OP 04 27–INCREASED COST OF LOSS AND RELATED EXPENSES FOR GREEN UPGRADES

(December 2022)

INTRODUCTION

This endorsement is used with the Insurance Services Office (ISO) OP 00 01–Capital Assets Program Coverage Form (Output Policy). It recognizes the rapidly developing "green" initiatives in building design, operation, and construction to maximize energy efficiency and minimize adverse environmental effects. This optional coverage endorsement amends various coverage provisions to address green upgrades to buildings, certain business personal property, and related expenses.

OP 04 27 is a supplement to replacement cost coverage. It is used to settle property claims when the named insured plans to upgrade any building or business personal property damaged in a loss with more energy-efficient and environmentally friendly materials, products, or design methods in construction, operations, and manufacturing that are recognized by specific "green" standards.

The endorsement is not a standalone coverage form. All terms and conditions in the OP 00 01 apply unless modified within this endorsement.

This analysis is of the 04 13 edition of this endorsement. Changes from the 10 10 edition are in bold print.

OP 04 27–INCREASED COST OF LOSS AND RELATED EXPENSES FOR GREEN UPGRADES ANALYSIS

Schedule for Green Upgrades

This schedule must be completed because the coverage applies only as scheduled. If more entries are needed, an endorsement must be added where the information can be added.

The following are required entries on the endorsement schedule:

Location Number
Building Number
The maximum amount of coverage for Green Upgrades for:

Building
Business Personal Property

The green upgrades for business personal property may be limited to only business personal property described on the schedule.

Increased Cost of Loss Percentage

When building and business personal property are not subject to the same percentage, enter the items as two separate entries. (04 13 addition)

Related Expenses Amount
Number of Days for Extended Period of Restoration

Covered Business Personal Property can be limited by identifying and describing it in the space provided. (04 13 addition)

A. Green Upgrade Coverage

The terminology used in this endorsement is specific to it and does not apply to the rest of coverage on this policy.

1. The amount of coverage on the endorsement schedule is the maximum amount available for the total of all Green Upgrades costs for the type of property involved. If covered direct physical loss or damage occurs, the amount the insurance company pays for all Green Upgrade costs is based on the following formula:

Step 1: Determine the amount of loss or damage that would be paid without any green upgrades at the covered location and for the specific coverage. This is before applying any deductible.

Step 2: Multiply Step 1 by the Increased Cost of Loss Percentage on the endorsement schedule that applies.

Step 3: (04 13 change) Go to Step 4 if the amount of the direct damage loss is more than the deductible. Take the following steps if the direct damage loss is less than the deductible:

Step 3a: Subtract the amount of the direct damage loss from the deductible amount.

Step 3b: Stop calculations if the cost of Green Upgrades is less than Step 3a because no payment will be made.

Step 3c: If the cost of the Green Upgrades is more than Step 3a, the insurance company pays the least of the following:

The actual costs of Green Upgrades based on this endorsement's provisions minus Step 3a
Step 2
The maximum amount for Green Upgrades on the endorsement schedule

Step 4: The insurance company pays the least of the following:

The actual costs of Green Upgrades based on this endorsement's provisions
Step 2
The maximum amount for Green Upgrades on the endorsement schedule

Note: The steps above do not follow the endorsement outline but instead organizes it in an easy-to-follow format. Step 3 tracks with paragraph d. while Step 4 tracks with paragraph c.

Examples:

Omar Oils’ policy has a $10,000 deductible, a Building Green Upgrade of 40% with a maximum of $1,000,000, and a Business Personal Property Green Upgrade of 40% with a maximum of $500,000. Omar sustains the following losses:

Scenario 1: Smoke damages the outside of a building. The loss amount is $9,000. The actual cost of the green upgrade is $2,000. The green upgrade loss payment is:

Step 1: $9,000

Step 2: $9,000 X .40 = $3,600

Step 3a: $10,000 - $9,000 = $1,000

Step 3b: $3,600 is greater than $1,000

Step 3c: Payment is the least of $1,000 ($2,000 actual cost - $1,000 deductible difference), $3,600, or $1,000,000. In this case, $1,000 is the amount paid.

