Incentives & Mandates

The growth of the “green” building market is undeniable. To date, the US Green Building Council, the foremost authority on green and sustainable building in the world, has registered over 28,000 building projects around the globe. A vast majority of these registrations have been fostered by the efforts of the network of volunteer advocates throughout the country encouraging legislators and policy makers to incorporate responsible building guidelines as well as financial incentives for high performance building. The US GBC also employs highly capable and well-experienced legislative analysts and policy counselors that assist the volunteers in their local efforts.

As a risk professional that does not practice law, I have a different perspective on the regulatory marketplace pertaining to green and sustainable building. I have told my legal colleagues for years that my involvement in the conversation on the liabilities and risks of green building is motivated by my desire to prevent unneccessary litigation financed by the insurance community based on unenforceable contractural risk transfer clauses.

For example, if a local, state or federal incentive or mandate requires certification by an independent third party as a precondition for earning the award, than each tier in the construction and development process will attempt to contracturally transfer the risk of failure away from themselves. Traditional liability insurance and commercial surety has typically acted as the financial backstop for construction professionals and provides defense coverage, compensatory damages and financial assurance that their personal assets were not at risk upon entering into the agreement.

However, the risk community has yet to effectively and universally address these new exposures to those involved in the development of a project. In the situation where third party certification is a precondition for a financial award, than the risk of failure of attaining such certification will compel a developer to attempt to transfer that risk to their architect, general contractor or construction manager, who will then transfer it to the various subcontractors that have been hired to perform specific work on the project. All parties will carry commercial general liability insurance and Errors and Omissions Liability in the case of skilled professionals. Large private developments and public bids will also require the use of a surety bond guaranteeing to the owner that the contractor will perform the work as required.

In the unlikely event that a building fails to earn a desired level of certification and is either penalized by the governing authority or denied the original benefits of the incentive or mandate, the parties involved will look for someone else to blame. As noted in several recent situations such as the DC Green Building Act, Shaw Development vs. Southern Builders, or most recently, Pittsburgh, PA, green building policy is meant to encourage natural resource efficiency, environmental stewardship and occupant health & safety. Regulators must find ways to enforce their respective policies. Sadly, no one called me for my input on effective enforcement mechanisms that will serve to encourage long term sustainability AND are supported by the financial, legal and risk communities.

Pittsburgh’s recent city ordinance stipulates that any publicly financed private development must attain a “Silver” certification by the US Green Building Council within 3 years of completion. A failure to attain such a rating will result in a fine to the developer of 1% of the total construction costs. If the fine isn’t paid within 30 days, the city will revoke the certificate of occupancy. In this situation, the developer will attempt to transfer the risk of failing to meet desired levels of certification to the next entity in line after them. The risk transfer vehicles of liability insurance and surety performance bonds will not provide the financial security to the lower tiers, leaving them tremendously exposed for significant legal and compensatory expenses.

Unless the risk community steps up to indemnify parties for claims due to failure to earn an incentive or regulatory action from a policy mandate (currently excluded from liability insurance and surety), than the progress we have achieved to date will come to a grinding halt once the lawsuits come. Maybe that’s why there are so many LEED-AP attorneys?