Defining undefined loss exposure in 'green' construction

Reprinted by permission from Claims Journal

A green heating system that doesn’t heat. LEED-certified units that meet fewer than half the requirements for certification. Clients suing construction firms because of lost tax breaks from promised green buildings. Welcome to “green” construction. Even as the green construction movement is taking wing, legal experts are warning of the dangerous territory ahead.

Some such territory includes lawsuits like this: A builder is sued by the client because the client lost a tax break for Leadership in Energy and Environmental Design (LEED) certification, because the building ultimately did not meet the LEED level asked for by the client. Other lawsuits include a luxury condominium complex in Battery Park City, N.Y., where its owners are suing developers for $1.5 million for fraud and breach of contract, stating the building isn’t as green as advertised.

Probably the most prominent lawsuit was one filed against the U.S. Green Building Council (USGBC) by Henry Gifford, owner of Gifford Fuel Savings. He claimed the organization committed fraud, created unfair competition, practiced deceptive trade practices and engaged in false advertising. The crux of the complaint was Gifford’s contention that green energy was not more efficient than regular energy options. The $100 million suit was dismissed because the court found that the plaintiffs in the class action suit did not show USGBC caused them any harm. Still, Gifford has managed to get the industry talking about what constitutes green and just what is bought when one purchases a LEED-certified property.

What seems to be the most telling statement by the ruling judge Leonard Sand spells out one of the primary issues with green construction: “Because there is no requirement that a builder hire LEED-accredited professionals to attain LEED certification, it is not plausible that each customer who opts for LEED certification is a customer lost to plaintiffs.”

The Uncertainty of ‘Green’

That speaks to the crux of the green problem. What makes a building green and who’s deciding it? That question still goes unanswered as courts and insurers alike struggle to wrap definitions around green construction. For a building to be certified as a LEED design, it must meet a checklist of requirements, and the point values assigned to each requirement determines the level of certification.

Aside from a LEED certification, the definition of “green” becomes a bit more dicey. According to the California Department of Resources Recycling and Recovery (CalRecycle), “A green building, also known as a sustainable building, is a structure that is designed, built, renovated, operated or reused in an ecological and resource-efficient manner. Green buildings are designed to meet certain objectives such as protecting occupant health; improving employee productivity; using energy, water and other resources more efficiently; and reducing the overall impact to the environment.” Just what those objectives are and what constitutes “resource-efficient” use has yet to be defined clearly.

Don’t look to the federal government to clarify things. The Environmental Protection Agency’s own definition of green building, presented in 2008, is “the practice of maximizing the efficiency with which buildings and their sites use resources – energy, water and materials – while minimizing building impacts on human health and the environment, throughout the complete building life cycle – from siting, design, and construction to operation, renovation and reuse.”

There’s a reason for being vague, and Stephen Del Percio thinks it’s a good thing. Del Percio, a construction and real estate attorney in New York who blogs regularly on green property issues, thinks the definition should match the needs of the owner and any regional circumstances. He explains: “In the desert Southwest, a green building could be one that doesn’t consume a lot of water.” He said LEED certification now comes in a regional credit system to address where the building sits and what those needs are.

Even who is ultimately deciding what the standard is has question marks surrounding it. Lawyers, in Stuart Farber’s view, are working out the details case by case and contract-by contract. Farber, CEO and chair of Preferred Concepts, an insurance services and program administration firm, said there’s plenty to work out. Including direct financial loss, zoning and ordinance noncompliance, lawsuits and legal entanglements are beginning to blossom.

“Many lenders, both mortgagees and in some cases leases, are requiring a targeted LEED rating,” Farber said. “If that is not met, where’s the breach? Where’s the damage? Who pays for it? And who’s responsible?”


Also, the owner of the green building is paying for green construction, Farber said, which comes at a higher price tag. Materials costs, construction techniques, industrial hygiene, and LEED architect/engineering help jack-up the costs quickly. All of these elements and more become relevant when upgrading or building within green standards.

How this affects insurance is still fleshing itself out. Insurers, he said, are writing endorsements and providing property insurance specific to the green construction exposures. While such coverage will be at a premium, that premium may be modestly higher. Farber has a client currently who will pay just 5 percent over a standard endorsement due to the size and level of green in the building.

Premiums aside, what constitutes loss seems to be the larger question. Farber gives the example of an expectation of a gold-standard building, but having a silver-standard property delivered. “Is the damage based on the loss of the gold, or is it limited to the costs of bringing that up to the gold standard?” he asked.

