Insurance Coverage Issues for Green-Related Building Projects


Kermit the Frog once famously lamented that “it’s not easy being green.”  Well, we hate to break it to you, Kermit, but that’s not exactly true anymore.  As it turns out, being green is now all the rage, especially in the construction industry:  a recent study notes that approximately 48 percent of new construction projects in the United States were green in 2012, with that share expected to increase to 58 percent by 2015.1

Although there are benefits to “going green” in the construction, development, and operation of buildings, there are also risks unique to green building that will test the boundaries of coverage under typical liability insurance policies.  In light of the relatively new nature of green construction, below are some of the issues we expect will have to be litigated.

Whether Covered “Property Damage” Exists

The first issue will be whether green construction triggers covered “property damage,” which liability policies generally define to mean:  (1) physical injury to tangible property, including all loss of use of that property; and (2) loss of use of tangible property not physically injured.  In addition to the traditional types of “property damage” issues that courts routinely deal with in resolving construction defect coverage disputes, one particularly interesting issue is how courts will treat issues such as failing to achieve “green” status, such as obtaining Leadership in Energy and Environmental Design (LEED) ratings and/or energy reduction credits.  To the extent that construction agreements require that buildings achieve LEED certification, courts will likely treat the failure to do so as nothing more than a breach of contract claim.  In that case, liability policies would not provide coverage because breach of contract claims only seek economic damages.  We expect this will be the case even in the face of insureds arguing that a builder, owner or developer “lost use” of their building(s) as a result of failing to meet “green” requirements.

Application of the Professional Services Exclusion

Another interesting coverage issue presented by green construction is how liability policies’ professional services exclusions will respond to claims arising from the highly specialized work necessary to meet the strict requirements for obtaining green credentials (such as LEED ratings).  Specifically, in order to obtain those ratings, project owners may be required to hire contractors and design professionals with specialized experience in sustainable building projects.  Liability policies with typical professional services exclusions might not necessarily provide coverage for “property damage” arising out of a contractor’s or design professional’s work of this nature, especially in states such as California that take a broad view of what type of services are “professional” in nature.

Mold/Fungus Exclusions

Part of the appeal of green building is its self-sustaining nature, and there are few better examples of those types of measures than vegetative roofing and alternative power and water systems.  From an insurance coverage standpoint, however, these measures provide mold and fungus risks because they are heavily dependent on water usage.  For example, rainwater runoff collected on-site at green building projects used for cooling and irrigation could lead to leaks in the runoff system, thus creating the potential for mold growth.  Coupled with the fact that certain materials used to construct these features are more sensitive to moisture and water damage or infiltration (such as wood), coverage for these losses might be precluded under typical mold exclusions, and especially ones containing “anti-concurrent cause” provisions.

Subsidence/Earth Movement Exclusions

Vegetative roofing also raises the peculiar issue of soil movement that can occur up to hundreds of feet in the air as opposed to below ground.  Earth movement and subsidence exclusions typically preclude coverage for “property damage” caused by the subsidence of land and arising out of, or attributable to, any operation of the insured.  With vegetative roofs, the additional weight of soil and vegetation could create structural integrity issues and result in third-party “property damage,” either because of the sheer weight of the soil or because of post-installation settlement that causes the soil to move.  In either case, courts will have to resolve how exclusions historically written to address earth movement underneath the ground will apply to such issues up in the sky.

EIFS Exclusions

According to the U.S. Green Building Council, building developers and owners can obtain LEED credits by constructing buildings using exterior insulation and finish systems (EIFS) or certain synthetic stuccos.  Certainly, insureds seeking coverage for EIFS-related losses will face the typical EIFS exclusion as an obstacle to obtaining coverage.  And, as detailed in our write-up of the Western District of Washington’s decision in First Mercury found in this edition of CDCQ, such an exclusion could end up precluding coverage for an insured even if that insured was not working on an EIFS depending on how broadly the exclusion is worded.

Pollution Exclusion

One final aspect of traditional liability policies almost certain to be implicated in coverage disputes arising out of green construction is the pollution exclusion.  Although one would think that a project designed to benefit human health and the environment would not result in “pollution” within the meaning of traditional liability policies, this is not necessarily the case.  For example, courts for years have been dealing with coverage disputes arising out of the use of MTBE – a gasoline additive originally developed to enable cleaner combustion and lower emissions, but which was later claimed to pollute groundwater and cause potentially significant health issues.  Some examples of green construction-related pollution disputes could include the release of carbon dioxide from compost piles, seepage of materials used in vegetative roofs lacking waterproof membranes, the discharge of specialized construction debris during the "green" construction process, and/or storm water discharge used in green building runoff systems containing “pollutants” in large enough quantities to contaminate a water supply.  And, of course, there is always the unique materials being developed and used in constructing green buildings that could have unknown pollutant capacities.

As detailed above, "green" building construction projects present unique coverage risks.  And, from what we have seen, very few (if any) liability insurers have developed coverage forms, endorsements or exclusions that specifically provide or preclude coverage for those types of risks under liability policies.2  Until insurers start doing so, courts will have no choice but to address coverage for "green" risks under traditional coverages, endorsements and exclusions found in standard liability policies.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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