, green building raises new risks within old categories and renews old risks. Designers and builders ought not assume that the same old approach, the same old contract and the same old insurance are sufficient. They are not. Those old tools, however, can be altered, revised and renewed to properly address new issues. Existing mechanisms have incorporated countless risks before, and they will, no doubt, incorporate many risks beyond these immediate risks of green building.


FOOTNOTES:

1. As noted by Frank Musica of professional liability insurance underwriter Victor O. Schinnerer & Co., Inc., “The types of exposures on sustainable projects are not different from those on other projects but the [sic] prudence is necessary to avoid losses.” Presentation by Frank Musica, Esq., Assoc. AIA, Victor O. Schinnerer & Company Inc., Chevy Chase, Md., “Don’t Let Green Design Cause Red Ink,” AIA Convention, May 3, 2007, available at www.aia.org/SiteObjects/files/conted_TH0507.pdf .

2. Some risks have led to litigation and challenges to government regulation. In Shaw Development v. Southern Builders, contract documents called for conformance with LEED Silver certification, and the developer, Shaw, sought Maryland green building tax credits as part of project financing. The tax credits were tied to LEED conformance and required a certificate of occupancy within a set time. In Maryland Circuit Court, Shaw claimed, among other things, breach of contract for the failure to construct the project in conformance with LEED Silver certification. In another litigation, the Air Conditioning, Heating and Refrigeration Institute (ACHRI) challenged Albuquerque’s high performance building code, claiming that it was preempted by federal HVAC standards. Elsewhere, trade organizations from the surety industry have raised concerns about the performance bond requirement of Washington, D.C.’s 2006 Green Building Act.

3. ACE USA, Press Release, “ACE USA Introduces Endorsements to Address Environmental Concerns for its Builders Risk Product,” Oct. 20, 2008, available at www.aceusa.com/News/Pages/News.aspx .

4. G. William Quatman, White Paper: Managing the Risks and Embracing the Benefits of Going Green, prepared for the AIA Trust, Feb. 2008.

5. Marsh, “The Green Built Environment in the United States: 2008 Year-end Update of The State of the Insurance Market,” Dec. 2008.