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   ARTICLE   |   From Scotsman Guide Residential Edition   |   April 2008

More Green for Green Homes

Green homes are on the rise -- and so are insurance premiums that cover them

It seems that wherever we look these days, green is the “in” color. People everywhere are trying to do more for the environment. This is also true in the housing industry, where more people are looking for homes that are environmentally friendly and energy-efficient -- or “green” homes.

As a mortgage broker, you know that part of the process on loan packets and underwriting is securing homeowners’ insurance. In fact, the insurance premium plays a part in the total amount of your clients’ monthly mortgage payments. And with today’s tight credit market, every dollar matters when you are trying to get clients approved for a loan.

Despite green homes’ benefits, their building design, features, labor costs and construction materials can lead to higher replacement costs when compared to other homes. And a higher replacement cost means a higher cost to insure.

Because green buildings boost insurance premiums -- and therefore your clients’ monthly payments -- it helps to know what goes into building and insuring them so you can properly explain these issues.

Building green

The Environmental Protection Agency describes green buildings as those that have environmental, economic and social benefits to individuals, the community and people in general. There are many aspects to green building, from lot-planning and materials to energy and water conservation.

When it comes to homebuilding, many builders will say that building green starts with the preparation of the lot. The process starts with determining what must be cleared and what natural trees and vegetation can be kept -- and how to do it with as little of an environmental impact as possible. Proper lot-planning also minimizes dust, natural soil disruption and destruction of natural plants.

Another aspect to green-homebuilding is the construction and the materials used. Green homes have materials that are natural for a particular location and its climate. Homes in areas that experience more-extreme temperatures, stronger winds, natural disasters and difficult ground-soil conditions require specific design and materials to keep them safe. Materials can consist of adobe, which is made of earthen materials, concrete and straw bale.

Green builders also incorporate recycled materials into the home’s design. For instance, recycled tires may be used for roofing materials; recycled tiles for flooring and countertops; recycled paper products for insulation; recycled home fixtures such as doors and windows used from older homes; and various recycled metals for different aspects of construction.

Energy savings and use are a big part of green-home construction, as well. These homes are designed to minimize energy costs and to reduce carbon dioxide emissions. Many new homes now have Energy Star products and appliances. Plus, solar water heaters are used to reduce electrical demands, and solar window screens reduce heat from the sun.

Lighting is also being upgraded to include more fluorescent bulbs and solar lighting, which uses natural sunlight to light a home. Other energy-efficient ways that are being used to heat and cool homes are solar, wind and geothermal energy.

Water conservation and use, which often wasn’t considered in the past, is now part of the equation when building today’s green homes. Water used to be just water when building homes -- now there’s water, gray water and black water.

Homeowners cannot reuse black water because it comes from toilets, showers and tubs. It must be sent directly to septic or sewage tanks. Gray water, which is from sinks and laundry, is not drinkable but can be used to water lawns and home foundations, thus reducing overall water usage. This requires extra plumbing and equipment so that water from different sources can be properly routed to sanitation/septic tanks for black water and to another holding tank for gray water.

Understanding insurance

When their green home has been built and the keys are in your clients’ hands, they must think about insuring their home. One of the biggest mistakes that green-homebuyers make is thinking they can insure their home like a traditional home.

All the things that went into making the home green make it more expensive to insure when there is a partial or total loss. This is because, though green homes are not new, they are not mainstream. As such, reconstruction costs can be much higher than other homes.

For instance, the roofer who designed and built a recycled-tire roof may not be around to replace it, and a general roofer may not know how. It’s the same idea with solar water heaters or geothermal heating and cooling systems: The cost to replace them may exceed the cost involved when they were first installed.

Insurance companies use a standard valuation program to determine a home’s replacement-cost value. The program takes into account the home’s particular features, as well as local construction and labor costs. This is where questions about a home’s square-footage, the number of bedrooms and bathrooms, and other construction features come into play.

Because green homes have individualized construction materials and can be more labor-intensive, the cost to rebuild or replace them is higher than traditional homes. Your clients should look over everything in their home with their insurance agent, from the walls to the flooring, heating and insulation that make their home green. This will let them determine a replacement-cost value on the home that may be higher than the actual cost to build it.

For example, a 2,000-square-foot home with brick veneer and a regular roof may cost $165,000 to rebuild. A green home in the same area with the same square footage but that has a special roof, lighting, exterior walls and more plumbing may cost $205,000 to rebuild.

Additional riders

Once the insurance agent has determined the replacement-cost coverage on the home, an important endorsement your clients should ask for is the guaranteed replacement coverage. This rider will give them 25-percent or 50-percent coverage above the amount for which their home is insured, in case the cost to rebuild is greater than what was determined. This helps cover any rebuilding-cost overruns that may come up during the course of rebuilding a green home.

In homeowners’ policies, there also is a rider that covers ordinance and law issues. This covers any extra rebuilding costs brought on by updated ordinance laws regarding construction/materials on residential homes.

For example, older homes may have aluminum wiring, and a new ordinance could require any homes built to have copper or plastic insulated wiring, which would be more expensive. Or a new ordinance may require homeowners to have ground-fault-interrupter circuits in every room, which they did not have before.

These extra costs to update homes are not covered under typical homeowners’ policies. Remember, insurance companies cover to replace homes with like kind/quality, not to cover the extra costs associated with updating a home because of new building or ordinance laws. The ordinance/law coverage therefore provides extra protection for homeowners if they are faced with such added expenses.

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Green homes are here and increasing in popularity as society becomes more environmentally conscious. But the cost to insure them may be greater than traditional homes. Advise your clients so they’re not caught off guard by this added expense.


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