As the green building movement gains momentum across the United States, owners and developers are incurring additional costs to meet regulatory requirements and are exposed to additional risks associated with the design, construction and operation of sustainable buildings.
Potential new risks for owners include:
- failure to meet legislated green building requirements;
- loss of tax credits or other incentives available for green buildings;
- higher construction costs;
- delays in construction schedules;
- legal action for buildings that fail to achieve cost savings or other promised benefits; and
- higher maintenance and operations costs.
Owners seek to make design professionals and contractors responsible for these risks by inserting performance standards, warranties and guarantees of certification in design and construction contracts, but architects and contractors are pushing back on these obligations, especially when insurance policies do not cover claims by owners and tenants.
The first report of a litigated green building claim stemmed from a Maryland condominium project that was expected to achieve LEED Silver certification. After completion, the general contractor filed a mechanic’s lien against the owner for unpaid construction costs. The owner counterclaimed for more than $1 million—including $635,000 in tax credits that were lost when the contractor failed to complete the building before a deadline in the state green building program. The counterclaim also alleged the contractor “…failed to construct an environmentally sound building in conformance with the LEED rating system.”
The project was built under the terms of an AIA 1997 contract form stipulating a design that complies with Silver certification. However, the contract did not allocate responsibility for obtaining the certification and did not mention the green building tax incentive. The case was settled out of court without resolving some important questions, and with no written report filed.
The issues raised in this case highlight a number of new risks associated with the development of green buildings. First, is the general contractor responsible for the lost tax credit due to the project not finishing on time (especially if it was not advised of the deadline)? Would the loss be covered by the general contractor’s insurance policies?
A claim of this nature would fall under the commercial general liability (CGL) and excess liability policies. The loss of a tax credit is not direct property damage, but would be categorized as a “consequential damage,” which is a damage not contemplated by the parties at the outset of the contractual relationship. Most construction contracts contain mutual waivers of claims for consequential damages, but even if they do not, CGL insurance policies exclude consequential damage claims.
In the Maryland case, the developer sought other damages for losses resulting from the failure of the building to meet promised performance standards—including specific warranties of energy efficiency, water conservation or greenhouse gas emissions—as well as the failure to achieve LEED Silver certification. These allegations do not constitute direct property damage, and therefore resulting losses may not be insured under the contractor’s general and excess liability policies.