Separating what is a green-related loss and a traditional loss is a sticking point for many insurers. Jim Cooper, co-chair of the Policyholder Insurance Group at Gardere Wynne Sewell LLP, said insurers will often deny coverage for building defects or when something goes wrong that damages the building itself or the product installed. Cooper, who works with builders and contractors, said he hasn’t seen much case law just related to LEED or green projects.

The Million-Dollar Question

How do we determine damages? With few cases to turn to for precedent, experts think that answer is a long way from perfected. Cooper said he would examine a defect in this way: “Is that the product not working or the product damaging something?” The former is a product claim; the latter could be a green claim if “the failure to work properly diminishes the value of the building or causes the owner to evacuate the building for a significant amount of time.”

Cooper said many green property policies do cover loss of use and can cover diminution of value. What he sees as challenging is finding the property damage.

Del Percio sees the same problem. “If a building doesn’t earn certification, do you look at what the per square foot value of a LEED rating is versus a non-LEED? The real problem has been there hasn’t been a case where this kind of scenario has played out.”

Without clear parameters, insurance adjusters and the insurance industry are left to define damages on a case-by-case basis. Forget looking to claims history – according to Del Percio, there have been only very few claims to date under insurance policies. Most of those claims have related to advanced building systems used in green construction.

The challenge for adjusters and the insurance industry, he said, is to understand what those technologies are, how they work, and what their performance shortcomings have been. “Most of the issues that sustainable construction presents are within new technologies and advanced technologies that people may not have familiarity with at this point,” he added.Contracts, he believes, will be the ultimate deciding factor. “How [green] is defined is going to be in the contract between the owner and professional.” Read More.

What you need to know about proposed lien law changes

North Carolina Construction News has been keeping you apprised of the continuing effort to overhaul the state’s lien law. On May 22 Sen. Brunstetter filed Senate Bill 864. To some, the proposed revisions look minor. This is not the case. North Carolina’s lien law is a complex maze, and a word here, a definition there, can make a huge difference in whether and how lien rights are enforced.

Things got hot last summer in Raleigh for the North Carolina’s construction industry, with contractors, subcontractors and suppliers, title insurers and construction lawyers butting heads over proposed changes to the state’s lien law. Everyone agreed something needed to done, but no one could decide exactly what.

The N.C. Bar Association held a public hearing to find a solution to the problems with the law last revised in 1969. Stakeholders were also invited to express their concerns with the association’s drafting committee members. Several drafts were sent out to those who had attended the public meeting to obtain their thoughts and comments. Still many comments were at odds with those of others in the industry. For example, general contractors said they face a problem of “double payments” to subcontractors and suppliers.

The problem, the contractors say, arises when a first-tier subcontractor doesn’t pay its own suppliers and subcontractors. The general contractor can be liable to the second-tier and below subcontractors even if he made full payment to the first-tier subcontractor, which is where the double payments come in.

The subcontractors and suppliers, of course, had a different concern. They say recent bankruptcy decisions stripped them of many of their lien rights unless they served liens before the first-tier subcontractor filed bankruptcy. That is difficult, they say, because they don’t routinely want to serve liens unless there is a problem.

Title insurers, meanwhile, griped about what they call “hidden liens,” which occur when a building is finished near the closing date. The title insurer does its search, finds nothing encumbering the property and issues title insurance.

Meanwhile, a contractor who hasn’t been paid by the original owner has 120 days from the time he finishes the project to file a lien. Once he does, the new owner files a claim against the title insurer, which is obligated to make the title good.

There was another factor complicating the process of revising the law. Three bankruptcy rulings handed down by the Bankruptcy Court of the Eastern District of North Carolina clouded some of the rules the stakeholders were working under. The other was a legislature unwilling to dive headfirst into the issue without consensus from the industry. House Bill 489, introduced in March 2011, failed to gain traction.

Instead, the issue was assigned to a legislative study committee, which has scaled the provisions back. There’s no longer any provision, for example, on “hidden liens.”

The latest proposal does classify off-site non-commodity work as “improvement,” which means it qualifies for lien rights even if it is not delivered to the project site. It also provides standardized lien waivers, designed to eliminate confusion that arises from the language of existing forms. The changes that will go before the legislature this summer also increase sanctions for false statements and subject violators to discipline from their governing boards.

The changes also would require contractors on public projects to provide lower-tier subcontractors with a project statement that would give them the information necessary to provide pre-notice to the contractors. As long as the notice is timely, the subcontractor would be entitled to pursue its claim. But if the pre-notice is delayed, it would limit the subcontractor’s claim to the value of work done within 60 days of the claim.

