One impact of climate change is being felt as natural disasters of increasing frequency and strength are causing extensive damage to homes and businesses. The four hurricanes of 2005—Katrina, Rita, Wilma and Dennis—caused more than $57 billion in insured losses from 3.3 million claims—the largest losses on record for the insurance industry. This sort of loss quickly makes insurers reevaluate the market and its potential risks. One way the insurance industry is dealing with the increased risk due to climate change is to leave the market.
Since 2004, one million policies have been canceled in the Mid-Atlantic and New England area, including 50,000 in the New York Metropolitan region. While coverage can be found with smaller insurers, it is usually resulting in higher premiums, as shown by a 56 percent increase in home insurance premiums between 1999 and 2005. While this is a reaction to how the unpredictability of exposure to loss from climate change is impacting housing, it is becoming increasingly clear that housing significantly impacts climate change as well. In New York City, 80 percent of carbon emissions come from the energy consumption of buildings. The recent proliferation of green buildings, specifically through the U.S. Green Building Council’s (USGBC’s) Leadership in Energy and Design (LEED) program, is an important way to address this massive energy use—and insurers are starting to pay attention.
New Risks and Opportunities
The expansion of green building has created new risks and opportunities for the insurance industry. Gaps are being exposed in current policies, as the specifics of green building must be addressed.
An emerging risk of green building is the liability of design professionals if a LEED project does not reach the proposed level of certification. This potential liability currently isn’t covered under the standard language of errors and omissions insurance, which excludes guarantees. Little precedence means there is a lack of data available on this issue and the associated risks, so it is unlikely that insurers will move quickly to provide a professional liability insurance that deals with this unique issue of green building. Without this safeguard, designers could be deterred from pursuing the most ambitious environmental benchmarks possible.
Professional liability is an example of how the insurance industry as a whole has yet to fully grasp the changing demands of green building and respond with appropriate insurance products. A small number of insurers are realizing the new demands of green building and are placing themselves at the vanguard of the insurance industry. They are responding to the growing needs and demands of policyholders, while also understanding the risk reduction and economic value associated with green building. Their new products are helping to expand the company’s writings and premiums and attract new customers.