Step 4: Skip

Scenario 2: Fire causes a $30,000 business personal property loss. The cost of the green upgrades is $15,000. The green upgrade loss payment is:

Step 1: $30,000

Step 2: $30,000 X .40 = $12,000

Step 3: Skip because the direct loss is more than the deductible.

Step 4: Payment is the least of $15,000, $12,000, or $500,000. In this case, $12,000 is the amount paid.

2. Green standards-setters are organizations or governmental agencies that study green products and practices and generate guidelines related to them. Examples are:

a. The U. S. Green Building Council's Leadership in Energy and Environmental Design (LEED) program

b. The joint program of the U. S. Environmental Protection Agency and the U. S. Department of Energy known as ENERGY STAR

c. The Green Building Initiative's program known as Green Globes

3. Green is defined as enhanced energy efficiency or use of environmentally preferable, sustainable materials, products, or methods in design, construction, manufacture, or operation. One of the green standards-setters must recognize it.

4. Only buildings and/or business personal property written on a replacement cost basis are eligible for Green Upgrades Coverage.

5. The Loss Payment Loss Condition in the policy is amended to include Green Upgrades. Unfortunately, this item does not explain exactly where these included Green Updates are to be placed in the condition. Because it appears to be a standalone item similar to Party Walls, a logical approach may be to view it as item d. of the coverage form Loss Payment Loss Condition, and it could read as follows.

d. Green Update

The additional costs that are needed to repair or replace damaged or lost covered property with materials and/or products that are considered green are covered. This is subject to all of the following:

The covered property must be described in this endorsement’s schedule.
The loss must be a direct loss.
The damage must be caused by a covered cause of loss.
The green materials and/or products must be recognized as green by a green standards-setter.
The costs must be reasonable.
All other terms and conditions of the policy continue to apply.
The insurance company continues to have the right to repair or to replace the damaged or lost property.

This condition does not apply to any property that was considered green by a green standards-setter prior to the loss. Note: That means that the already green items are automatically repaired or replaced green because that is what would meet the like kind and quality aspect rule.

6. When the insurance company concludes that it must replace a building component or building system following a loss both of the following apply:

The green replacement will meet the same functional purpose as the property that was damaged. This means that a damaged roof can be replaced with a vegetated roof but that would not include the cost of solar panels on that roof.
The replacing of the damaged item with green material does not extend to replacing undamaged items with such green components unless such items are necessarily damaged as part of the repair and replacement of damaged items.

Example: Bob's Bruhaha Brewery's roof is damaged by a covered cause of loss. His long-term plan was to update to a vegetated roof and add solar panels to generate energy, which is why he added Green Upgrades coverage. EnviroGreen Insurance Company agrees to replace the damaged roof with a vegetated roof because of this endorsement. It also agrees to restore the damaged electrical wiring that ran through the damaged roof that supported the brewery's electrical power system before the loss. However, there is no coverage for the solar panels because they are an enhancement to the energy system, not to the damaged roof.

7. This endorsement does not cover the costs to bring a building up to minimum ordinance or law standards. The only minimum standards it meets are the ones necessary to satisfy Green Upgrades. If the Green Upgrades also happen to help meet ordinance or law requirements, this endorsement does not disallow them.

8. The insurance company does not pay any additional costs to repair or replace damaged property when the only reason to do so is to accumulate certification or recertification points for the property by a green standards-setter.

9. Concerning Business Personal Property, Green Upgrade Coverage does not apply to:

Personal property that belongs to others
Additional Coverage–Personal Effects
Leased personal property
Stock

Note: Item 10 in the 10 10 edition of this endorsement was about vegetated roofs. This item was eliminated because the 04 13 edition of the OP 00 01 coverage form covers vegetated roofs, so the prior item 10. is no longer required. The following numbers were therefore changed too.

10. Under this endorsement’s terms, the insurance company does not pay unless the property is actually repaired or replaced. The rebuilding can be at the same location or a different one. The named insured has up to two years to make repairs, but they must be made as soon as reasonably possible after the date of loss or damage. The insurance company may extend the two-year period. If it does, it must do so in writing.

