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By Stephen Bushnell, CPCU, ARM and Mark Oldham, CSP
Published in the November 2006 issue of Today’s Facility Manager
Facility managers are generally cognizant of the benefits of going green, but few are aware of risks specific to the sustainable building industry—many of which may not be covered by a conventional insurance policy. Once these risks are identified, managers can take the necessary steps to mitigate risk, ensure they’re properly insured, and truly optimize a company’s green approach.
Managers realize the direct benefits of converting a building to green, including reduced energy and water use, increased employee productivity, lower employee turnover and absenteeism, reduced costs for employee health insurance premiums, and fewer Workers’ Compensation claims.
Another important benefit is overall company reputation: firms that implement green practices are generally viewed in a more favorable light. On a larger scale, with global warming causing greater and more frequent hazardous weather conditions, it is in everyone’s best interest to help reduce global warming by encouraging green practices and construction. It’s the right thing to do.
With new building concepts developing, it is important to re-evaluate current risk management systems. Enterprise risk management looks at the potential for benefits, in addition to loss, when evaluating and controlling risk across an enterprise.
Enterprise risk management is a good way for facility managers to evaluate the larger picture of green risk vs. green gain across the establishment. The same basic control measures are used as in traditional risk management systems, but outcomes can include gain as well as loss.
Green building initiatives apply well to enterprise risk management. There are the risk factors associated with green initiatives, such as potentially increasing cost of construction, adding technical complexity of systems, ensuring replacement parts and systems are compatible with existing systems, and taking on the basic risk of new technologies.
For example, consider the risk/loss factors associated with a grass roof. Traditional risk management would focus on such things as potential for roof leaks and mold, roots coming through the T-8 fluorescent lamps, and deer grazing atop a client presentation meeting. Enterprise risk management would consider these things, but also load into the risk/benefit equation the lowered utility costs, diminished environmental footprint of the building, and increased tenant satisfaction.
Where traditional risk management stops at costs, enterprise risk management picks up and goes to benefits and payouts. Limiting risk management to the risk of loss is limiting the potential benefits of creative, intelligent risk taking behaviors, such as going green.
Why would insurance companies be interested in green buildings? Through enterprise risk management, insurers may recognize that going green exposes some risks while mitigating others that are potentially far more significant.
For instance, green buildings may generally pose less exposure to loss. They feature new, state of the art electrical, plumbing, and roof systems, all of which are less prone to insured loss.
Mold, which has become an increasing problem, is less of an issue in green buildings because of reduced water use and improved ventilation. Green interior components, cleaning chemicals, and management practices can have a decided positive impact on improving indoor air quality, a significant component of many General Liability and Workers’ Compensation losses.
Despite the benefits of green buildings, there are some distinct risks that must be insured. A singular challenge to managing a green operation may be encountered if facilities experience a structural property loss (such as a big fire). Will the insurance policy’s response to the loss satisfy risk management and green objectives?
The right property insurance should cover the loss to property, the resulting loss of income, enable business continuity, and help manage unexpected outcomes of the loss (crisis management). Addressing these issues after the loss is too late.
Every part of a business must be insured, from HVAC to maintenance to employee practices. If business practices are going green, it becomes imperative for insurance coverage to account for—and to cover—these new sets of risks.
As a claim is adjusted, the insurance company wants to return the organization—as close as possible—to its pre-loss condition. Most insurance policies won’t pay for property upgrades. However, if the policy has specific green upgrade coverage, then the organization may have the coverage for replacing sustainable design components.
Consider the following coverages that might be consistent with green risk management objectives:
- Are current limits of insurance adequate? Green materials and components can be more expensive than their traditional counterparts. If the company suffers a loss, will the policy limits provide enough to bring operations back to what they were?
- Is Replacement Cost coverage or Actual Cash Value coverage being purchased? Replacement Cost pays to replace lost or damaged property with “like kind and quality serving the same purpose.” Actual Cash Value reduces the valuation by considering depreciation.
- What “perils” are covered? Is coverage broad enough to meet predetermined green risk management objectives?
- Does the insurance company offer any green upgrade coverage? Some companies may allow the insured to replace lost or damaged standard property with green alternatives.
- Is there coverage for HVAC re-commissioning expense? If an HVAC system is damaged, will the replacement components perform as intended? They may not, without re-commissioning the balance. Indoor air quality could be degraded and energy costs may increase.
- Does the insurance company offer Crisis Management Coverage to assist with public relations needs following the loss? If an organization is branding itself as green and something goes wrong that negatively affects the environment, it can be critical to have professional PR advice to assist in the maintenance of brand and reputation.
Once a facility turns green, it is up to facility managers to work hard to keep it that way. Difficult decisions regarding the building, materials in the workplace, cleaning chemicals and techniques, waste disposal, energy and water use, and maintenance all impact a risk management program as well as test an operation’s commitment to a green management philosophy. The right insurance may help take facilities one step closer in the quest to achieve—and stay—green.
Bushnell is a product director at Fireman’s Fund Insurance Company in Novato, CA, where he is responsible for development of innovative new products (including green products), services, and information for commercial real estate customers. Oldham is loss control director with Fireman’s Fund. He has been in the loss control profession for 22 years and is active in the American Society of Safety Engineers (ASSE), where he has served as education chair in the Chesapeake Chapter and newsletter chair and vice-president of the Atlanta Chapter.