Organic foods, hybrid cars and more energy-efficient homes are all moving into the mainstream. As Americans change their habits and lifestyles to adjust to the new greener lifestyle, manufacturers and marketing agencies aren’t the only ones sitting up and taking notice.

Insurers are also getting in on the green game and focusing on customer concerns about carbon footprints and global climate change. These eco-surance policies may be new, but they’re a fast-growing segment of some insurers’ business plans.

“It is really a pretty new field, but in the history of insurance, the rapidity in which this has gone from being a new thing to being a huge thing is striking,” says Howard Mills, chief advisor of the insurance group for Manhattan-based Deloitte and Touche. “It is new, but it is rapidly becoming something the industry is very focused on.”

Green Homeowner’s Insurance Basics
What exactly is a green homeowner’s policy? Obviously, they differ from company to company, but generally the basic idea is simple: Buy “green” coverage and if your home ever has a property damage of loss, the company will pay not only for the actual replacement costs of what was there before, they’ll pay for you to make environmentally friendly choices when you rebuild or repair.

Boston-based Lexington Insurance is one of the first companies to offer greener options for homeowners who have made eco-improvements to their homes.
Boston-based Lexington Insurance is one of the first companies to offer greener options for homeowners who have made eco-improvements to their homes.

Boston-based Lexington Insurance Company was one of the first insurers to come out with what they call “EcoSurance.” Vice President of Personal Lines David Valzania says the company prides itself on industry innovation.

“Lexington is trying very hard to be the industry leader in green insurance, both for commercial and personal lines," Valzania says. “We see a market need. These products are different in their space, but we’re always looking to push the envelope and broaden the scope of our business.”

Lexington offers two green insurance options. Upgrade to Green is the standard green insurance plan where if an insured suffers property damage or loss, the company pays to repair the damage with greener options. This is a change from the standard policy in which losses are replaced with the same type of product as what was damaged. For example, if a home has wind damage that tears off vinyl siding, most policies would replace with vinyl. A greener insurance policy will replace the vinyl, however, with more eco-sensitive composite wood siding, which produces fewer chemicals in production and offers greater energy-saving benefits for the homeowner.

LexElite Eco-Homeowner is a more specialized policy catering to homeowners who have already made green investments in their property and who are looking for insurance that fits their specialized needs. For example, the LexElite program will not only replace something like solar panels but if the customer was producing their own power, they’ll pay the customer the funds they weren’t spending on energy bills so they don’t have to bear the burden of that financial loss. In fact, if the customer’s energy generation was so prolific they were selling power back to the energy company, the policy reimburses them for that loss of income, as well.

When a Loss Means a Gain
While no homeowner ever wants to experience a property loss, there is a definite silver lining for eco-minded homeowners who hold green insurance policies.

“If you buy our policy and purchase this endorsement, whatever gets repaired or replaced, you can replace it with a greener, more energy-efficient or more rapidly renewable material,” Valzania says. “If you want the bamboo floors instead of linoleum or the Thermopane™ windows instead of single-pane glass, we’re willing to pay additional funds to repair and replace with upgraded green products.”

How does the company decide how much the homeowner can spend upgrading to greener materials? Valzania says the determination process takes a few steps. The company sends out an adjuster who gives an estimate on what it takes to replace or repair with the same type and quality of material as what was lost or damaged. But if you have one of the EcoSurance policies, you can then call in local contractors—preferably those who have experience with green remodeling or building—to find out what your options are when replacing your loss with a more eco-friendly alternative.

Eco-Replacement Cost Limitations
Of course, however, insurance is still a business, and there has to be a cap to eco-replacements expenditures.

If you suffer damage to your house, green homeowners’ insurance policies generally replace what’s currently in your home with more energy-efficient or environmentally responsible options.
If you suffer damage to your house, green homeowners’ insurance policies generally replace what’s currently in your home with more energy-efficient or environmentally responsible options.

“We couldn’t have a 1900s totally non-green home burn down and replace it with a geothermal home with a sod roof,” Valzania says. “We have to maintain the fundamental property of indemnity that you’ll be returned to your initial state but with greener alternatives. If your roof is damaged, we won’t replace something that wasn’t there, like a solar panel, but we might use wood materials that come from responsibly managed forest or we could give you a higher-grade roof shingle so it lasts longer.”