Even though the proposal has been scaled back, some players still have misgivings about the changes, and passage is not assured when the full legislature takes the revisions up in the short session of the General Assembly this summer.

John M. Sperati, a construction lawyer with Smith Debnam Law in Raleigh, says his clients are divided. “It’s a knife that cuts both ways,” Sperati says. “For general contractors and owners, some of those things are good. But for subcontractors, it creates burdens on them. We pushed to take out those burdens. North Carolinais one of a handful of states that have constitutions protections in lien laws. Some of the proposed changes would have removed the constitutional protections.”

Melissa Dewey Brumback, a litigator with Ragsdale Liggett PLLC in Raleigh who focuses on construction, also remains leery of further versions to the lien law. “My concern with the various proposals to modify the current lien statute relate to my representation of design professionals; that is, architects and engineers,” Brumback says. ”Currently, the design professionals are usually in the best position with regard to lien rights, as they are usually the first and often the last to furnish services to improve a property. This enables them to work well with their owner-client regardless of the owner’s temporary financial issues. Because the lien ‘relates back’ to the date of first service, the designer does not have to press for late payments from the owner quite as quickly as subcontractor or supplier needs to do. They can work with an owner experiencing temporary financial issues without risking their own lien priority.”

Some of the proposed revisions to the Lien Law have attempted to change the current lien law priority in an effort to reduce the potential “hidden lien” issues for title insurance companies. While the proposal on the table right now does not significantly alter anything for architects and engineers, I remain concerned that future efforts to deal with the “hidden lien” issue may revive proposals that put the design team’s early lien rights at risk,” Brumback says.

Sperati recognizes that his clients have competing needs, which means there likely won’t ever be agreement on changing the law. “The best compromises are ones that nobody is really happy with. I’m still concerned about the changes for subcontractors and suppliers, particularly the bond claim on state-owned projects. For the general contractors, those things are fantastic. But it could hurt the people providing labor and materials. For folks that are small suppliers, it puts a recordkeeping burden on them that may not justify the cost.”

He’s hopeful that a provision exempting everything under $10,000 will be approved as part of the eventual package. “If it went through as it is, I think everybody could live with it. But additional changes could hurt. If those provisions from last year sneak back in, my clients would be more unlikely to support it.”

Readers are welcome to visit www.ncconstructionnews.com for updates on the NC lien law revisions. A lot can change between now and the end of the legislative session.

Triad's unemployment rate falls to 9.1 percent

The Triad Business Journal reports the Triad region’s unemployment rate slipped to 9.1 percent in April from 9.6 percent in March, according to data released by the N.C. Department of Commerce. The region’s jobless rate was 10.2 percent in April of last year.

Unemployment dropped in all of the Triad’s metropolitan areas. Burlington’s 9 percent jobless rate fell by more than a percentage point from a month prior, while the Greensboro-High Point rate slipped to 9.3 percent from 9.8 percent in March. Winston-Salem’s unemployment dipped to 8.5 percent from 8.9 percent.

Statewide, unemployment rates fell in 93 counties, increased in three and held flat in four. The statewide unemployment rate is 9.4 percent. The jobless rate declined in 11 of the Triad’s 12 counties, but rose in Montgomery County. 

NC State University economist Mike Walden attempted to explained NC’s high unemployment rate in a recent issue of The Raleigh Telegram. ”Manufacturing is still much more important to North Carolina’s economy than it is for the average state. Almost 22 percent of our state’s economy (measured by the output of businesses) is based on manufacturing, compared to the national average of 13 percent. So clearly, one reason our job market took a big hit during the recession is because of what the downturn did to the manufacturing sector,” Walden said.

“It also appears North Carolina has imported some unemployment,” said Walden. Between 2008 and 2010, the net movement of households to North Carolina from other states was five times higher than the average for all states. Some of these new residents likely did not find jobs and therefore boosted our unemployment rolls.

So how much difference did these two factors — our heavier dependence on manufacturing and our greater attraction of moving households – make to the state’s jobless rate? Walden estimates North Carolina’s peak rate (11.4 percent) would have been 9.1 percent if these two factors had been the same as the average for all states.

“Does this mean manufacturing and newly arrived households are negatives for North Carolina,” Walden asked. “Certainly not,” he said, “because as economic growth returns they can fuel a faster recovery; indeed, we saw a stronger North Carolina economic rebound in the mid-2000s. But these factors can have downsides on the backside of the business cycle.” Read More.

