Terrorism Insurance

Washington, D.C. – The terrorist attacks of Sept. 11, 2001, left behind devastation at the World Trade Center and the Pentagon. The attacks also left commercial real estate professionals grappling with how to prepare for any future attacks and how to educate tenants that office buildings, shopping centers, stadiums – and everywhere America lives, works, and plays – are safe.Now, more than six months later, yet another fall-out of September 11^th is just beginning to build momentum: Many of America’s landmark buildings have no insurance – or are drastically underinsured – against any future terrorist attack.Some industry experts predict that on Jan. 1, 2002, approximately 70 percent of all reinsurance policies expired. Reinsurers play a vital role in enabling primary insurance companies to spread their risk. Now, as primary insurance policies are coming up for annual renewal, building owners are discovering that the cost of their basic policy – which prior to September 11^th included terrorism coverage – had increased dramatically and no longer included terrorism coverage. Some providers offer separate terrorism riders, but at high rates, with caps on damages, and/or high deductibles. As a result of the lack of available coverage or very limited coverage for the quoted prices, building owners have been forced to underinsure or “go bare” by self-insuring for terrorist risks, because the capacity they require is just not available in the current market.This, in turn, has raised other concerns. First, as Richard Hillman, director of Financial Markets and Community Investment, U.S. General Accounting Office (GAO), testified before the Subcommittee on Oversight and Investigations of the House Committee on Financial Services on Feb. 27, 2002, “The economic burden of another terrorist attack would fall increasingly on policyholders as the insurance industry sheds or limits its risks to such exposures, raising the potential for more devastating economic consequences should such an event occur.” The GAO’s testimony also pointed out that the losses from the World Trade Center are estimated to be about $50 billion, of which reinsurers are expected to ultimately pay about two-thirds. If another attack occurs in the future, damages could still be the same, but the reinsurers would pay a much smaller share. With primary insurance companies also withdrawing from the market, the losses will increasingly be left to the affected businesses, their employees, lenders, suppliers, and customers. The result will be bankruptcies, loan defaults, and lay-offs.Second, since lenders typically require borrowers to carry all-risk insurance coverage to protect the value of loan collateral, buildings that are underinsured are technically in default of these loan covenants. According to the GAO testimony, many lenders have begun notifying borrowers with properties considered at risk for terrorism of the requirement to carry insurance for the risk of terrorism. Lenders and investors are now forced to choose whether to allow their risk exposure to increase or acting to terminate existing loan agreements because terrorism coverage is not available to satisfy insurance requirements on the agreement.As primary insurance policies expire throughout the course of the year, these problems are only going to exacerbate as the available capacity of insurance coverage in the marketplace is absorbed. Without a solution to the problem, building owners whose policies expire next July, for example, can expect even more problems than building owners confronting this problem now.For this reason, BOMA International, along with a broad based group of real estate associations, business groups, and manufacturing and transportation associations, have banded together to form the Coalition to Insure Against Terrorism (CIAT). Member groups include the National Football League, the National Association of Manufacturers, the U.S. Chamber of Commerce, and the Association of American Railroads, among others. The coalition believes that the gap in terrorism insurance coverage threatens economic progress and will lead to more jobs lost if Congress fails to remedy this problem. Given the market failure, CIAT believes that the Federal government has a role to play in ensuring that policyholders can obtain coverage against any terrorist attack, including bio-terrorism. According to CIAT’s statement to the House Financial Services Committee, “Individuals and companies should not bear the full brunt of the risk when the terrorists’ real target is both the United States government and our society as a whole.”Late last year, the U.S. House of Representatives passed legislation to address these issues, but the Senate thus far has not acted. BOMA encourages everyone to take the time to contact your U.S. Senator to voice your concerns – and share any difficulties you may be experiencing in obtaining an adequate level of terrorism insurance at reasonable and affordable rates.For more information on this and other topics discussed in this column, contact BOMA International at (202) 326-6365.