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12.06.2010 Casualty and Insurance Considerations in the Context of Green Leases
12.06.2010
Carefully drafted casualty and insurance provisions in green leases can help protect the significant investments that property owners and tenants make when they decide to “go green.” In order for landlords and tenants to be protected in the unfortunate event of a casualty, they need to be aware of the unique casualty and insurance issues that affect green buildings.

When negotiating and entering into a lease for a green building or premises, the landlord and tenant need to pay close attention to how the casualty provisions of the lease are structured. The parties need to address factors such as the time period for rebuilding after a casualty event, the rebuilding costs involved, and whether the party responsible for reconstruction will be obligated to restore the property to a specific green standard (i.e. LEED, Green Globes, etc.).

Tenants occupying green buildings need to understand that the time period for reconstructing a green building after a casualty event will often exceed restoration times for conventional buildings. Aside from the extra time required to recertify a building to a certain green standard, green building materials may not always be readily available and customized or upgraded building system equipment can take longer to replace.

Casualty provisions in a green lease should also clearly address who is responsible for the costs of recertifying a building, especially when the casualty is not the fault of the tenant. From a tenant’s perspective, the landlord should carry insurance that is adequate to cover the costs of restoring the building to a particular green certification standard. If leasing space in a green building is an integral part of a tenant’s identity, the tenant will want its lease to require the landlord to rebuild the building to at least the green certification existing at the time of the casualty. If the landlord fails to meet this obligation, the tenant should attempt to include remedies in the lease, such as rent abatement or lease termination.

For their part, landlords need to consider whether or not they will agree to be obligated to rebuild in accordance with a specific green certification standard. Such standards will be subject to change over time, meaning the requirements for obtaining the building’s original certification may become more difficult to satisfy in the future. In addition, there are no guaranties that a building, once rebuilt, will ultimately receive the green certification that the landlord intended or promised to deliver in the casualty provisions of the lease. In order to avoid being required to rebuild to a certain green certification standard, the landlord should try to limit its restoration obligations to using “commercially reasonable efforts” to restore the building to its original green certification standard.

In the event of a casualty, property owners who have invested their time, money and other resources into going green should make it a priority to protect their investments with appropriate insurance coverage. Over the past few years, an increasing number of insurance providers have started offering innovative and customized insurance policies and endorsements to cover potential losses in green buildings.

When considering which insurers might offer the appropriate coverages, it is important to consider that not all insurance companies address risk assessment for green buildings the same way. Some insurers are of the opinion that green buildings will provide less exposure to loss. They believe that new state-of-the-art equipment being used for building systems, coupled with the thorough review of HVAC, electrical, plumbing and roofing systems performed during the LEED certification process, will ultimately lead to fewer incidents of loss. As a result, these insurers have a tendency to offer discounted pricing and reduce their premiums accordingly for building owners who are committed to going green.

Other insurers, due to a lack of historical precedent of risk and loss data, have expressed concern over calculating green building replacement values, as well as accounting for the increase in time and cost that can be associated with constructing green certified buildings. Green buildings and sustainability concepts are new frontiers for many insurance companies, which results in uncertainty when it comes to sophisticated green building designs and products. Until the day that green design ideas become mainstream in the construction industry, some insurers may tend to view new and cutting edge technology with a skeptical (and cautious) eye.

Once a building owner has decided that a green building insurance policy is right for its property, there are a number of coverage factors that should be considered. An insurance policy for a green building should provide coverage for recertification costs that may be incurred if a building sustains substantial damage. The recertification coverage should specifically address the applicable level of green certification in question and should account for costs involved with engaging accredited green consultants, architects and engineers to assist in green design and reconstruction. Debris removal and recycling are also crucial elements of green building insurance policies. The policy should not only cover debris removal after a casualty, but should include specific coverage for the extra expenses of separating debris and having it sent to certified building material recycling facilities (as opposed to being deposited at a landfill). In addition, having an adequate business interruption insurance component in a green building policy can provide protection against longer reconstruction timelines and for recovering lost income from rent and onsite energy production that is sold back to local utility companies.

The specific green coverages discussed above can be accompanied by premiums that are higher than those associated with casualty insurance policies for non-green buildings. If a landlord is passing its insurance costs through to a tenant as part of building operating expenses, the lease should make it clear that the tenant is responsible for paying for the special green-related insurance coverages required to restore and re-certify the building. Tenants also need to consider their own insurance policies for tenant improvements and personal property. If they are committed to being green, tenants should carry insurance on their improvements that covers restoration costs for sustainable features and replacement costs for upgraded energy efficient equipment and trade fixtures.

Michael P. Nicholson is an associate in Williams Mullen’s Real Estate Practice. Please contact Mr. Nicholson at 804.420.6434 or mnicholson@williamsmullen.com with any questions about this article.

Williams Mullen Financial Services & Real Estate Quarterly Newsletter. Copyright 2010. Williams Mullen.
Editorial inquiries should be directed to John M. Mercer, 804.420.6443, or Matthew E. Cheek, 804.420.6923, . The Williams Mullen Financial Services & Real Estate Quarterly Newsletter is provided as an educational service and is not meant to be and should not be construed as legal advice. Readers with particular needs on specific issues should retain the services of competent counsel.