NC gas tax cap update

Earlier this month, in an unusual agreement between the two often feuding sides, Democratic Gov. Bev Perdue and Republican legislators agreed to cap the gas tax at 37.5 cents.

The Carolinas AGC released this statement: “While we would prefer no reduction or cap, the agreement is that the gas tax would be capped for one year at the rate of 37.5 cents with the understanding that the NC General Assembly will look at the entire transportation funding package next year as part of the review of the entire tax structure.”

The tax rate is expected to fall July 1 from 38.9 cents to about 37.7 cents, because part of the tax is tied to wholesale fuel prices and fluctuates as they do. While the tax nonetheless continues to fall, Perdue and the House Republicans say they want to prevent it from rising. Perdue says that the cap of 37.5 cents would save motorists $63 million in gas taxes, a tiny piece of the $1.88 billion the state expects to take in. Last fall, the House and Senate could not agree on whether to cap the gas tax, but Senate leader Phil Berger said he wants to freeze the tax during the current short session.

NC Go!, a transportation advocacy coalition of which CAGC is a founding member, issued these comments: In her proposed 2012-2013 budget, Governor Bev Perdue has included a provision to cap the state’s motor fuels tax at 37.5 cents, in order to provide relief to North Carolinians struggling with high gas prices at the pump. While NC Go! supports relief for drivers, capping the tax must be a temporary measure and the cap must be allowed to “sunset” or expire after July 1, 2013. Failure to do so will do far more harm than good to North Carolina’s transportation system, and ultimately to citizens, businesses and our state’s economic climate. As the legislature weighs budget decisions, NC Go! urges them to consider the effects of any long-term cap to the motor fuels tax...

...A variable portion of the tax adjusts as price goes up and down, to balance increases or decreases in gas sales. Doing so allows the state to plan accordingly and forecast revenue, even when prices rise and fall and consumers’ purchasing decisions change. Capping the tax, which is our state’s primary transportation funding source, could cause long term harm to our state’s transportation infrastructure, to safety and to our economic climate. Without adequate investment in our roads and bridges, North Carolina faces highways that become more congested and less safe over time. Access to an adequate and efficient transportation system is a key factor in where businesses choose to locate. That’s why the gas tax and other transportation funding must be part of a comprehensive discussion about North Carolina’s tax structure that we urge the General Assembly to tackle in 2013. Read More

NC masonry contractors elect new officers for 2012-1014

Officers for the 2012-2014 term were elected at the North Carolina Masonry Contractors Association Convention at the Grove Park Inn Resort & Spa in Asheville.

Pictured left to right, new president Gary Joyner, Joyner Masonry Works, Greenville, NC; Western Regional Vice President Don Caldwell, C & R Masonry, Candler; President-Elect Ashlee K. Moore, Koontz Masonry, Lexington, NC; out-going president and Board Chairman Larry Kirby, Kirby Construction Services, Conover; Secretary-Treasurer Bob Gates, Gates Construction Company, Mooresville; and Chris Bruner, Central Regional Vice President, Gates Construction Company, Mooresville.

Not pictured, James “Bo” Black, Carolina Masonry Unlimited, Fuquay-Varina, Eastern Regional Vice President.

Joyner is the first to repeat as NCMCA president, having also been president for the 1987-1989 term. Mooreis the first female and the first third-generation president-elect. Her grandfather, the late Belton Koontz, was president in 1976-77, and her father Freddy Koontz was president for the 1998-2000 term.

Larry Kirby is the first out-going president to be presented the newly created “Glenn W. Sipe Presidential Service Award,” named to honor NCMCA’s first president elected in April 1974. Mr Sipe, now 91 years old, was present for the installation of officers and the presentation of the new award. Read More.

NCDOT projects $30M in savings with innovative 'turbine' interchange design

The upgrade of the existing Interstate 85/485 interchange near Charlotte is proof that a bigger design can actually mean bigger savings, reports Engineering News-Record.

Part of the North Carolina Dept. of Transportation’s (NCDOT) program to fill the last six-mile gap in the 65-mile I-485 outer loop around Charlotte, the interchange uses a two-level “turbine” configuration rarely found in the U.S. Also called a “whirlpool” interchange, the design features swirling lanes that take left-turning traffic around a central bridge in a clockwise direction.

The design requires space for sweeping high-speed, high-capacity ramps. But what it takes up in acreage is made up for in construction efficiencies and cost savings. The projected price tag is $30 million less than the four-level stacked interchange NCDOT originally envisioned.

