The following article contains excerpts from Kaplan Financial Education's Green Insurance Coverage Options Insurance CE course in Florida.
Society’s interest in environmentally friendly products and services is significant for the insurance industry, particularly in the areas of sales, underwriting, risk management, and claim handling.
Many green products and practices have specific insurance needs that may not be adequately covered under standard property and liability policies. Green products may also present new loss exposures or increase other risks of loss that risk managers and underwriters must be able to correctly identify, measure, and price. The green trend also affects adjusters, who may need to modify their usual claim handling procedures for losses involving green products.
Many state and local building codes have been updated to require green construction practices for new buildings and major renovations. These codes are also likely to be revised to implement standards in the International Code Council (ICC) 2012 Model Building Code for Sustainable Construction.
More commercial construction projects are beginning to include requirements for sustainable construction practices, particularly those involving government entities, school districts, and higher education institutions. Green buildings are also prevalent in the health care industry because they provide healthier indoor environments.
Other laws intended to encourage environmental awareness may create increased demand for green construction. For example, California now requires nonresidential building owners to provide a 12-month summary of the building’s energy usage to prospective tenants and buyers. This may result in building owners taking steps to improve their buildings’ energy efficiency to remain competitive in the real estate marketplace.
Most of the green-related insurance products currently available provide first-party property insurance coverage. Because this is a relatively new market, there are only a limited number of standard forms available from the Insurance services Office (ISO) and the American Association of Insurance services (AAIS). Most of these coverages were developed by individual insurers, and many are available only by endorsement. In this article, we will briefly discuss green insurance coverage options available for commercial and personal lines property insurance.
A limited amount of green-related coverage may be available under the ordinance or law additional coverage in the Insurance services Office (ISO) homeowners forms. Similar coverage is provided by the increased costs of construction additional coverage in ISO commercial property policies. These coverages provide a limited amount of insurance to pay expenses required to comply with ordinances or laws related to construction, repairs, or renovation of a damaged building after a covered loss.
Because of the limitations associated with the ordinance or law and increased costs of construction coverages, many insurers now offer green upgrades coverage, which allows insureds to repair or replace buildings and systems with green materials after a covered loss instead of items that are of like kind and quality. Insureds can benefit from this coverage even if their buildings are not formally certified as green because it allows them to incorporate green elements when damage is repaired.
This coverage is usually provided by endorsement. Some insurers’ endorsements only provide green upgrades coverage when a total loss occurs. Other insurers have designed green upgrades endorsements for specific markets, such as schools. Endorsements are also available that allow buildings that have already been certified to upgrade to the next certification level after a covered loss.
The Increased Cost of Loss and Related Expenses for Green Upgrades endorsement is a standardized form developed by ISO for its commercial property forms. This endorsement can be used with the building and personal property, condominium association, condominium unit-owners, business income, and extra expense coverage forms; a separate endorsement is available for the ISO Business owners form.
The ISO Green Upgrades endorsement covers additional costs required to upgrade covered property after a loss to meet green standards developed by a recognized authority, including, but not limited to, LEED and ENERGY STAR. The insured may select green upgrades coverage for buildings, business personal property, related expenses, and business interruption. Personal property of others is not covered.
For each coverage selected, the insured must schedule a maximum coverage limit and an increased cost of loss percentage of 10%, 20%, 30%, 40%, or 50%. The insurer will pay the lesser of:
This calculation applies only to the amount paid for the upgrade, not the total cost that would be paid for the damaged property.
Construction professionals who incorporate sustainable practices in building projects have loss exposures that are not covered under standard builders risk policies. AAIS has developed two standardized forms to address these exposures.
The Green Building Coverage endorsement adds four additional coverages that apply when a covered loss occurs under the AAIS Builders Risk policy:
A separate limit of insurance for each additional coverage is scheduled in the endorsement. These coverage limits apply separately from other limits in the builder’s risk form.
Another green insurance form developed by AAIS is the Delay in Completion Coverage Part—Green Building form. This form, which is a variation of the standard delay in completion forms offered by AAIS, contains coverage extensions that apply when a construction delay must be extended to ensure that the project meets the level of certification incorporated into the project design. Covered expenses include loss of rental and net income, construction expenses, taxes, and interest.
If the insured has renewable energy-generating equipment and sells surplus power back to local Public utilities, the energy-generating income coverage extension covers any income loss that results if this equipment is inoperable after a covered loss.
Insureds who have invested in environmentally friendly products and systems, such as vegetative roofs, rainwater runoff collection systems, and on-site water treatment and reuse systems, may experience coverage disputes if these items are not specifically defined as covered property in standard commercial property policies. To ensure that coverage is available for these items, an insured may need to purchase excess or surplus lines coverage or separate endorsements.
Because green repairs or upgrades may take longer than traditional methods, they may increase the amount of loss under business income and extra expense coverages.
Specialized extra expense/business income coverage is available for insureds who generate their own geothermal, solar, or wind power and sell the surplus energy back to the local power utility. These policies cover income that is lost when a covered peril causes a power outage and additional expenses required to purchase electricity from another source. Fees charged by the utility for reconnection and inspection would also be covered.
The additional time that may be required to make green-related repairs and replacements can also affect coverage under equipment breakdown protection/boiler and machinery policies. Companies that use environmentally friendly equipment and mechanical systems may have a contractual agreement with the product manufacturer to ensure they receive quick delivery of replacement parts and equipment. This is particularly common with ENERGY STAR-certified equipment, which may be manufactured by companies that have small-scale production facilities and frequently have backlogs of orders. Equipment breakdown protection coverage may be amended so these additional costs are paid under the policy’s expediting expenses coverage.
Green insurance coverages are more common for commercial property lines than personal lines. At the time this course was written, neither ISO nor AAIS had developed standardized green upgrades coverage endorsements for their homeowners forms. However, several property-casualty insurers have developed their own forms to provide this coverage. At least one major insurer has upgraded its homeowner’s product line to cover home-based charging stations for electric cars.
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