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COUNTING COST OF TERROR INSURANCE

By Donna Mitchell

Israel’s government provides insurance support for losses arising from acts of terrorism, such as this bombing at a Jerusalem mall in December.

Hard on the heels of the September terrorist attacks came dire warnings from the commercial real estate industry about the need for government to underwrite terrorism insurance. But with legislation still stuck in Congress at press time, the industry is coping.

Some commercial real estate groups warned that without such underwriting, coverage would be either prohibitively expensive or unavailable, and that lenders would be scared away from retail projects. But not all those threats have come to pass, and there is some disagreement about whether they will.

Developers do agree, at least, that insurance costs have gone up. The Wilmorite Co., Rochester, N.Y., said it has been working down to the wire to iron out agreements with its current insurers. The company said it is facing astronomical costs for terrorism coverage — and for general property and liability coverage as well — though it declined to disclose the potential increases.

“Historically, we were able to renew policies within 90 days of expiration,” said F. L. Gorman, senior counsel at Wilmorite. “Now it comes down to the eve of policy renewals.”

Glimcher Realty Trust reported higher overall insurance rates as well, but not specifically for terrorism risk.

“Part of it may be that we’re not in a lot of major metropolitan markets that would be considered risky,” said Clare Calabrese, vice president of marketing for the Columbus, Ohio-based developer.

Some developers will not be able to get terrorism insurance at all, warned Wayne Mehlman, ICSC’s director of economic issues and government relations. While insurers may offer terrorism coverage for shopping centers in such low-risk, low-profile locations as rural or suburban areas, he said, they are not likely to cover trophy regional shopping centers in major metropolitan markets — the very ones most likely to be targets of terrorism.

Some policyholders are finding that the market for terrorism coverage is virtually limited to two major players: New York City-based American International Group (AIG) and Lloyd’s of London, said Steven Sachs, senior vice president at Atlanta-based Hobbs Group, an insurance brokerage and risk management firm that represents The Rouse Co. In early January, Lloyd’s offered 5 cents to 50 cents of terrorism coverage per $100 for the value of retail property, depending on its location and vulnerability, Sachs said.

“That was more than what most [developers] were paying for all of property insurance last year,” Sachs said. In some cases, he added, Lloyd’s rate would double a property developer’s insurance cost. AIG proposed a $150 million limit in coverage per year, with a 25 percent cap on coverage for each property.

For the insurance companies, Sept. 11 was devastating, according to insurance professionals.

“This is probably the most hostile insurance environment I’ve seen in 35 years,” said Bob Nelson, a partner at San Francisco-based risk management and insurance firm Nelson & Bernstein. Already crowded with rivals keeping premiums competitively low, the market was hit with a string of losses on natural disasters, including Tropical Storm Allison, which flooded the Texas coast in June 2001. The industry was expected to recover by consolidating and implementing massive premium increases, 60 percent to 70 percent, for earthquakes and similar risks — until the terrorists hit.

“They would have been back up to a profitable plane in a year to 18 months, if Sept. 11 had not occurred,” said Nelson.

But there is less to the crisis than meets the eye, countered one industry expert. Despite the payouts stemming from the terrorist attacks (estimates range from $40 billion to $50 billion), the insurance industry lost only 13 percent of its capital, said Bernard M. Brown, president of Insurance Advisors, a Greenwich, Conn.-based consulting firm for commercial insurers and lenders.

“The insurance industry is one of the richest and best capitalized in the world,” Brown said. “This terrorism loss gives them another excuse not to provide coverage.”

But what about the other warnings? Industry leaders and lobbyists say that without terrorism coverage, lenders will forgo financing new properties or refinancing existing ones. Existing loans on retail real estate properties might even go into technical default without it, warned ICSC’s Mehlman.

Bank of America, however, says it is continuing to make construction loans on commercial real estate properties — including shopping centers.

“We evaluate each transaction on its own merits and make judgements as to what impact having or not having [terrorism insurance] would have on the project,” said Ronald L. Morris, managing director in Charlotte, N.C.-based Bank of America’s real estate banking group. Morris said he was disappointed that the federal government failed to come up with a program late last year, but from a practical standpoint, he explained, business had to continue.

As for insurers’ inserting terrorism exclusions into new policies — not so fast, said Brown. The insurance industry is state regulated. Insurers would have to get approvals for the newly restrictive policy forms from all 50 state commissioners. New York spoke in January when it rejected an exclusion for terrorism claims over $25 million.

Even if Congress never implements a government backstop for the insurance industry, developers will continue to operate shopping centers, and lenders will continue to make loans, Brown said. Otherwise they will have to find different livelihoods.

At press time the industry was still waiting for a lifeline from the government, despite the warnings that commercial real estate reinsurers will exclude terrorist coverage. Primary insurers, with no way to limit their own risk, were threatening to do the same.

Lobbyists are calling for a program similar to the United Kingdom’s Pool Reinsurance, established in 1993 to deal with losses resulting from Irish Republican Army bombings. Israel, meanwhile, has two separate government-backed programs, providing casualty and property, and life and health insurance.

In the United States, though, legislation was still stuck in Congress at press time. The House of Representatives voted in November to pass the Terrorism Risk Protection Act, but the Senate failed to get its proposal to a vote before adjourning.

Industry leaders, moreover, have expressed reservations about some of Congress’s proposed remedies. The House legislation would have provided what is essentially a loan program to primary insurers, they said. Under the proposal, the federal government would pick up 90 percent of the cost for losses exceeding $1 billion due to terrorist attacks. But Nelson, the risk management and insurance executive, portrays that as an assessment on policyholders to repay the government for its assistance.

“It’s a form of taxation, and it is probably the wrong time to impose it,” he said.

Meanwhile, senators were trying to negotiate a risk-sharing program. Under that proposal, each participating insurer would be required to offer terrorism coverage in all of its policies. For total terrorism insurance losses below $10 billion, the government would cover 80 percent of the losses. For losses between $10 billion and $100 billion, the government would pick up 90 percent. But the Senate stalled over one main issue: whether to limit punitive damages in any lawsuit filed against retail property owners after a terrorist attack. Republicans were in favor of limiting those damages, while Democrats did not want victims’ families to be limited in any way. The House proposal would prevent victims from seeking punitive damages from property owners as a result of terrorist attacks, said Mehlman.

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