Increased interest in creating more energy efficient, resilient buildings is expected to fuel growth in the green construction industry, particularly as the government looks to spur investment in these projects through new incentives.
But insurance specialists in the space say supply chain disruptions and a lack of qualified labor, as well as the unknown exposures of newer construction materials, could limit coverage capacity, as well as hinder or delay projects.
“Current shortage of materials and skilled labor add to long-term challenges around new design, materials and building methods driven by sustainability and net zero strategies,” Allianz Global Corporate & Specialty said in its recent “Managing the New Age of Construction Risk” report.
From vegetative roofs to mass timber buildings to advanced solar panel technology, the green building space is evolving rapidly. While the green building concept itself isn’t new, said Alicia Pavelko, head of Construction Innovation and Sustainability at Zurich North America, new technology, materials and construction methods bring unforeseen risks.
“The vast majority of the new ‘sustainable’ or ‘green energy’ production plants being built are utilizing new and emerging technology. The underwriters and carriers do not have the luxury of years of rigorous testing and use to see how the product performs and what delineates a good versus a bad risk,” she said.
As such, insurers are taking a more conservative approach to deploying capacity in this space, Pavelko said, and are “being prescriptive with the use of amendatory endorsements to protect themselves from unanticipated catastrophic exposure.”
Blanca Berruguete, Global Industry Solutions director for Construction at AGCS, said green buildings are tailormade compared with those using conventional construction where everything has been done the same way for years and the risks are known.
AGCS sees green construction as the way forward and is committed to the space in terms of coverage and capacity, Berruguete said. However, brokers are still struggling with large risks that require multiple carriers to fulfill the needed capacity.
“Not every company can deploy capacity for complex risks, where the material is unknown or where claims are massive,” she said. “Capacity in this insurance market is very hard to find these days.”
Business interruptions caused by material damage have led to many costly and complex claims in green building construction, Berruguete said.
These claims create two issues for carriers — the expense of replacing the damaged material and the amount of time it takes to replace that material, especially given current supply chain issues, she noted.
“The insurance company pays when your activity is stopped and sometimes that cover is far more expensive than the material damage itself because you have had to stop work at your site,” she said.
Fines imposed by government regulators can also increase the cost of these claims.
That’s why it’s critical for insurers to look at the entire lifecycle of a project and understand how a green building project may differ from one using traditional and proven means and methods, said Pavelko, adding, “the details matter.”
David Laks, vice president/Eastern Canada manager for Hub International’s Risk Services Division, said carriers are scrutinizing all construction projects more closely, not just green building. But he does see underwriters becoming more comfortable with certain types of green building projects that at one time were very hard to insure, such as vegetative or “green” roofs. These are designed to reduce a building’s energy consumption, catch stormwater run-off and provide noise reduction, according to Hub.
Carrier appetites for green building projects are generally dependent on the situation, he said. “There’s a lot more scrutiny put on a retrofit than on a green installation on a new build … because there’s other aspects you have to look at,” Laks said.
From an exposure perspective, AGCS views certain new building materials or methods of construction it isn’t familiar with as “prototypes,” Berruguete said. Underwriters work closely with brokers and clients to learn about the new method of construction or material before they will be comfortable insuring the risk.
“There’s always this collusion when it comes to exposure and innovation,” she said. “The more information clients can share with us, the better we can understand what they’re doing.”
That partnership is critical to providing better policy terms and conditions, she said.
“Right now, challenges are everywhere for construction because it is booming,” she said. “What we need to know, as insurers, is more about the clients. The more you can tell me about what you’re doing to confront all these challenges, the more assurance I can have to deploy massive capacities. It’s a trust relationship.”
Federal, Local Regulations
While carriers are approaching the risk cautiously, government efforts to modernize building codes, as well as the recently passed $1 trillion infrastructure package, will be a boon to the sector, experts say.
“Investments in infrastructure and energy, along with rising populations in emerging markets, support a growth outlook. … A shift to electric transport will require investment in new plants, battery manufacturing facilities and charging infrastructure. Buildings not only will be expected to improve their carbon footprint, but will also require improved coastal and flood defenses, and sewage and drainage systems,” the AGCS report states.
The National Initiative to Advance Building Codes, introduced in June by the Biden Administration, is one such initiative that seeks to fuel additional investment in the adoption of sustainable building materials and resources.
The administration said it hopes to incentivize communities to adopt the latest building codes developed by the International Code Council (ICC) and other organizations. The newer codes are designed to encourage the building of more energy efficient and resilient structures.
Green building insurance specialists say they believe the overall impact of this initiative will be positive for the green construction sector, and society in general.
“Many project owners and contractors simply ‘build to code’ without putting the time and resources into truly understanding the lifecycle of a building and how to optimize the building’s resilience and performance, not only today, but well into the future,” said Zurich’s Pavelko. “The new code will begin to standardize sustainability and resiliency in structures that otherwise would continue to be built by traditional means.”
As new regulations and energy efficient requirements become more prevalent, the industry must work together to come up with solutions that benefit development and adaptation of green building projects, Pavelko said.
Zurich currently offers up to $50 million in capacity on qualified mass timber projects, a new type of wood that is believed to be more sustainable and a low-carbon alternative to steel, and is making investments in alternative energy, Pavelko said.
The carrier is “actively refining our strategy to provide the significant capacity and broad array of coverage amendments to support the exposure.
“We all have a vested and shared commitment to the health of our climate and economy. Brokers, insurers, manufacturers, suppliers and construction companies must work together to properly identify, quantify and appropriately transfer these new and emerging risks,” Pavelko said.
Laks said as green building technology and regulations continue to evolve, the insurance market will have no choice but to adapt and grow. “By force, there is going to be more and more green building and there’s going to need to be more capacity for coverage,” he said. “[Carriers] are going to have to adjust and go for it. If they don’t, there’s going to be someone down the road that will jump in.”
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