Jittery Industry Pushes for Renewal of Terrorism Insurance Law:
COMMERCIAL REAL ESTATE
By TERRY PRISTIN
New York Times
Published: May 12, 2004
Uncertainty over whether the federal government will renew a law providing a backstop to insurance companies in the event of a terrorist attack is causing widespread concern in the commercial real estate industry, particularly among those who do business in areas that are considered potential targets.
Proponents of extending the 2002 Terrorism Risk Insurance Act - which is due to expire at the end of 2005 - say that it is needed to prevent a return of conditions after the attacks of Sept. 11, 2001, when many lenders refused to cover terrorist acts or charged prohibitively high rates for the coverage.
Ending the federal program, said Douglas Durst, the New York developer who has two projects under construction in Manhattan, including the 51-story Bank of America tower on 42nd Street and the Avenue of the Americas, 'would seriously impact our ability to go forward with our new buildings.'
Although the program has bipartisan support in Congress, officials of the Department of the Treasury have expressed some reservations about whether it should continue. And opposition has come from the Consumer Federation of America, which says that the insurance industry can well afford to assume the risk of terrorism on its own.
The terrorism insurance law requires the federal government to cover 90 percent of combined damages in excess of $12.5 billion this year (rising to $15 billion next year) up to $100 billion. It covers only acts that occur within the United States that are committed by people acting on behalf of a foreign person or cause.
The statute has another 18 months to run, but a more immediate deadline is looming. By Sept. 1, the Treasury secretary must decide whether to extend a provision that requires insurance companies to make terrorism coverage available. If the Treasury Department does not grant the extension, the provision will expire on Dec. 31. Anne Womack Kolton, a department spokeswoman, could not say whether the department would act before the deadline. 'We want to make a very thorough examination of the issue before making a decision,' she said.
The Sept. 1 deadline is too late for many insurance companies, according to a recent General Accounting Office report. 'Insurers,' the report said, 'need to make underwriting, price and coverage decisions for these policies in mid-2004.' Gail Davis Cardwell, a senior vice president at the Mortgage Bankers Association, a trade group, said that some insurance policies that expire in June are being renewed only through the end of the year.
Testifying before two House of Representatives subcommittees on April 28, Gregory V. Serio, superintendent of the New York State Insurance Department, urged that the decision be made sooner. He called the insurance measure 'a key factor in stabilizing and re-energizing New York's economy.'
At the hearing, Wayne A. Abernathy, assistant Treasury secretary for financial institutions, said the department would not decide whether to support the renewal of the terrorism insurance law itself until June 2005, when it completes a mandatory report on whether the measure, which was intended to be temporary, is still needed.
Under questioning, he said that if the federal government continued to provide a backstop, the insurance industry might be discouraged from developing methods for assessing and pricing the risk from terrorism.
But Robert J. Hartwig, the chief economist for the Insurance Industry Institute, a trade association, said that unless the terrorism insurance coverage was reauthorized this year, negotiations for next year's property insurance renewals would become more complicated. Not knowing whether the backstop will be available would be bad not just for owners, but also for investors, Mr. Hartwig said.
Until Sept. 11, 2001, insurers had considered the risk of terrorism so low that it was included in property and casualty coverage without being priced separately. After the attack, however, many insurance companies stopped providing terrorism coverage or made it extremely costly.
In a survey conducted in 2002, the Mortgage Bankers Association found that nearly $8 billion worth of transactions in the first half of the year were either halted or delayed because of a lack of terrorism insurance coverage, Ms. Davis Cardwell said. The ratings agencies downgraded about $7.5 billion in commercial real estate securities because of concerns about inadequate terrorism insurance, the mortgage bankers' group said."
The use of terrorism insurance by property owners, landlords and Real Estate Investment Trusts places a false sense of security in the minds of executive risk managers. One specific problem lies in an overall lack of comprehensive emergency management and risk mitigation programs being sponsored by commercial real estate owners for their tenants. This is an area that is under more scrutiny now that the NASD and NYSE have introduced new rules regarding continuity of business operations. A new form of liability may be emerging on the risk management horizon: the failure of commercial property infrastructure owners to adequately plan and test scenarios for diasters, both natural and man-made. Most importantly, having the ability to respond to a crisis effectively - without increasing the risk of additional harm- may be the most valuable benefit of having such plans in place. For more on this see CERT Briefing