Mitigating Risk Through Sustainable Building Practices
This article was contributed by Kelly McMurtrie and Carrie Van Brunt-Wiley, contributors to the HomeInsurance.com Blog. The HomeInsurance.com blog serves as a resource center for insurance consumers across the country. The author's views below are entirely his or her own and may not reflect the views of Green Home Guide.
April 26, 2013
Time and again, green homes prove to be safer, more efficient and less costly to operate than homes built with standard building materials. As research has found, homes made from sustainable building materials are better able to withstand the perils of wind, hail and flood. From an insurance stand point, we’re interested in connecting the dots between how this reduction of risk could translate into better insurance rates for the people who invest in sustainable homes- and potentially impact the market as a whole.
A standard homeowners policy will pay to replace a home that is damaged in a covered peril with standard building materials. However, homeowners who want to rebuild their home with green building materials can typically schedule an endorsement on their policy which will cover any additional cost of rebuilding sustainably. Because a green home is typically seen as a safer home, major insurers typically offer a discount for LEED certified homes up to 5% of the premium. But why are green homes safer? And what makes them less of an insurance risk?
Severe weather vs. a LEED-certified roof
In 2012, severe thunderstorms in the U.S. caused nearly $15 billion in insured losses and almost $28 billion in total economic losses, according to the Insurance Information Institute (III). The average cost of a weather-related insurance claim tops $6,000.
Consider a green home that earns points toward LEED certification by using highly reflective, energy-efficient materials such as steel or aluminum on at least 75% of the roof’s surface. These LEED-certified features also happen to be some of the strongest, most durable, fire-resistant roofing materials available, and they’re designed to withstand extremely harsh weather conditions including wind and hail. To an insurer, that translates into a lower risk of filing expensive claims. To the homeowner, that means they can qualify for more preferred insurance policies.
In addition, in certain states where there is a greater threat of hurricane and tornado damage, insurance carriers provide discounts for homeowners who upgrade their roof covering with one that is built with sustainable materials. In Florida, for example, where homeowners are at great risk for hurricane damage, homeowners may be eligible for a wind mitigation discount to help offset some of the highest homeowners insurance premiums in the country.
Water damage vs. updated water-saving plumbing
Water damage accounts for nearly a quarter of all U.S. homeowners insurance claims, and the III also reports the average cost of a water damage claim as almost $7,000.
In order to earn points for Indoor Water Efficiency in compliance with LEED v2009, many homeowners and business owners will install water efficient toilets and new plumbing. In the insurance world, updated plumbing systems greatly reduce the risk of a burst pipe or other malfunction and indicate a responsible homeowner less likely to file expensive water damage claims. Therefore, a home or business that complies with the 20% water savings required by LEED v2009 could again qualify for more preferred homeowners insurance policies and therefore pay lower premiums.
Electrical fires vs. modern electrical systems
About half a million structure fires break out every year, according to the National Fire Protection Association, and a residential fire occurs every 82 seconds. The average property damage from fires is a devastating $30,000. Blame for much of the fire damage rests with older homes that have outdated fuse boxes and ungrounded power outlets and otherwise fall short of current local safety codes.
Electrical systems in green-certified homes either were built or renovated for ultimate energy-efficiency. Modern electrical systems greatly reduce the risk of house fires; homeowners who use them not only earn big points toward LEED certification but are also living in a much safer, more sustainable home.
Energy-efficient HVAC vs. seasonal damage
Many insurance carriers require central air conditioning for homes in warmer, more humid climates because it reduces the risk of mold. In addition, air-conditioning system failures annually contribute to about 2,500 home fires, according to the NFPA.
An updated heating system also is crucial for maintaining a safe home. The III reports pipes that freeze and burst are the third most common cause of homeowner property losses, accounting for more than $5 billion annually in reported claims.
Updated heating, ventilation and cooling systems account for a large number of credits towards green certification and greatly reduce the risk of filing property damage claims as a result of seasonal weather. As a result, homeowners who qualify for Platinum LEED certification enjoy safer living conditions, which can translate into paying less to insure their homes.
The green difference
Major financial benefits of owning a green home have been well-documented. One University of California study reported the resale value of certified-green homes averages about 9% higher than comparable, noncertified homes, and the U.S. Department of Energy reports that Energy Star appliances help homeowners save up to $400 a year on utilities. However, as green homeowners tally their savings from sustainable living, it would be an oversight not to include insurance savings earned by reducing risk.
In addition, there is a greater trend on the horizon in favor of insuring sustainable homes. As we know, insurance carriers base their rates on what it costs to cover the payout of claims. As reported by the III in 2011, 92% of the $62 billion in premiums that homeowners paid went towards covering the cost of claims. If sustainable building practices reduce the frequency and severity of claims filed, it will result in lower costs incurred by insurers. Ultimately sustainable homes may do more than just benefit individual homeowners, they could also be the key to throttling insurance rate increases across the market.