- Mills, Evan, Ann Deering, and Edward Vine. Reprinted with permission from Risk Management Magazine, March 1998 issue, pages 12-16.
Emerging energy-efficient technologies are now making it possible for risk managers to implement choices that are safe, effective and environmentally sound. New strategies can help cut costs and eliminate named perils ranging from fire and ice damage, to professional liability and business interruption. And in some cases, applying these tools can reduce greenhouse-gas emissions, thereby contributing to a worldwide effort to lessen the risk of global climate change and it's attendant hazards.
Thus far, federal and local government agencies, energy utilities, energy-service companies, non-governmental organizations and a range of professional societies have been the most active constituents promoting energy efficiency. However, the risk management and insurance communities can offer a great deal to this process.
Risk managers would be welcome partners in these activities, especially because they can provide a unique perspective focusing on loss-prevention benefits. And insurers can promote the use of energy-efficient technologies and strategies by introducing premium incentives and new insurance products.
Risk Management Tools
There are a number of specific measures that combine energy efficiency and loss prevention. New products and materials are available that can fulfill their primary function and also deliver safety and environmental benefits.
Energy-efficient windows—Efficient multiple-pane windows or windows with retrofit films can reduce energy losses by half or more. During a fire, heat-stressed windows can shatter as a result of different expansion rates near the frames, and the increased supply of air flowing through a broken window rapidly accelerates the spread of fire and toxic fumes. The new windows are more resistant to breakage by fire, thieves or windstorms and also block damaging UV radiation and enhance occupant comfort.
Insulated water pipes—Insulating pipes or cold spaces where pipes run is a simple energy retrofit that saves energy and reduces the likelihood of freeze damage, which has been identified as an important cause of losses in Europe and North America. The U.S. insurance industry paid $4.5 billion in claims during a 10-year period for freezing pipes in 17 southeastern states.
Reduced heat losses through roofs—Eliminating heat leaks, insufficient insulation and leaky heating ducts in otherwise cool attics can prevent or slow the formation of destructive ice dams and icicles on roof eaves. Melting water tends to pond behind an ice dam, often damaging the roof and the building interior. Water runoff or falling ice can also present safety hazards. A large blizzard in the United States in early 1996 was estimated to have resulted in 10,000 to 15,000 water damage claims, with an average cost of $2,000 per home. Electric heating elements often installed along rooflines are intended to provide a drainage channel for the water, but they are unreliable and create substantial added energy costs.
Duct sealing—Eliminating heating system duct leaks in buildings can help prevent dangerous pressure imbalances that can lead to fire risks or health and life risks from carbon monoxide backdrafting from combustion appliances. Suction like depressurization can also accelerate the entry of cancer-causing radon gas from surrounding soils.
Urban heat island mitigation—Increasing the solar reflectance of roofs and roads, and planting trees, can lower urban air temperatures, reducing air-conditioning costs by up to 50 percent. Light-colored materials for walls and roofs can be designed to offer increased fire resistance. Reducing urban air temperatures also slows the formation of smog. Studies have shown that lightening roofs, insulating attics and utilizing natural ventilation could have greatly reduced the total number of deaths (over 5,000) caused by the 12 most severe heat waves in recent U.S. history.
Perhaps the greatest risk management opportunities arise when loss-reduction measures are bundled together. A new trend among real estate developers is toward "green" construction, using design principles and building materials that maximize the role of energy-efficient and environmentally sound technologies as well as the latest construction techniques to assure high performance, reliability and sustainability. Such buildings can simultaneously offer benefits such as improved fire safety extended operating times during power outages and reduced worker's compensation claims through improved indoor air quality.
Some insurers are discussing professional liability premium discounts for architects and engineers who become trained in energy-efficient and loss-prevention procedures in the buildings they construct or renovate.
With proper knowledge, building performance data and loss control methods, risk managers familiar with the potential advantages of the green building approach can he in a position to negotiate better rates and conditions under their property policies.
Many companies are implementing bundled energy efficiency measures in new and existing buildings under the ENERGY STAR Buildings Program, which is operated by the U.S. Environmental Protection Agency and the U.S. Department of Energy. Risk managers and insurers are welcome to participate.
Healing Sick Buildings
Energy efficiency should not be discussed without considering indoor environmental quality (IEQ), which is directly tied to such risk management concerns as workers' compensation claims, life insurance, compliance with OSHA regulations, professional liability, CGL pollution coverage, business interruption and product liability. Improperly applied efficiency measures can compromise IEQ, while properly applied ones can improve it.
There are at least four classes of risk that link human health with the indoor environment: infectious diseases, respiratory diseases (e.g., allergies and asthma), acute sick building health symptoms and poor worker performance. In some instances, as with radon gas, indoor air quality problems can be life-threatening. The four largest indoor air quality cases we have identified involved about $90 million in claims, the largest of which resulted in a $35 million settlement being paid by Reliance National Insurance Company for occupant respiratory-illness problems experienced at the Polk County courthouse in Florida.
