By Peter L. Higgins
Insurance losses resulting from a catastrophic events such as terrorism fall into several key areas:
· Property Losses to the target building and adjacent buildings, incurred by the owners themselves.
· Liability Losses for claims due to inadequate procedures for evacuation or fire prevention incurred by building owners.
· Workers compensation, health and life insurance losses resulting from death or injury of tenants or visitors to the building.
· Business income and rent loss due to inability to occupy the buildings incurred by tenants and owners.
· Financial losses by various lenders and investors in mortgage-backed securities associated with the mortgage notes themselves.
The real estate finance community and building owners associations have been subjected to a substantial debate since 9/11 about the exclusions of Terrorism Risk insurance. The real estate and lending environments in target cities such as New York, Washington, DC and Los Angeles have been in turmoil over the unavailability or terrorism risk insurance at reasonable prices.
This insurance crisis prompted the legislation of the Terrorism Risk Insurance Act of 2002 (TRIA) effective through 2005. The Act requires property and liability insurers in the United States to offer coverage, however, the act only addresses a defined category of terrorism losses. To be certified as a loss by the Secretary of the Treasury, it must have the following characteristics:
· It must be a violent act or an act this dangerous to human life, property or infrastructure.
· It must have resulted in damage within the United States or on the premises of any U.S. mission abroad.
· It must have been committed by someone acting on behalf of a “Foreign person or foreign interest, as part of an effort to coerce the civilian population of the United States or to influence the policy or affect the conduct of the U.S. Government by coercion.”
· It must produce property and casualty insurance losses in excess of $5 million.
It is important to note that chemical, biological and radiological losses are excluded from the terrorism risk coverage.
Under TRIA the federal government reimburses the insurers 90% of covered terrorism losses exceeding a deductible paid by the insurance companies.
The gap that exists today based on these criteria is losses under $5 Million as well as acts of terrorism such as the Oklahoma City bombing.
More on this series over the next few weeks.