Weighing Risks Associated With Green Building

As the number of green building projects across the U.S. continues to grow, building owners, contractors, architects, and engineers, are expressing concern about a variety of risks that may be associated with these projects. The list of potential risks is a long one, including potential financial exposures, uncertainty about evolving regulatory standards and legal issues, validating the qualifications of consultants and subcontractors, and assessing whether the long-term performance of green building materials meet expectations.

A new report from Marsh Inc., a leading insurance broker and risk advisor, found that significant potential risks may be associated with green-built and LEED certified projects and construction project participants are not sure how best to manage them.

According to Marsh’s report, building owners, contractors, and design firm executives are most concerned about potential financial risks, including the affect of green design, construction, and ownership on profitability and cost, and the ability to complete projects on time and on budget.

The report – based on feedback from 55 senior executives involved in green design and construction who participated in one of a series of four half-day forums held by Marsh from mid-2008 to early this year – ranked the top five risks associated with green building projects. Financial issues were considered the most serious because of the likely potential for green building practices to increase the cost of projects.

The Marsh forum participants cited standard of care and related potential legal risks as the second most significant potential exposure. These risks encompass the challenges associated with achieving appropriate LEED certification as required by the owner, tenant, or other critical third party, defining the standard of care as the green building environment evolves as well as the competency of team members, and the evolving building codes with the potential establishment of strict liability standards.

“While it’s exciting to see the green building movement gain momentum, success for design and construction firms involved in these projects, as well as for the building owners, ultimately may depend on having a clear understanding of their potential risks and the most effective ways to address them,” said Michael Feigin, a managing director of Marsh and the firm’s Global Construction Practice Leader.

In terms of potential frequency and severity, the following three types of exposure rounded out the top five green building risks confronting the construction industry:

• Performance risks, which center on the ability of products, systems and buildings to perform in a green environment.
• Consultant, subconsultant, and subcontractor risks, including challenges associated with making sure firms assigned to a project have the appropriate training and expertise, and questions about the ability to replace a defaulting contractor with one that has appropriate certifications and qualifications.
• And regulatory exposures, such as uncertainty about how the regulatory environment might evolve with respect to green building, including the concern that the potential for punitive damages might drive owners to seek warranties and guarantees to recapture costs from contractors and subcontractors.

Other key risks identified by the Marsh green building forum participants, include supply chain challenges, technology, brand and reputation exposures, education, and return on investment.

“Despite the industry’s concerns about these exposures, many of them can be addressed to varying degrees through the availability of commercial insurance and surety solutions, or in some instances mitigated through contractual agreements,” said Catha Pavloff, a senior vice president of Marsh and leader of the firm’s Green Building
Team.

“Nonetheless, the commercial insurance market still is evolving with respect to green building exposures. As underwriters become more adept at assessing and quantifying risks associated with green building, we may see a growth of green-building-specific insurance coverages,” she added.

Marsh’s report, Green Building: Assessing the Risks – Feedback from the Construction Industry, is available free of charge by making a request online through http://global.marsh.com/news/articles/greenbuildingsurvey/register.php.

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