A week after suicide bombers killed 57 people at U.S.-branded hotels in Amman, Jordan on Nov. 9, leaders in both the House and Senate introduced legislation to extend the Terrorism Risk Insurance Act of 2002. Set to expire Dec. 31, the act provides a federal backstop against insured losses of up to $100 billion in the event of a terrorist attack on U.S. soil.

Real estate leaders maintain an extension is critical. After the 9/11 attacks, most private terrorism insurance evaporated until November 2002, when TRIA compelled insurers to make the coverage available and provided federal reinsurance for the program. Without TRIA, insurers could drop coverage or raise premiums to astronomical levels, leaving many properties without coverage that is now required by some lenders.

“If it's not renewed, there definitely will be issues,” warns Roy Chun, managing director of the CMBS Surveillance Group at Standard & Poor's. Although Standard & Poor's won't lower a rating solely due to a lack of terrorism insurance, Chun says, ratings may suffer if loan servicers and borrowers wage a legal fight over lapsed coverage.

That's what happened in the case of the Conde Nast Building at 4 Times Square in New York during the pre-TRIA months of 2002. When a dispute over the borrower's refusal to renew a terrorism insurance policy racked up $3 million in legal fees and cut into payments to certificate holders, Standard & Poor's reset the loan's rating to D (default) until the matter was resolved.

But with TRIA extensions proposed in both houses, lapsed coverage may not become an issue. “The insurance industry will be very happy that the Act is being extended at all,” says Robert Hartwig, chief economist at the Insurance Information Institute, a Washington, D.C.-based trade group. “This will ensure that coverage is available, and likely quite affordable, as we go into 2006 and 2007.”

That's good news for U.S. businesses, roughly half of which have added terrorism coverage to their property insurance. That's double the take-up rate from early 2003, Hartwig says.

The Senate unanimously approved its TRIA bill on Nov. 18 and the House was expected to pass its own measure after Thanksgiving, but lawmakers must act quickly to reconcile the measures into a single document. The final version will require another vote and a presidential signature before TRIA expires.

Industry leaders are anxious over how the bills will shake out. Some provisions — such as a House stipulation that policies cover losses from nuclear, biological, chemical or radiological attacks — have insurers worried.

Nuclear power plants have used a federal insurance backstop since the 1950s because insurers view nuclear risks as uninsurable, Hartwig says. “Losses could be several hundred billion dollars with the detonation of even a relatively small nuclear device in downtown Manhattan, for example. That would bankrupt a large swath of the insurance industry.” The simpler Senate bill doesn't specifically address nuclear, biological or chemical attacks.

The bills would extend TRIA for two years, with a potential third-year extension under the House version. The measures increase insurers' exposure through higher deductibles and co-pays, and both increase the dollar amount required to trigger TRIA payouts from the current level of $5 million in terror-related losses in a single year to $50 million in 2006 and $100 million in 2007.

The House bill is a clear favorite among some real estate professionals and organizations, due to its greater detail. The measure also calls for the creation of a commission to recommend long-term solutions. “The House bill builds a bridge toward the future,” says attorney Scott Sinclair, who serves as general counsel to the Commercial Mortgage Securities Association in Washington, D.C.

Ideally, industry leaders would have preferred a permanent fix for terrorism insurance rather than an extension of the TRIA stopgap, Hartwig says. By contrast to the United States, the governments of the United Kingdom, Germany, France and other developed nations have already established permanent terrorism insurance programs. “With this two-year extension, we're going to very quickly be back in the same mode of asking, ‘What are we going to do when TRIA expires?’”

Nevertheless, TRIA proponents will welcome almost any measure that avoids a gap in coverage after Dec. 31. Robert Blumber, manager of the terrorism specialty group at insurance giant Marsh Inc., believes that an extension is imminent. “I'm much more optimistic in the last two days than I was a month ago,” Blumber said in mid-November, while the House and Senate bills were still in committee. “The fact that the Senate has stepped forward with its version of a bill is a positive sign that something will get done.”

Matt Hudgins covers legislative issues and industry trends for National Real Estate Investor. He is based in Austin, Texas.

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