Taking the LEED

More recently, in the June 2006 issue of the Harvard Business Review, in an article titled “Building the Green Way,” noted environmental and real estate consultant Charles Lockwood stated green buildings have financial advantages, including lower utility costs, greater employee productivity, less absenteeism and stronger attraction and retention of employees than standard buildings.

Lockwood went so far as to say owners of standard buildings will someday face massive obsolescence. Add to that widespread availability of green materials with increasingly lowered costs, and what you’ll find is that more companies are considering constructing or retrofitting their commercial buildings as green.

It seems that as time goes by, more and more people are realizing that green is good. But what risks are inherent in green construction—and how do companies go about insuring those risks?

Green coverage

“Fireman’s Fund Insurance has launched three new products for our commercially insured in the area of green building,” says Steve Bushnell, product director for Fireman’s Fund. “They address insureds who own buildings already certified as green; insureds who own traditional buildings and would like to start upgrading them to green; and specialized coverage, called ‘building commissioning coverage,’ of which green or traditional buildings can take advantage.”

The company’s first coverage is for buildings that have been certified as green by the USGBC or Green Building Initiatives, which check initiatives such as energy efficiency, water efficiency, management and operating philosophy.

“For these certified buildings, we’ve done a couple of things,” says Bushnell, who has been in the insurance business for 30 years. “First, we’ve redefined how we cover their buildings, their real property. We’ve done that because a lot of green buildings have special features, such as vegetated roofs with plants growing on them. That kind of exposure isn’t well covered by a typical property insurance policy. We’ve broadened our policy terms to cover the full value of all those plants that might be on a roof. We’ve broadened our policy to cover alternative energy systems that a building might have and more appropriately cover them. These could be solar arrays, wind turbines, geothermal or biomass power sources. We’ll cover those for physical damage but also for business income.”

By that, Bushnell means many buildings with alternative energy systems sell power back to the power grid when they have excess power. If there’s a loss and the systems don’t work, the companies would have to buy more power from the grid to make up for the lack of their own generation capacity.

“We’ll cover that additional cost,” explains Bushnell. “We’ll cover alternative water systems that these buildings may have. Green building, especially in the west, can have some elaborate water reuse facilities, where they’re using ground water or storm water run-off, or gray water coming off the building’s systems, and recycling that back into the non-potable water systems, into the HVAC coolers, into landscape irrigation or any number of uses. That means there are going to be underground pumps, holding tanks or cisterns, and we cover all of that in full. It really gives green building owners the right kind of coverage for their property.”

Because Fireman’s Fund recognizes these green buildings as a “superior risk,” meaning their loss potential is reduced, they offer a rate credit about 5 percent lower than a standard rate.

“[Green buildings] have a lot of elements that directly address the areas where we tend to pay our property losses on buildings, which are the electrical system, the heating and air-conditioning system and the plumbing system. These systems are better arranged, better engineered and better installed in green buildings.”

Building upgrade coverage

Fireman’s Fund recognizes that, while the potential for green buildings is huge, currently there aren’t that many green commercial structures.

“There are less than 500 [commercial green structures] online today,” says Bushnell. “There are many, many more under construction and in design. But if we’re really going to impact the market, we need something that provides the same coverage and risk management benefits to traditional buildings that want to become green. That’s what our upgrade coverage does. What we’ll do is, following a loss, instead of replacing with the kind of material the building had before the loss, we’ll replace with material that’s upgraded to green or green-like.

“For example, we’ll replace a roof with Energy Star-rated roofing materials that are much more energy-efficient. For lighting, we’ll use the most energy-efficient lighting fixtures on the market, complete with occupancy sensors for conference rooms and offices, daylight dimmers in the windows that turn down the lights and, as the sun comes in and moves over the building, the lights get brighter.”

In plumbing losses, a company would be encouraged to install low-flow appliances, water restriction devices and occupancy sensors in restrooms—even waterless urinals, if wanted.

Personal property would be replaced with Energy Star-rated electronic equipment. This could include computers, water coolers, photocopy machines or commercial heating and cooking equipment in restaurants and hotels.

“If we have a loss on the interior of a building, we’ll replace it with paint that doesn’t have the volatile organic compound [VOC], so it doesn’t smell or make people ill; carpeting that’s green-certified; and office furniture that doesn’t off-gas formaldehyde. We’re going to be doing things that improve the indoor air quality of the building and make people healthier. If the building has a total loss [such as a catastrophic fire], we’ll rebuild as a green-certified building.

“We’re very excited and think we’re going to sell a lot of this form. The additional price will be modest. We want to increase the limit of insurance a little more than we normally have to reconstruct a building. We expect that most building owners are going to be very tuned in to the value proposition of what can happen when you have a building that’s going to use less energy, less water and present a better indoor environment to tenants.”