If the property relocates to another location, the insurance company does not pay more than the cost of the Green Upgrades at the location where the loss or damage occurred. This is subject to all of this endorsement's other terms and conditions.

11. Under this endorsement’s terms, the insurance company does not pay for certain costs associated with enforcing or conforming to any standards that:

Require that any property be demolished, repaired, replaced, reconstructed, remodeled, or remediated due to contamination brought on by pollutants or due to any aspect or activity of fungi, wet rot, or dry rot
Require any insured or others to assess or respond to the effects of pollutants, fungi, wet rot, or dry rot. This provision does not negatively affect the coverage that B. 4. Building Air-out and Related Air Testing under Related Expenses below provides if such coverage applies.
The named insured was required to comply with before the loss occurred but failed to do so. This provision applies even if the property was not damaged.

12. The named insured may have Green Upgrades Coverage and decide not to exercise that option while making necessary repairs of or replacing damaged property. If it does, the insurance company settles the loss to the affected property according to OP 00 01's terms and conditions and disregards this endorsement.

B. Related Expenses

The insurance company pays the Related Expenses outlined below only if both of the following apply:

The loss is covered under A. Green Upgrade Coverage as outlined above.
There is an amount for Related Expenses for the property that sustained loss or damage on the endorsement schedule.

The most the company pays for the total of all Related Expenses is the amount on the endorsement schedule that applies. If other coverage in the policy applies to these Related Expenses, the amount for Related Expenses on the endorsement schedule is excess over such other coverage.

1. Waste Reduction and Recycling

The insurance company pays the named insured's expense to reuse or salvage building materials and contents and to extract and transport reconstruction waste to appropriate recycling sites. If the named insured receives any income from such waste reduction and recycling activities, the insurance company reduces the amount it pays by that amount.

2. Design and Engineering Professional Fees

The insurance company pays reasonable and customary accredited engineer or architect fees for necessary engineering or design recommendations associated with repairing or replacing damaged sections of a covered building.

3. Certification Fees and Related Equipment Testing

a. The insurance company pays fees a green standards-setter imposes for its work to determine that certification or recertification is appropriate according to its standards.

Example: The Capital Assets Policy written on Art's Artifacts was endorsed to include Green Upgrades Coverage and Related Expenses. A fire wiped out his business personal property and also extensively damaged his building, so Art set his plan in place to upgrade the building during the rebuilding process by adding a number of green features. He hired Paul to arrange the details and incorporate them into the reconstruction. This coverage will pay Paul’s fees.

b. The insurance company also pays the named insured's reasonable expenses to test building equipment and systems after they are repaired or installed as replacements. Such testing must be done in conjunction with the certification or recertification process.

Example: Continuing the example above, testing must occur for the green standards-setter involved with Art's project to determine whether the project qualifies for certification. Art hires Felix and Friends to perform the required tests. This coverage pays their fees.

c. The insurance company does not pay for any additional modifications if the building is not certified or recertified or does not meet a specific level of certification.

Example: Concluding the example above, one of the tests reveals that two of the windows were not appropriately energy efficient. The insurance company did not pay the cost of the replacement.

4. Building Air-out and Related Air Testing

The insurance company pays the named insured's reasonable expenses to flush out renovated spaces and/or test the air quality of such spaces after repairs or rebuilding is completed. The expenses incurred must mitigate deficiencies in indoor air quality due to the repairs or rebuilding and according to a green standards-setter's recommended procedures.

C. Business Interruption

When the policy provides business income and extra expense coverage, this section applies.

1. The period of restoration extends to include the longer period of time needed because of the coverage provided in Paragraph A and/or Paragraph B above. The time extension is limited to 30 days unless a different number of days are on the endorsement schedule.

2. Business Income and Extra Expense–Extended Business Income begins after the period of restoration established in item 1 ends.

3. The increase in the period of restoration does not increase the business income and extra expense limit of insurance.

Note: A careful review of the business income and extra expense limit should take the impact of green updates into consideration.

D. Coinsurance Additional Condition

The Coinsurance Additional Condition does not apply to this endorsement's coverage. It continues to apply with respect to the amount of coverage on the declarations for the Covered Property that this endorsement insures.