Insurance: Terrorism and Disaster Coverage

By David Tevlin

This year two significant insurance issues will be before Congress: the continuation of the Terrorism Risk Insurance Act (TRIA) and the need for a similar program to cover natural disasters, such as the series of severe hurricanes in 2005. A report by the Realtors Commercial Alliance of the National Association of Realtors (NAR) titled "Commercial Real Estate Insurance: Meeting the Challenge" summarizes the issues.

The September 11th, 2001 attack on U.S. soil resulted in estimated losses of $40 billion to American businesses. The following year, Congress passed the Terrorism Risk Insurance Act to insure that terrorism insurance was available to all businesses and to allow time for the reinsurance market to expand its capacity to cover possible future losses.

TRIA established a federally backed reinsurance mechanism that defined a "trigger point" at which the federal government would cover significant portions of damages from a foreign-sponsored terrorist event. TRIA was an acknowledgment that if private insurers were forced to bear all the risks of future terrorist events, the result conceivably could bankrupt the insurance industry.

With the backstop in place, insurers then were required to make conventional risk coverage available to policy holders under the same terms and conditions of other property-based coverage. The program applies also to a number of other coverage lines, including nuclear, biological, chemical and radiological perils, as well as worker's compensation.

TRIA is scheduled to expire at the end of this year. Creating a permanent backstop solution will be a high priority in the current Congress. The report notes that 14 other nations recognize that private markets cannot undertake the entire risk of a terror attack and each has a permanent terrorism insurance law.

If TRIA is not renewed, the consequences for commercial real estate would be serious, says the report. Many small businesses and property owners might be unable to secure the policy limits required by lenders. Without terrorism coverage, mortgage loans will be difficult to obtain and the risk of loss will be shifted to business owners and investors and would negatively impact the price of commercial real estate.

The report notes that a number of groups are seeking to devise solutions that would combine a federal backstop with some increased participation by private markets. One such plan, put forward by the Real Estate Roundtable in 2006, is called "Homeland Security Mutual" (HSM). This could be either a state-chartered mutual reinsurance entity or some form of pool in the U.S. Treasury. HSM would create a layer of private capital between primary insurers and the federal government. The report says that a growing consensus within the insurance industry believes that without a reinsurance backstop, insurers will largely exclude this type of coverage in future policies.

The Realtors Commercial Alliance Report notes that eight of the top 10 property and casualty losses in U.S. history occurred between 2000 and 2004. As a result, some insurers have left the market altogether, while others have cancelled existing policies or significantly raised premiums. As a result, real estate owners in some parts of the country now face the same problem in obtaining natural disaster insurance as they do for terrorism insurance. As a result, the NAR, working with other groups, is seeking to have Congress define a comprehensive natural disaster policy.

In the last Congress, a number of bills addressed the issue of such insurance. The bills were of two kinds: One type supports a federal backstop and one does not. Most proposals involve a three-layer plan: policies sold by insurance companies; state or regional catastrophe pools to provide reinsurance; and a national mega-catastrophe fund that backstops for additional losses. Several other bills propose changes in the tax code that would reduce the burden on insurers and property owners. The NAR itself does not now have a position on a federal backstop for national disaster insurance.

David Tevlin is Managing Director, Corporate Real Estate Services in BDO Seidman’s New York office. The lease audit consulting group represents large space users throughout the United States in operating expense and electric energy audits. David can be reached at 212 885-8457.

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