Studies show that green construction will be a significant driver of economic activity in the years ahead. Inevitably, property insurers are going to see more claims involving green construction projects.

Trends in construction suggest that the building industry is going green. Property owners and developers all over the world are embracing environmentally efficient materials and techniques that are likely to become mainstays of commercial and residential construction. Studies show that green construction also will be a significant driver of economic activity in the years ahead. Inevitably, property insurers are going to see more claims involving green construction projects.

The use of sustainable materials and design with the environment in mind, such as Leadership in Energy and Environmental Design (LEED) certification, is attractive for a variety of reasons. In addition to long-term cost savings, property owners may also reap tax incentives where local governments want to promote green projects. The Green Building Council and Booz Allen Hamilton conducted a study in 2015 that suggests green construction will contribute 1.1 million jobs annually by 2018 and account for $303.4 billion of GDP. According to the U.S. Green Building Council, LEED projects have been constructed in 164 countries and are being certified at a rate of 2.2 million square feet each day. In the first quarter of 2017, the USGBC certified 938 commercial LEED projects in the United States, totaling more than 114 million square feet; the next largest number of LEED certifications is in Canada, at 104 projects and about 14 million square feet.

Property insurers have some special considerations when looking at green projects. For starters, non-traditional materials used in green construction are not necessarily less expensive to manufacture or acquire. At first glance, green project risks appear to be mostly in the domain of Builders Risk insurance, which provides property and liability coverage during construction. Looking a little deeper, it’s clear that first-party property insurance will come into play when a property owner faces physical damage to a green building. Are insurers prepared for greater cost and complexity in green property claims?

Questions insurers should be thinking about include:

What are the costs to restore a green building to compliance? LEED requires extensive testing, which must be repeated to maintain certification after remodeling or repair. Insurers need to look at the costs to restore a property to a given certification level, including for example the cost of water recapture and replacing solar panels. This is likely to make claims both more expensive and time-consuming when a building incurs damage.

How should underwriters and claims executives value green elements? If conventional construction is valued at $X per square foot, insurers will need to determine how to assess the value of green materials. It will not be as simple as two times $X or $X plus $Y, given the different levels of LEED certification and variation in materials used. If insurance carriers aren’t thinking through these things, they risk undervaluing the assets and potentially inviting claim disputes.

What are the trends in sustainable materials, by type and cost? Some very interesting innovations are occurring in green building. To cite just one example, more architects are designing structures using cross-laminated timber. This material, known as CLT, refers to solid wood panels made of layers aligned in alternating directions and held together with structural adhesives. They are lightweight, strong enough to support high-rise structures, can be made in large panels, emit minimal carbon and are manufactured without needing to harvest old-growth forests. Although CLT is wood, its burn characteristics more closely resemble that of concrete. CLT does not ignite easily. How should the insurance industry classify it? More analysis is needed on CLT and other innovative materials that the green building industry is adopting.

Greater energy efficiency, reduced resource consumption and lower environmental impact are all important goals in sustainable development. Property insurers have a crucial role to play in supporting sustainability and community resilience. Underwriters should give careful consideration to new building materials, techniques and certifications in policy wordings. Doing so can enhance coverage offerings, reduce the likelihood of disputes and avoid the unintended consequences of assuming too much risk in a growing segment of the construction industry.