Green is gold, but may be risky
1. Better understand risks of green design/products
2. Learn to address some of the heightened risks
3. Learn about resources available to assist in green design.
The “greening” of America and, indeed, the world, is now a common aspect of daily life for businesses everywhere. Whether it involves waste reduction, enhanced energy efficiency, adaptive reuse, recycling, or use of renewable resources, all are focused on how to leave a positive impact—or at least reduce the negative impact—on the environment.
Engineers face daily requests to “reduce energy consumption,” “maximize passive lighting,” “specify ‘green’ products,” and find other innovative ways to meet society’s desire for a greener world. With these requests comes real opportunity for engineers to make a difference and provide leadership that benefits our greater society. However, engineers need to widen their understanding of the unique risks associated with projects that have green construction and sustainability requirements and be proactive in their mitigation and management.
Four organizations are helping drive green construction and establish related goals: the U.S. Green Building Council and its LEED rating systems, the Green Building Initiative and its Green Globes initiative, the International Living Future Institute and its Living Building Challenge, and the U.S. Environmental Protection Agency (EPA)and its Energy Star program. In addition, many professional organizations, like ASHRAE, have set standards to encourage more energy-efficient buildings.
Across the country, the federal government and growing numbers of states and municipalities are building on the momentum created by these organizations and are mandating that public sector projects examine green alternatives and implement them where feasible. Meanwhile, many private-sector projects are seeking various levels of LEED or other certifications to take advantage of tax incentives, attract tenants, and establish a favorable reputation.
Engineers engaged in green projects must evaluate the risk created by this push for sustainability and, in particular, look closely at contract provisions that address standard of care, warranties, guarantees, and consequential damages.
Standard of care: Within the context of standard of care, engineers are required to undertake their work with the same care and consideration used by other engineers undertaking similar work in the same geographic area. This requires always evolving as the practice of engineering evolves. For example, engineers may take a cue from the American Institute of Architects (AIA), which has established requirements for design firms to examine “environmentally responsible” approaches under AIA B101-2007 Sections 3.2.3 and 18.104.22.168. This language and the actual words and actions of engineers and architects may actually be creating an evolving standard of care that would make failure to consider green options a violation of the standard. For example, the code of ethics for engineers has added “sustainability.”
The National Society of Professional Engineers (NSPE) – Section 3.2.d. states: “Engineers are encouraged to adhere to the principles of sustainable development in order to protect the environment for future generations.
The NSPE defines sustainable development as: “… the challenge of meeting human needs for natural resources, industrial products, energy, food, transportation, shelter, and effective waste management while conserving and protecting environmental quality and the natural resource base essential for future development.” The standard of care is evolving. For each project, engineers should at least formally evaluate sustainability issues and perhaps go much further in promulgating environmentally sensitive designs.
Warranties and guarantees: Another area of concern in green building is warranties and guarantees. Red flags should go up whenever engineers see contract wording such as: “Achieve LEED Gold”; “Guarantee that energy consumption will drop by X%”; “Warrant that plans will….” In reality, these outcomes are affected by owner and contractor decisions on siting, procurement, waste management, and other aspects of the project that are beyond an engineer’s control. Where possible, avoid any reference to such operational outcomes unless you as the engineer/specifier control the quality of the installation, the training of all operating personnel, the maintenance of the facility/machinery, and so on. Failure to do so can jeopardize your professional liability insurance coverage as these policies cover only “liability the engineer would have had in the absence of any contractual commitments.”
Consequential damages: Engineers should seek to avoid contractual language holding them accountable for consequential damages. Such damages (e.g., lost profits due to late opening of a casino) are disproportional to the compensation engineers receive to undertake their portion of the work on a project. Sustainable design increases the risk of such consequential damages as owners look to hold engineers responsible for the potential loss of tax credits or reduced occupancy rates or rental rates if a facility fails to achieve the requisite certification level.
While such damages may be covered by your insurance policy, they would result in deductible payments and potentially higher future premiums. The engineers on a project should not be held responsible for these.
Additional considerations that should be considered when designing energy-efficient or green buildings include:
· Unrealistic owner expectations: Does the owner understand that LEED Platinum certification costs more than LEED Silver or Gold?
· Certification not necessarily leading to better building performance.
· Defects or problems with innovative materials, including issues with procuring materials in a timely manner.
· Commissioning and operational issues.
· Under-skilled installers.
Green litigation: Lessons learned
A seminal lawsuit in Green Building, Shaw Development v. Southern Builders, occurred in 2007. Brought before the Circuit Court in Somerset County, Md., the suit involved a condominium designed to be at least LEED Silver certified. Construction delays related to the certification involved significant costs and triggered suits brought by both the builder and developer. At issue was $635,000 in potential tax credits for obtaining LEED Silver.
The developer alleged the project manual and scope of work required Southern Builders to construct a “green building” that achieved a LEED “Silver Certification Level.” The case eventually was settled but illustrates the unique exposures when certification is required.
