In Part IV of The Basics of Commercial Lines Rating series, we’ll explore what it takes to “go green” from a rating and underwriting perspective.
If there’s a silver lining to property damage, it’s the chance to go green. Green construction is a hot trend in the industry, and it’s popular with policyholders who need to rebuild. While green construction offers a number of environmental benefits, it also requires pre-planning from an insurance standpoint.
When a builder talks about “going green,” they’re not talking about the paint job. In construction, “green” can refer to both the structure and its operation. Green buildings are characterized by either enhanced energy efficiency or by the use of designated green standards in design, construction, manufacture, or operation. These standards, which are set by outside organizations, require the use of environmentally preferable and sustainable materials, products or methods.
Organizations that set green standards are known as, unsurprisingly, green standards-setters. Some of the big ones include:
In green construction or re-builds, there are three coverage areas to understand: Green Upgrade Coverage, Related Expenses, and Business Interruption. Let’s look at each of these in detail.
Green construction is almost always more expensive than standard construction. Green upgrade coverage takes into account the added cost of using energy-efficient, environmentally preferred materials as recognized by a green standards-setter. It modifies existing Replacement Cost coverage to provide an additional limit of insurance to address loss settlement for damaged property.
Be aware that green upgrade coverage:
Green upgrades also incur extra expenses, and an additional limit of insurance is required to cover them. These related expenses include:
All businesses will experience some degree of disruption during reconstruction. But because a green upgrade typically takes longer to complete, it helps to add a Business Interruption Option. This option extends the period of restoration on an existing Business Income Coverage or Policy. A few specifics to note:
Now that we’ve outlined the basics, let’s look at green coverage in action. The example below shows how to calculate a rate with these options. To make your calculations, you’ll need to refer to the tables in the Commercial Lines Manual (CLM) state rules, Divisions Five and Ten, to find applicable factors.
(Excerpt from Forms CP 04 02 and BP 14 75, Increased Cost of Loss and Related Expenses for Green Upgrades).
|
|
Green Upgrades |
|
|
Number of Days For Extended Period Of Restoration |
|
Premises Number |
Building Number |
Building |
Your Business Personal Property |
Increased Cost of Loss (%) |
Related Expenses |
|
1 |
1 |
$400,000 |
|
50% |
$10,000 |
60 |
Underlying building limit of insurance = $1,000,000
Rate for illustration purposes = .065
Maximum amount
Repeat for each cause of loss per Division Five Fire and Allied Lines.
Related Expenses calculation:
Number of Day’s Extension |
Factor |
|
Number of Day’s Extension |
Factor |
60 |
1.02 |
|
60 |
0.002 |
90 |
1.03 |
|
90 |
0.004 |
120 |
1.04 |
|
120 |
0.005 |
180 |
1.05 |
|
180 |
0.007 |
Need more information about rating green upgrades? Start by referring to Division Five and Ten of the Commercial Lines Manual.