There is evidence that the incidence of indoor air pollution problems is on the rise. Recent challenges to the practice of subsuming indoor air quality problems under the Absolute Pollution Exclusion suggest that this will be a growing area of concern. Fortunately, there is a valuable body of research in a number of areas that promises to provide assistance in mitigating these exposures.
Some insurers are seeing these changing conditions as an opportunity to launch new products. The Clair Odell Group, for instance, is developing an innovative policy providing indoor air quality (IAQ) coverage. The policy will cover bodily injury claims, property damage, loss of rent and the cost of mitigation. The coverage will only be available when the building owner or manager is a member or the Building Air Quality Alliance, an organization that has developed a specific "due diligence IAQ Screen" for preventing air quality problems.
Willis Corroon Environmental Risk Management Services is also developing a new breed of IAQ policy for property owners, managers and developers. The product will bundle insurance with audits and guidelines on design, construction and maintenance practices that minimize the risk of IAQ problems. Coverage will include payments for the correction of problems and loss of use.
Improper performance of heating and cooling systems is an important cause of litigation, business interruption and contractor call-backs in buildings. A reemerging practice called "commissioning" aims to increase quality control during the design, construction and start-up phases; conduct formal functional testing and inspection of energy-using equipment to ensure that intended performance land energy savings of 5 percent to 30 percent) is achieved; and provide for operator training. DPIC, the second largest U.S. professional liability insurer for architects and engineers, studied 44 closed cases and identified a cumulative payout of nearly $26 million for HVAC-related claims. They concluded that in some cases the claims "would not have existed or would have been significantly less costly if commissioning had been provided."
Insurers and legal experts have also cited commissioning as a way to decrease the likelihood of professional liability lawsuits pertaining to indoor air quality problems. Other potential benefits include improved occupant comfort, avoidance of extreme premature equipment failures and reduced repair calls. The cost of commissioning tends to be balanced out by the energy savings achieved.
While commissioning is often applied to new buildings, inspections of existing buildings can also reveal sources of energy waste and insurance risks. Inspections of 200 buildings by Hartford Steam Boiler Inspection & Insurance Company in New York City revealed that 75 percent of all electrical system failures resulted from a lack of maintenance, costing the company $100 million over the past 10 years.
Chubb has identified $21 million in avoided claims from the use of infrared cameras in detecting electrical and other risks. Other identified risks include refrigerant leakage, water damage, eroded insulation in steel making furnaces and ruptured underground heating lines.
Innovative services could evolve into new business lines in energy auditing, retrofit evaluation, installation and management of energy-efficient systems, building commissioning, savings measurement and verification. One new approach would be to formulate a new type of "whole building performance survey" by integrating a host of existing types of inspections (e.g., fire safety, earth-quake safety, termite, electrical safety) with energy and indoor air quality inspections. Partnering with utilities or energy service companies (who specialize in financing energy efficiency improvements) could make this enterprise especially effective.
More than three-quarters of code enforcement officials failed a competency exam delivered by the Institute for Business & Home Safety (IBHS). So it's no surprise that safety-related performance targets set by codes are often not met in the field, which is an issue of great concern. Several studies have found that half of new buildings do not meet mandatory energy standards.
Adherence to these standards can have a clear and direct impact on the reduction of many of the energy-related risks discussed in this article.
Improved education of builders and code-enforcement officials can help ensure that these performance objectives are attained. The U.S. Department of Energy and groups like the Building Codes Assistance Project support a major activity in this area. Meanwhile, IBHS-which represents almost 75 percent of the U.S. property/casualty insurance sector-endorses energy code enforcement efforts and operates a large training program for code officials. A coordinated training effort emphasizing both energy and safety issues could prove worthwhile.
Planning for the Future
New technology is part of the lifeblood of risk management. We have identified dozens of applicable energy-efficient and renewable energy technologies already under development at nine U.S. national laboratories. Risk managers could participate in strategic research and development (RGTD) activities necessary to move these emerging technologies and procedures into the marketplace.
For instance, there is a joint effort among the insurance and roofing industries and the Department of Energy to analyze roof failure mechanisms during severe windstorms and to identify specific ways in which energy-efficient design elements can also enhance structural integrity.
Other examples of promising R&D efforts include energy-efficient and fire-resistant windows, paints and light fixtures; improved indoor air quality monitoring devices; and energy-efficient methods to reduce airborne disease transmission (e.g., colds and flu) in office buildings. There is also a need for improved research on many fundamental building science issues such as the causes of sick building syndrome and the connection between the quality of the indoor work environment and the health, productivity and morale of workers.
For more information, please consult the following Web site: Climate Insurance
Support for this work was provided by the Assistant Secretary for Energy Efficiency and Renewable Energy, office of Building Technology, State and Community Programs of the U.S. Department of Energy and the U.S. Environmental Protection Agency, Atmospheric and Pollution Prevention Division. Allan Chen gathered useful information on indoor air quality.
Evan Mills, Ph.D., leads the Center for Building Science at the U.S. Department of Energy's Lawrence Berkeley National Laboratory in Berkeley, CA.
Ann Deering is Managing Partner of ADVice Inc. of New York.
Edward Vine is a staff scientist with the Energy Analysis Department at Lawrence Berkeley National Laboratory in Berkeley, CA.