Commissioning new and existing buildings

Fireman’s Fund will commission engineers to inspect systems, such as HVAC, to ensure they’re running properly and are energy-efficient.

“Commissioning involves a professional engineer who’s concerned with the installation of the building systems,” says Bushnell. “That’s primarily the electrical, heating and air-conditioning systems, the plumbing systems and the life safety systems of the fire alarms, sprinkler systems and such. What they do is make sure these systems are installed per manufacturer’s and the architect’s specifications and to meet the insured’s needs and expectations for energy efficiency. A building that undergoes a commissioning process is much more energy- and water-efficient. They’re safer from an insurance company perspective because we have more confidence that the systems that lead to the losses that we pay have been arranged and installed properly.”

The California Commissioning Collaborative (CCC) is a nonprofit 501(c)3 organization dedicated to improving the performance of California buildings and their systems. It’s made up of government, utility, building services organizations and other professionals. The CCC develops programs, tools, techniques and a service delivery infrastructure to encourage the use of the building commissioning process in new and existing buildings.

“Commissioning is a growing industry,” says Phil Welker, executive director for CCC. “It’s a quality assurance process for the design and construction of new buildings, along with retro-commissioning for existing buildings that have never been commissioned and recommissioning for buildings that were commissioned when new and have to be kept up to speed.”

Retro-commissioning is defined as a systematic process for improving an existing building’s performance by identifying and implementing relatively low cost operational and maintenance improvements, helping to ensure that the building’s performance meets owner expectations.

“In an existing building project, the owner’s needs must be specified so engineers and operators know what criteria to use to correctly analyze, improve and operate the building,” says Welker. “The commissioning process should result in a building that functions correctly and has documentation and training to help the staff continue to operate correctly over time.”

Welker explains the importance of commissioning. “In the United States, the electric utilities are interested in commissioning because they’re trying to improve commercial building efficiency. They want buildings to work better and be more efficient,” says Welker. “Buildings, including residential buildings, use about 70 percent of the electrical energy in the United States, and one-third of a commercial building’s operating costs are energy-related.”

How does this relate to green building? “From our perspective, it’s not ‘green’ unless its systems ‘work,’” says Welker. “There are a whole lot of ways to ‘green’ a building, and a common way of thinking is about building materials, interior fixtures, paints and so on. But from an operational point of view, a building constructed out of renewable or sustainable materials isn’t entirely green unless the mechanical and operational systems are running efficiently.”

Fireman’s Fund goes green

Fireman’s Fund doesn’t own its headquarters in Novato, but it strives to be green nonetheless.
“We’ve been recognized by Marin County as a green firm because of our recycling,” says Bushnell.

“We’ve also installed very energy-efficient lights and occupancy sensors in conference rooms to shut the lights off if no one’s in the room. We’ve recently gone through a major renovation of our plumbing to install sensors on all the plumbing devices in the building. We’re making strides to become energy-efficient and greener. We’re owned by Allianz of Germany, and it has a huge global commitment, spending hundreds of millions of dollars to green the company. One of the big issues of climate change is to reduce carbon emissions. Allianz has talked about committing to a 20 percent reduction in carbon emissions by 2012, which is a significant number.”

Why is this the right time to insure green? “We began looking at it a couple of years ago. In the commercial insurance business, there’s two ways to compete. You can either sell your product as a commodity, at a low price with nothing special in terms of coverage or risk management capabilities, or you can sell a differentiated product. We’ve made a commitment to sell a differentiated product. We develop extensive knowledge about the industries we insure. I’ve done a lot of research in the real estate industry. While I was doing that research, it became very apparent that green is a developing movement. There’s a lot of reasons for it, but there’s such a very profound value proposition that building owners look at.

“In 2001, the Environmental Protection Agency released a study that showed, if building owners can reduce their energy consumption by 30 percent, they’ll improve their net operating income and the asset value by 5 percent. We know building owners look at their cash flow and the value of their building, and that’s how they make their money. A 5 percent increase in the net operating income is huge for these guys. We’re looking at this as a way to do a couple of things. We can give our current customers better coverage so they’re likely to stay with us longer, and we’re going to attract new customers because no other insurance company is offering this kind of coverage.”

Bushnell says he derives personal satisfaction from his work with green building. “As we sell more and help more buildings become more energy-efficient, we’re going to have a positive impact on the environment in terms of using less energy. This means less carbon going into the atmosphere and using less water, which means less strain on the infrastructure of the water supply that we have. We think this operates on so many different levels. It will benefit the insureds, it will benefit our Fireman’s Fund business plans because we’ll be writing more business policies—probably better accounts and safer businesses because of the properties of green buildings—and we’re going to be benefiting the environment. It helps everybody. To have the chance to do something that benefits our company, our insureds and the environment and creates a better world for my kids to live in is a powerful thing for me. I get excited about it.”