The Paramedic Service headquarters in Ottawa received the city’s first LEED certification and uses many conservation measures such as motion-activated lighting and a “heat reclaim” system. (Fred Chartrand/TheCanadian Press) Click here to see full sized version.

More and more insurers see opportunities to increase revenues, reduce risk and enhance their reputation by offering products and services that reward environmentally “friendly” clients. These are particularly focused on green buildings. Such products could have significant environmental benefits, as buildings are responsible for 38 percent of U.S. greenhouse gas emissions and existing technologies can reduce these emissions by up to 50 percent. They can also provide building owners with new options to transfer risk.

For a start, some insurers offer 10 percent discounts on traditional pollution legal liability insurance for Leadership in Energy and Environmental Design (LEED)-certified buildings. As of late 2008, there were 126 LEED-certified commercial projects in Canada, most in Ontario, B.C. and Alberta.

In addition, new insurance products are becoming available, starting in the U.S. Some are directed to individuals (for example, incentives for driving hybrid vehicles  or residential green building insurance). Most, however, are directed at commercial operations.

Energy savings insurance

Energy savings insurance allows building owners to insure against the risk that capital improvements will not produce the anticipated energy savings. Such insurance has the potential to reduce the net cost of energy savings projects by reducing the interest rates charged by lenders and by increasing the level of savings through quality control.

Upgrading after damage

When a building is destroyed, insurance typically covers replacement to current building code standards. An upgrade endorsement is now available from some insurers (for example, AIG’s “Upgrade to Green – Commercial”) that permits the policyholder to upgrade to a greener standard when rebuilding.

After a total loss, a property owner could upgrade to the next level for a LEED-certified building, or, for a non-LEED building, to LEED silver. This may include testing for and removing contaminants following reconstruction, as well as soft costs involved in LEED certification (for example, for architects and engineers to commission, or certify, the building and increased costs for materials and labour).

Buildings that have suffered a partial loss can be covered for upgrades such as energy-efficient appliances, lighting, plumbing, office equipment and indoor air quality (for example, paints, carpets) and sustainability (for example, cabinets and flooring made of renewable or recycled materials). Such upgrade coverage may cost more, but the cost could be recovered after a loss in reduced energy bills.

Indoor environment

Indoor environment coverage protects against claims of bodily injury caused by any pollution produced by a green building’s specialized air or water control equipment. While this type of equipment is required for green certification, losses resulting from its use are typically not covered in standard general liability policies.

Reputation damage

Green reputation coverage provides up to $50,000 in coverage, per occurrence, for costs to manage a reputational crisis when a green building fails to meet industry standards and public expectations. This coverage includes defence costs. It would be useful where the owner of a LEED-certified building is accused of failing to maintain certification or of not living up to a standard it promised to a tenant.

D&O protection

Director & Officer liability policies protect against claims that allege harm that is attributable to the governance or management of an organization; wrongful acts covered by these policies may include errors and omissions, as well as neglect or breach or duty. This can extend to what companies are doing to manage climate-related risks.

One important area where insurance remains difficult to get is renewable energy projects, such as wind farms and geothermal energy. In addition to conventional risks, like business interruption and equipment breakdown, these products face many unknowns, including lack of technical expertise within the insurance industry, the need for improved actuarial and performance data and how best to package risks to achieve economies of scale.

Companies with poor environment profiles may also find it more difficult or expensive to get insurance. Over 40 international insurers and brokers have already adopted ClimateWise principles. ClimateWise companies aim to lead in risk analysis and to incorporate the science of climate change into their risk models.

This means that they will consider climate change in their investment strategies and reduce the environmental impact of their own businesses. This could have a significant impact, since life insurance companies own 22 percent of institutional real estate in the U.S. 

While the new policies are intriguing, insureds should also think more carefully about their conventional insurance. Both insurance companies and insureds have a lot to lose from the increasing frequency of disasters. While insurance premiums are likely to rise, insurance companies are encouraging clients to think hard about their climate risks. 

For example, AXA recommends that businesses carry adequate business interruption insurance (such interruptions make up 25 percent of all insured losses from catastrophes). Many businesses have also underinsured their buildings, as rebuilding costs have risen substantially. Underinsurance can particularly hurt if the insured has failed to maintain the minimum required by their coinsurance clause. In our experience, few insureds understand this. And this is definitely not an area where ignorance is bliss.

Dianne Saxe is an environmental law specialist and heads the environmental law boutique Saxe Law Office in Toronto. Jackie Campbell is an associate at the same firm.