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The Impact of Building Energy Performance Standards (BEPS) on Commercial Real Estate and Community Associations

SAHOURI
Author
SAHOURI
Published
May 6, 2024

Understanding complex regulations and market risks is critical to corporate safety and success. 

BEPS are transforming commercial real estate and community associations. Understanding these regulations is essential for compliance and managing the related risks and insurance needs effectively. Below, we offer a detailed exploration of the insurance implications of BEPS, delivering essential guidance to property owners on navigating regulatory shifts and securing appropriate coverage.

What You Will Learn

  • Explaining BEPS
  • Compliance Requirements
  • Insurance Premiums and Coverage Requirements
  • Risk Mitigation and Liability Coverage
  • Property Valuation and Claims Handling
  • Regulatory Compliance Coverage
  • Caveats for BEPS Liability Insurance
  • BEPS and Beyond

 

Explaining BEPS

BEPS aims to find ways to reduce energy consumption and environmental impact in buildings. Government organizations, environmental organizations, and industry stakeholders are participating in the global effort to address climate change. 

BEPS regulations require energy performance improvements, which promote sustainable building practices. Various regions, including the European Union and the United States, have adopted BEPS regulations as part of more extensive climate action plans. The standards evolve through legislative processes and stakeholder consultations, balancing environmental goals with economic realities to improve global sustainability.

According to a CBRE Econometric Advisors (CBRE EA) report, the adoption of statewide BPS policies is increasing, reflecting states' commitment to addressing climate change and promoting sustainable practices on a larger scale. So far, Colorado, Maryland, Oregon, and Washington have implemented BPS. 

 

Compliance Requirements 

  • BEPS regulations intend to improve energy efficiency across buildings.
  • They establish minimum energy performance standards that buildings must meet.
  • Compliance is not an option for commercial real estate and community associations; it is a strategic imperative. 

The specific energy efficiency measures required by BEPS vary, but they typically include upgrades in heating, ventilation, air conditioning (HVAC), and lighting systems. Following these standards is imperative, as noncompliance can result in significant penalties. 

 

Insurance Premiums and Coverage Requirements 

  • Impact of energy efficiency on insurance premiums: Buildings that meet or exceed BEPS' energy efficiency standards frequently benefit from lower insurance premiums. Insurers view these properties as lower risks due to their advanced safety features and reduced environmental impact.
  • Coverage requirements related to BEPS compliance: Compliance with BEPS necessitates specific changes to a property's infrastructure, which may include substantial upgrades. Community association insurance managers and property owners must have insurance policies that cover these modifications to meet the mandated standards.
  • Considerations for obtaining appropriate insurance coverage: Property owners must carefully assess their insurance needs to align with BEPS requirements. Such activities include reviewing current policies for adequacy, understanding potential liabilities, and considering additional coverage for compliance-related upgrades and retrofitting efforts.
  • Enhancements: Some carriers offer enhancements to provide additional coverage for “green” upgrades.

 

Risk Mitigation and Liability Coverage 

  • Reduced risk through upgrades: Implementing energy-efficient upgrades not only aids BEPS compliance but also significantly reduces risk. Upgraded, more efficient systems are less prone to failure, potentially reducing the number of insurance claims. 
  • Liability for noncompliance: Property owners should consider liability coverage to handle any fines or penalties that might arise from failing to meet BEPS standards. (Disclaimer: Depending on state statutes, liability policies may or may not pay for fines and penalties.)
  • Proactive strategies: Commercial real estate managers and community associations must adopt proactive risk management strategies to minimize these exposures. 

 

Property Valuation and Claims Handling 

  • Increased property value: Energy efficiency improvements can enhance property valuation. Properties adhering to or surpassing BEPS standards are typically more appealing to buyers, often commanding higher prices. 
  • Insurance coverage adjustments: The increase in property value following upgrades should be reflected in the insurance coverage to avoid gaps in coverage. An appraisal is the best way to properly reflect increased valuation due to significant upgrades.
  • Claims handling adjustments: As properties undergo energy-efficient upgrades, handling claims may need adjustments. Insurers must account for the upgraded features when assessing claims, which could influence property valuations during such processes. 

 

Regulatory Compliance Coverage 

  • Covering compliance costs: Insurance that covers regulatory compliance expenses is crucial. This coverage can alleviate financial burdens related to legal fees, equipment upgrades, and other adaptation expenses necessary to meet BEPS standards. However, it’s important to note that such policies may not be readily available in the market. Generally, liability policies, except for cyber liability, offer defense-only coverage for regulatory penalties. 
  • Selecting coverage options: Choosing the right insurance coverage requires understanding the specific demands and potential liabilities associated with BEPS compliance and ensuring they adequately address all regulatory aspects.

 

Caveats for BEPS Liability Insurance

Liability insurance for Building Energy Performance Standards (BEPS) primarily covers legal defense costs in non-compliance disputes. However, it's crucial to note several caveats:

  • Defense Coverage Only: This insurance typically covers legal defense expenses, such as attorney and court costs. It does not usually cover the penalties or fines often excluded in standard liability policies.
  • Market Variability: The availability and scope of liability coverage for regulatory penalties vary significantly. Property owners should conduct thorough market research or consult with insurance experts to understand the specific offerings and limitations.
  • Exclusion of Penalties: Most liability policies explicitly exclude fines or penalties imposed by regulatory agencies. This is a significant consideration for property owners, affecting the total risk management strategy for BEPS compliance.
  • Specialized Insurance Needs: Given the exclusions and limitations in standard policies, property owners might need to seek specialized insurance products designed to offer broader protection, including coverage for some regulatory penalties, although these products are less common and not universally available. 
  • Selecting coverage options: Choosing the right regulatory compliance insurance coverage requires understanding the specific demands and potential liabilities associated with BEPS compliance, ensuring its availability, and adequately addressing all regulatory aspects.

 

BEPS and Beyond 

For property managers and community associations, staying informed about BEPS and proactively managing related insurance needs is crucial. As regulations evolve, the intersection between compliance and insurance will become increasingly complex. Working with an experienced insurance agency that understands these challenges and can deliver solutions to protect against current and future risks is essential. 

In conclusion, BEPS regulations fundamentally transform the management of properties and insurance for commercial real estate and community associations. By keeping abreast of these changes and collaborating with expert insurance advocates like Sahouri, property owners can master this evolving landscape with confidence.

Contact Sahouri today to explore deeper insights and receive customized insurance solutions that meet your needs.

SAHOURI
SAHOURI
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