Sustainable projects present a plethora of unique issues which must be addressed by an attorney prior to and during construction of the building in order to minimize the potential for future litigation.While design professionals carry insurance it is paramount to consider whether the insurance carried by the design professional is adequate in light of the sustainable nature of this project. Sustainable design is different from the traditional design that many professionals such as engineers and architects engage in and is also in its infancy therefore, giving rise to a greater probability that there could be problems inherent in the design for which the owner may wish to sue the design professional. Likewise, it is important to evaluate the warranty and guarantee language of the products and materials being utilized in the construction to ensure that green construction procedures and installation techniques do not void the warranty for a product. Closely related to the warranty and guarantee issue is the potential for intellectual property infringement or the need to protect intellectual property. Sustainable building is still in its infancy and new techniques and methods to achieve LEED credits are being still being developed. The owner, general contractor, and architect must be aware of the potential for intellectual property infringement by utilizing techniques pioneered by others as well as aware of the need to protect innovative strategies or methods that might be developed during the construction of their building. Clients need to be advised of the importance of contractually defining who is responsible for infringements of other’s rights as well as who will own the intellectual property rights to any techniques developed during this project. Sustainable buildings have both short term performance goals, such as obtaining certification as well as longer term performance goals such as reduced energy use or the use of energy from renewable resources. The performance goals of a sustainable building must be discussed with the client and if necessary contracts must be drafted to ensure these long term performance goals are met by tenants and other parties. It is important that the client realizes that in constructing a green building, obtaining LEED certification is just one small step and that without the proper education and operation guidelines and contracts in place the true energy savings will not be achieved. The owner must also consider whether traditional insurance will be adequate to compensate them and permit them to rebuild to LEED standards in the case of a loss, or whether they should obtain an insurance policy which specifically addresses the sustainable nature of the building and provides adequate funds to rebuild a LEED building in the event of a loss.
Today it is my great pleasure to present a guest post by Mark Rabkin of Althans Insurance Agency. Mark can be found on twitter @MeRabkin and is a very valuable resource to all involved in the construction world when it comes to insurance.
When a large, publicly funded construction project is sent out to bid, each contractor that is vying for a piece of the pie must submit a bid and performance bond in conjunction with their application. The bid and performance bond is underwritten by a surety company and provides a financial guarantee to the owner of the project that the contractor will comply with the terms of the construction contract. Should a contractor fail to perform, the surety company will either pay the current contractor to complete the project or hire another contractor to either fix the errors caused by the first or complete the job if the original contractor becomes insolvent. The surety company will then pursue the original contractor to collect on the defaulted amount.
As indicated above, a surety bond is meant to guarantee the performance of a contractor as per the construction contract. The surety underwriters evaluate a “risk” based on their financial position, overall industry expertise including managerial experience and familiarity with the construction methods upon which they are bidding. It is important to note that the most critical component of a final bond is the actual contract that is entered into between the various parties involved. Should the contract contain language that is onerous to either party, a surety will either refuse to bond the contract or seek to have that specific language excluded or stricken from the contract. For example, extended warranty periods or usurious liquidated damages clauses are significant red flags to surety underwriters and legal departments.
Building projects that are registered for certification by an independent third party such as the US Green Building Council are rapidly growing in number. Many federal, state and municipal entities now either require or encourage new construction, major renovation or leased space to demonstrate some level of environmental stewardship throughout the construction process or energy efficiency within the subsequent operation of the facility. There has been much debate within risk management circles regarding the possibility that a project could fail to either achieve certification or attain a specified level of achievement. These situations could result in lost revenue opportunities for the loss of tenants, lost tax incentives, utility expenses higher than promised or any other failure to achieve an expected benefit of the proposed project. To protect themselves, project owners will look to transfer the risk to the design team or construction contractors and subcontractors. It should be noted that most if not all sureties will refuse to bond a contract that contains language that guarantees certification by a third party entity such as the US GBC or seeks to guarantee a specific level of energy efficiency.
Traditional general liability insurance defends and protects contractors for bodily injuries or property damage caused by the insured party’s negligence. It does not provide for defense or indemnification for claims due to breach of contract. Should a third party claim financial injury due to the negligence of a contractor, professional liability coverage (also called errors and omissions) could respond. This coverage is available in the market for construction companies and is increasingly necessary as more contractors are obtaining accreditation as “specialists” upon successfully earning their LEED-AP designations.
Mark E. Rabkin is a triple bottom line risk manager for Althans Insurance Agency in Cleveland, Ohio. He counsels clients on the risks faced everyday that impact his client’s financial, social and environmental exposures.