Subsequently, a 2008 decision in The Air Conditioning, Heating, and Refrigeration Institute, et al. v. City of Albuquerque (U.S. Dist. LEXIS 106706) gave the industry relief from local ordinances that exceeded federal green standards. Albuquerque passed three ordinances that imposed minimum energy-efficiency standards for commercial and residential buildings, which exceeded federal standards.
In this case, local, regional, and national manufacturers and distributors of HVAC products filed suit against the city alleging that federal statutes preempt it from passing the ordinances. The federal court held in favor of the plaintiffs, asserting that federal law may preempt certain state and local statutes that require higher standards.
A number of cases that have been cited by professional liability insurer Victor O. Schinnerer/CNA illustrate the types of thorny issues that can arise in green building projects:
· Daylighting: Daylighting design and potential security issues surfaced in a project involving a government contractor that provided military systems designs and terrorism identification services. The project featured a green design including extensive daylighting systems with windows and skylights. The federal government determined the features would place confidential information at risk and threatened to revoke the project’s security rating, cancel existing contracts, and prevent future consideration. The client sued the architect, citing that the standard of care was breached as the architect was aware of the security concerns and should have contemplated them in the final design.
· Mold: An insurance company wanted green products used in the redesign of its interior space. The design firm specified cork flooring in kitchen areas. Subsequent damage to cork flooring in high-traffic areas around sinks, ice machines, and coffee makers led to water retention and mold growth. Efforts to clean and seal floors with environmentally safe solutions proved unsatisfactory to employees, and the cork tiles were replaced with vinyl flooring. Although the design firm experienced lost productivity and deductible costs in defending against the company’s claims of negligent design, the client ultimately chose not to pursue the claim and absorbed the cost of resurfacing the kitchen areas. Nonetheless, in addition to the defense costs and loss of productive time, the design firm’s reputation in the commercial market was marred by the incident.
· Air quality: A university agreed to an architect’s design of an operable sash for its library, despite concerns about how untreated air might affect the building’s operations. The design firm stressed the importance of outside air for student health and alertness. When solar shading designed for energy conservation provided shelter for pigeons, students using the library began reporting respiratory illnesses. Controversy ensued and the architect was sued for negligence because of introduction of diseases contained in pigeon droppings.
· “Sick building” syndrome: Guarantees of indoor air quality carry significant potential risk. Lured by the promise of “healthier and more productive occupants” associated with LEED publicity, a tenant rented space in a LEED Silver certified building. However, after the first year of occupancy, the tenant’s records showed increases in sick leave and employee complaints about working conditions, and reduced productivity. The tenant demanded a rent rebate from the project owner based on promise of a healthful workplace and sued the architect.
Assessing insurance implications
In light of the unique exposures related to green building projects, engineers should:
· Review their insurance coverage carefully and ensure that the boundaries of this coverage are contemplated when taking on new work. No additional or specific “green” insurance is needed, but engineers should be aware of warranties and other contractual obligations that may not be covered by their insurance policies. Notably, professional liability coverage typically extends only to acts of negligence—and not to other contractual liabilities. This underscores the importance of a thorough contract review before proceeding and avoidance of contractual risks that the engineer would not have been responsible for in the absence of the contract.
· With respect to builder’s risk/property insurance, design professionals should check that such coverage is in force and that the insurance policy on the project covers extra costs associated with re-building green to achieve LEED certification. This relatively inexpensive property insurance protection can help prevent more costly claims against the design professionals.
· Check for a waiver of subrogation clause in the contract. This prevents the owner’s builder’s risk insurer from paying a claim and then turning around and suing the engineer.
· Engineers should work closely with their legal counsel and insurance advisor to address potential contractual issues and ensure that their insurance program is fully up to date in helping to mitigate related exposures.
Green building and sustainability are here to stay. With a well-coordinated program of insurance and risk management, engineers will be in the best position to take advantage of these expanding opportunities.
Dan Knise is president and CEO of Ames & Gough, an insurance brokerage and risk management consulting firm that specializes in serving the needs of professional services firms. Knise works directly with many of the firm’s larger design firm clients, as well as advising project owners on risk and insurance issues.
Sustainable project contractual considerations for engineers
Whenever a project owner expresses a desire to achieve certification (e.g., U.S. Green Building Council LEED or Green Globes) for a sustainable/green project, engineers must carefully review proposed contract language. Consider including wording that reflects the following:
· Owner recognizes that engineer, while incorporating green design, will perform services to traditional standard of care.
· Engineer should not accept any express warranties or guarantees regarding achievement of certification (as many aspects of rating scale are beyond the engineer’s control).
· Owner recognizes that many so-called green building products are untested and therefore carry some risk that engineer cannot warrant.
· Engineer cannot accept responsibility for consequential damages (e.g., loss of tax credits for green building) as risk-reward is out of balance.