In general, says Valzania, the company will pay about 25percent over the total replacement costs to equip a home with greener alternatives. If a homeowner suffered a total loss and was insured for $400,000, for example, the policy would go 25percent above—or $100,000—beyond that figure for green improvements.

Consumer Costs
What are the actual costs of green insurance for the consumer? It’s tricky to generalize something like that, Valzania says, because every situation is different. But as a guideline, he says, Lexington’s green insurance policies run “a couple of percentage points” higher premium-wise than convention policies would for the same home. But he’s also quick to say this isn’t because they’re just cashing in on the “green” label.

“We’re trying very earnestly to provide some meaningful coverage to people,” he says. “This is not a gimmick. I think we’re taking a lot of risk on ourselves right now because there’s not a big body of evidence you can study to see how much you should charge for this.”

Valzania says that because this is such a new product line, there is risk associated with offering it. No one really knows what they should charge for coverage like this because it’s never been offered before, he says.

Company Benefits
It isn’t just earnest concern for global climate change that drives new product lines, however; if it weren’t likely to be a profitable situation, no company would offer it. What are the benefits to the insurer who offers green polices?

Choosing a Green Homeowner’s Insurance Policy

Ceres—a national think tank of investors, environmental groups and public interest organizations working with companies to address sustainability challenges such as climate changeissued a 2007 report entitled From Risk to Opportunity: Insurer Responses to Climate Change saying insurers more than doubled their climate change-related products and service offerings in the last year. The report detailed 422 industry initiatives from more than 190 firms in 26 countries.

With these new products and others on the horizon, make sure you know the right questions to ask when shopping for a greener insurance option. Here are some ideas.

Get details on how losses are handled. You need to ask specific questions about how the payments for the eco-friendly upgrades are determined.

Consider the source. Make sure the company you’re researching has a good record of paying claims in a timely fashion. Check your state attorney general, insurance commissioner’s Web site or the Better Business Bureau to investigate any insurer you’re considering—whether for home, auto or life insurance.

Look in the right places. As of early 2008, the only companies offering greener options in homeowner’s insurance were Lexington Insurance, which is a unit of American Insurance Group (AIG), and Fireman’s Fund, but Mills says to look for more companies offering eco-insurance in the near future.

First, says Mills, it’s great for public relations. “The consumer response is, I think, almost uniformly positive,” he says. “If a particular insured [person] doesn’t purchase a green-related insurance product, it still goes into marketing and branding and presents a positive message and positive branding opportunity,” he says.

Mills adds that companies also like to think of themselves as pushing the edge on an important topic like climate change. “It’s a great story, [and] it’s good for consumers who are getting options that allow them to feel they’re making an impact reducing their own carbon footprint,” he says. “But it’s beneficial to the industry because they can feel they’re at the forefront of something that’s of global importance.”

“It is a bit of a leap of faith on our part,” Valzania says. “We’re offering what I think is very robust coverage and not charging a heck of a lot for it. If a thousand people buy it, of course, statistically only a handful are going to have claims. We ran the numbers over and over again, and we said we could make ourselves blind trying to figure this out, and we figured we’d just try it and charge a little bit more and see how it goes.”

Consumers Embrace Green Options
But at the end of the day, the basic economic principal of supply and demand is at the heart of the conversation about eco-conscious insurance options.

“The industry’s focus,” Mills says, “is really being driven by the consumer. There is an intense consumer awareness, and the industry is aware that being responsive to this is just good for business.”

And it isn’t just consumer interest that’s sparking the changes—consumers are actually buying the policies, says Valzania. “Honestly, we’ve been surprised by the response,” he says.

Lexington rolled out the EcoSurance policies first in the Northeast. “We wanted to help people with their significant energy costs, particularly in the Northeast where many people use expensive heating oil,” he says. “The response was so positive, we bumped up the Upgrade to Green program to a nationwide release [this past] March.”

And while Lexington is one of the leaders offering these policies, it’s likely many others will soon follow suit. Mills says the reason is simple: People will buy it.

“The industry senses that this is not going to be a fad,” he says. “It’s driven in demographics with the younger consumer who will be purchasing insurance products for years to come. It’s something that is here to stay.”

Credit: Renovate Your World