In the final days of the first session of the 109th Congress, legislation to extend the Terrorism Risk Insurance Act of 2002 (TRIA) for an additional 2 years was enacted and signed into law. This was a hard-fought battle and a significant victory for BOMA Intl. and the real estate industry. Absent final congressional action, TRIA would have expired on Dec. 31, 2005. Many policyholders had already been notified by their insurers that the terrorism portion of their coverage would end at the end of the year, and experts predicted it would once again have been difficult and costly - if not impossible - for building owners to find other solutions.
The acts of terror on 9/11 cost the insurance industry billions of dollars. Following the terrorist attack, many owners of commercial properties were advised that their policies would not be renewed or that their new policies would exclude terror/war risks. Without adequate insurance, it is difficult, if not impossible, to operate or acquire properties, refinance loans, and to sell commercial-backed securities.
First signed into law by President George Bush in November 2002, TRIA began as a 3-year program, and legislators conceived it as a short-term program. It was immediately hailed by policymakers, policyholders, and insurance companies alike as being a huge success. It is credited with enabling building owners and managers and the business community to purchase terrorism coverage that was widely unavailable in the 15 months following the terrorist attacks of 9/11. It is also widely credited for returning stability to the economy, as deals once stalled after 9/11 for lack of adequate insurance began to move forward, creating hundreds of thousands of jobs and restoring the free flow of capital in the commercial mortgage-backed securities market.
Though TRIA was wildly successful in providing terrorism insurance at reasonable terms and rates to policyholders, the reinsurance marketplace did not mature and evolve over the past 3 years to the extent needed to enable it to effectively function absent a federal backstop. Unfortunately, it has proven difficult for the reinsurance industry to effectively assess and price the terrorism risk.
For over a year, BOMA Intl. and members of the Coalition to Insure Against Terrorism, a coalition of policyholders, have worked with Congress to educate them on the need for a longer-term program - either in the form of an extension of the original act or as a separate program relying more heavily on the private sector to replace TRIA upon its expiration. While there was general agreement among members of Congress that the reinsurance marketplace had not matured as expected and that the policyholder community would once again be uninsured in the event of another terrorist attack, halting or slowing new projects, there was no agreement on possible solutions.
Despite the early start of advocacy efforts, passage of the extension (with some revisions) once again came down to the wire. In the final days of the first session of the 109th Congress, policyholders were still wondering if their buildings would be insured on Jan. 1, 2006. Less than 2 weeks before TRIA’s expiration, legislators completed work on a revised extension. On Dec. 22, 2005, President Bush made it official and signed the Terrorism Risk Insurance Extension Act of 2005 (TRIEA) into law (PL 109-144).
Under the newly passed agreement, insurer deductibles would be 17.5 percent of premiums received by the insurer in 2005 for the first year of the program (2006) and 20 percent of the premiums received by the insurer in 2006 for the second year of the program (2007). The insurance industry’s aggregate retention amount is set at $25 billion in the first year of the program and $27.5 billion in the second year. The 2-year extension of the program would increase the financial losses that trigger federal assistance to $50 million in 2006 and $100 million in 2007. The trigger is $5 million under current law.
What does this mean for building owners and managers? Under the interim guidance issued by the Treasury Department, insurers were given until Jan. 31, 2006, to offer terrorism insurance to those policyholders whose coverage was scheduled to lapse in connection with the anticipated expiration of the program. However, insurers were not required to make new offers of terrorism insurance to policyholders who previously declined coverage that would have been in effect in 2006.
As for the long-term benefit, it is still too early to predict. Legislators hope that there will be no need for another extension when the new program expires on Dec. 31, 2007. Legislators raised the deductibles, retention levels, and trigger levels in an effort to gradually reduce the federal government’s involvement in the program, while increasing insurers’ share in the hope that they will be able to take over, without the federal backstop, in 2008.
For more information on these issues, contact BOMA Intl. at (202) 408-2662 or visit (www.boma.org).