Energy Codes Shaping Insurance Rates

May 01, 2006
May/June 2006
A version of this article appears in the May/June 2006 issue of Home Energy Magazine.
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        If you haven’t already heard of the Building Codes Assistance Project (BCAP), we are a national nonprofit organization whose mission is to promote the adoption and implementation of modern energy codes in states and local jurisdictions. BCAP is funded primarily by the Department of Energy and sponsored by the Alliance to Save Energy, the National Resources Defense Council, and the American Council for an Energy-Efficient Economy. These organizations sponsor BCAP because energy codes are one of the most effective ways to ensure a minimum level of energy efficiency in all new and renovated construction. Buildings are responsible for nearly 50% of the world’s greenhouse gas emissions, and in the United States, the built environment swallows some 48% of our natural resources. Over 20 million new homes and other buildings will be built in the United States over the next 20 years, and this is a conservative estimate. These three environmental groups know that we need to do a better job with buildings, and energy codes are a reliable way to achieve positive environmental change.
        A few years ago, BCAP began to engage the insurance industry in a conversation about energy efficiency. Other organizations have attempted to get the insurance industry to promote energy codes, energy efficiency, and building performance, but these efforts have met with limited success. BCAP’s approach has had a different focus.We focus on the ways in which energy efficiency can reduce immediate liabilities, such as builder callbacks and building failures, rather than on the fact that energy efficiency can reduce liability by reducing global climate change.
        Simply put, energy-efficient buildings reduce global climate change by reducing greenhouse gas emissions. Natural disasters are the major cause of the most costly insured loss events. Hurricanes, typhoons, windstorms, and winter storms, as well as heat waves, air pollution, and infectious and waterborne diseases are all related to climate change.Yet despite the increasing data and consensus on the link between climate change and human activities, insurers in this country show little interest in promoting energy efficiency to help reduce greenhouse gases.
        BCAP found that the best way to encourage the insurance industry to support energy efficiency would be, not by discussing the environmental benefits alone, but rather by educating its members on the physical principles of energyefficient technologies, their proper implementation, and their positive effect on buildings and risk reduction. There are many compelling reasons for the insurance industry to support energy efficiency in buildings. In addition to the environmental benefits, many energyefficient technologies can reduce or prevent insured losses caused by fire, ice, water, wind, acute and chronic illness, power outages,business interruption, and professional liability. BCAP’s objective is to engage the insurance industry in energy efficiency activities by teaching them how the International Energy Conservation Code (IECC) and other energy efficiency and building performance programs can reduce liability and claims; and by encouraging members of the insurance industry to become committed advocates for energy efficiency.
        BCAP developed a set of talking points titled “Better Energy Codes for Risk Management and Insurance Loss Reduction,” as a communication tool to spark the interest of potential stakeholders in the insurance industry, such as the Institute for Business and Home Safety (IBHS), the Alliance of American Insurers (AAI), several insurance companies, and the Insurance Service Organization (ISO). This paper included a comprehensive list of ten areas of common interest with the insurance industry. In addition, BCAP developed a presentation used to help develop consensus among key players.The goal of the presentation was to emphasize that proper implementation of energy codes and the interrelatedness of building performance issues can enhance risk management.
        BCAP took the show on the road with great success. The insurance industry showed support and involvement in several locations. In Illinois, representatives of AAI and State Farm Insurance were actively involved in developing and supporting successful legislation for the statewide adoption of the 2000 IECC. In Texas, representatives of the Texas Department of Insurance (TDI), including the deputy commissioner, several insurance companies, and the Texas Association of Home Builders participated in conferences with BCAP to discuss a serious mold liability issue in Texas. With a newly adopted energy code, there was a tremendous need for training and implementation support, and BCAP saw an opportunity for the insurance industry to assist in energy code adoption, and to reap the benefits of the better construction practices that would follow. Without hesitation, the Texas Association of Home Builders, along with the state energy office, rolled out training in support of the new energy codes that also addressed insurance liability-related mold issues—that is,water-resistant construction practices. The home builders understood the connection immediately— builders want lower liability, too.
        One of the greatest outcomes of BCAP’s efforts to engage the insurance industry occurred in the spring of 2004 when the Insurance Services Office, Incorporated, added energy codes as part of its Building Code Effectiveness Grading Schedule (BCEGS). BCEGS is a tool used by insurance companies to set community insurance rates. BCEGS assesses the building codes in effect in a particular community, how the community enforces its codes, how well staff is trained, and so on. The concept is simple: Municipalities with well-enforced, up-to-date codes should experience lower insurance claims, and insurance rates can reflect that. The prospect of reducing catastrophe-related damage and ultimately lowering insurance costs provides an incentive for communities to enforce their building codes rigorously.
        While the IECC had not been considered part of BCEGS in the past, it has now been given equal weight with the rest of the International Code Council’s family of codes. The benefits are many: lower insurance rates, safer buildings, less damage, lower insured losses from catastrophes, cleaner air, less-polluting buildings, and better use of our natural resources—a classic, and multiple, win-win situation.

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