The change was suggested during the design-build proposal process, says John Johnson, project director for the joint venture of STV and Ralph Whitehead Associates, which is teaming with Lane Construction for the project.

“We kept running into issues,” Johnson says. Drawbacks to the stacked design included icing problems that frequently shut down another area interchange in winter, the need to erect girders as high as 80 ft and constraints on future expansion. The standard stacked design would also require two million cu yd of earthwork to support steep ramps and a long-term detour of I-85 traffic to local roads.

The project team reasoned that a turbine design could solve these problems, if space were available. And it was: NCDOT had acquired rights-of-way in the early 1990s for an earlier plan to construct a modified half-cloverleaf interchange. That concept called for two high-speed, high-capacity ramps with two tight loops.

“By replacing the smaller loops with two more high-capacity ramps to create the turbine design,” Johnson says, “we made it work.”

The turbine design requires 18 bridges, three times more than the stacked interchange, but their smaller sizes and simple single-span designs—including thinner columns, drilled piers, HP pile foundations and spread footings—will be easier to construct and maintain.

In addition, says NCDOT project manager Virginia Mabry, the more balanced distribution of earthwork, with borrow and fill locations across the project site, “reduces the amount of heavy trucking in a highly congested urban area, which means better traffic control for both the contractor and the public.”

Even with its large footprint, the turbine’s flexible ramp placement will result in fewer environmental impacts, including avoiding a vulnerable stream and preserving nearly 400 sq ft of habitat for the endangered Schweinitz sunflower.

The turbine interchange is expected to be complete by early June 2014 and will coincide with a seven-mile widening of I-85. That $125-million project, held by a design-build team of Lane and HDR Inc., will feature another uncommon design: a diverging diamond interchange, or DDI (ENR 12/21/09 p. 17). In a six-mile, $139-million contract, Blythe Construction and Wilbur Smith Associates also are building a DDI and revamping I-485/N.C. 115 with a split diamond interchange, in which traffic leaving the main highway is diverted to other routes via roundabouts. NCDOT estimates the three rare designs will save at least $50 million off the outer-loop program. Read More.

Construction material prices rise slightly

In a sign of easing inflation pressure, the nation’s construction materials prices increased 0.1 percent in April, according to the Producer Price Index report by the U.S. Labor Department. Construction materials prices are up 2.5 percent compared to the same time last year. Nonresidential construction materials prices were unchanged for the month, but are 2.4 percent higher from one year ago.

“Recent news pertaining to the U.S. nonresidential construction industry has been somehat disheartening of late,” said Associated Builders and Contractors Chief Economist Anirban Basu. Still, at the very least, contractors have been enjoying the benefits of stable materials prices.

“Construction materials prices are now up just 2.5 percent on a year-over-year basis, and hardly moved in April,” Basu said. “However, the trajectory of prices may become more volatile in the months ahead with financial markets being impacted by ongoing bad news from both Europe and the United States regarding near-term economic prospect.

“While that should lead to a decline in materials prices due to softening demand, commodity markets are often impacted when equity and bond investors reduce their exposure to other assets and move into commodities,” said Basu. “This is what happened during the early months of 2008, and it has occurred on occasion since then.

Nonferrous wire and cable prices rose 0.7 percent for the month, but are down 5.2 percent from April 2011. Prices for fabricated structural metal products were up 0.5 percent for the month and are up 2 percent year over year. Prices for concrete products increased 0.2 percent in April and are up 2 percent compared to the same time last year. Prices for steel mill products inched up 0.2 percent in April, but are down 1.9 percent year over year.

In contrast, prices for prepared asphalt, tar roofing and siding fell 2.6 percent in April and are down 3.3 percent from one year ago. Prices for plumbing fixtures and fittings decreased 0.7 percent for the month, but are up 2.5 percent compared to the same time last year. Softwood lumber prices fell 0.4 percent compared to March, but are still 3 percent higher than the same time last year. Iron and steel prices slipped 0.3 percent in April and are down 1.8 percent year over year.

Crude energy materials prices dropped 6.8 percent in April as crude petroleum prices fell 7.9 percent. Crude energy materials prices are down 16.3 percent compared to the same time last year. Overall, the nation’s wholesale goods prices slipped 0.2 percent for the month, but are 1.9 percent higher than April 2011.

“At this point in time, there are two scenarios,” Basu said. “One would be a moderation of prices, with inflation kept in check. The other worse outcome would be one in which the economy continued to disappoint and materials prices rose.” Read More.