The ramifications of the Sept. 11 terrorist attacks continue to reverberate throughout the real estate community. For property owners, the question is whether reinsurance companies will cover terrorism insurance and, if so, whether they can obtain that coverage at a manageable cost.
“The ramifications of not having terrorism insurance could be quite severe in certain portions of the country,” said Bob Rusbuldt, CEO of Independent Insurance Agents of America, Washington, D.C. The fallout from a lack of adequate coverage could include projects being put on hold, breached contracts, loan defaults and a flurry of lawsuits.
The issue became even more dire when the U.S. Senate broke for the Christmas and New Year's holidays without passing a terrorism insurance bill that would provide backup coverage. The real estate industry was banking on help from Congress because 70% of reinsurance policies expired as of Dec. 31. The Senate isn't scheduled to reconvene until Jan. 23. The backup coverage requires approval by both the Senate and the House of Representatives. The House passed its own measure in November and is waiting on the Senate to act before the two sides can approve a combined bill.
Karen Penafile, assistant vice president of advocacy at the Washington, D.C.-based Building Owners and Managers Association (BOMA), a network of 18,000 commercial real estate professionals, said the organization at this point desperately wants a bill passed. Some BOMA members have been informed by insurance companies that signing up for a new insurance policy with a terrorism coverage component could increase the total cost of insurance policies by as much as 300%. The organization and its members hope that a federal backstop would ensure coverage at a more reasonable cost. BOMA plans to present evidence to Congress regarding policy cancellations and major price increases.
Prior to Sept. 11, insurance premiums were beginning to rise. “We were already seeing increases anywhere between 12% and 25% before Sept. 11,” said Mike Zeldes, vice president at Kaye Insurance Associates, an insurance broker in New York. “After Sept. 11, the typical increases for property insurance are ranging between 35% and 125%.”
Premiums were on the rise prior to Sept. 11, Rusbuldt said, because insurance companies experienced a precipitous drop in their returns compared with the go-go days of the 1990s. As stock market returns dried up, insurance companies realized that underwriting needed to be a money-making endeavor. After Sept. 11 — the largest single-event loss in U.S. history with an estimated cost of between $30 and $60 billion — insurance companies were forced to find other sources of liquidity. They lost up to $120 billion in underwriting dollars after the tragedy.
To ensure coverage, property owners are forced to accept premiums of 30% and higher, Zeldes said. Meanwhile, some insurance companies are lowering the total dollar amount of coverage. In these instances, property owners will have to piece together packages from varying insurance companies to get full coverage on high-dollar properties, Zeldes explained.
Other sectors feel the pinch
Office buildings aren't the only properties facing rising insurance costs and coverage issues. The retail and multifamily sectors are dealing with a sharp rise in pricing as well. Insurance rates for shopping centers have soared across the board, according to Bob Nelson, a partner at Nelson Bernstein, a San Francisco-based consultant for the shopping center industry. As insurers try to recoup some of their losses resulting from the World Trade Center tragedy, shopping center owners now face a 60% rate increase on average for catastrophic insurance, which includes coverage for disasters such as earthquakes and hurricanes.
Rates are rising in the retail sector partly because malls are considered a terrorism target. “If you're a terrorist, a major attack on a mall would be a great way to stop consumers from shopping,” Nelson said. Unlike office buildings, malls are open and accessible — they are designed to be easy to enter and easy to leave.
Without government intervention, property owners of all property types are basically at the mercy of the insurance industry. However, Alan Disciullo, senior attorney and first vice president at New York-based Morgan Stanley, noted that owners might be able to negotiate better deals if they have long-standing relationships with an insurance provider as well as a clean claims history.
For a closer look at the multifamily sector's reaction to the insurance dilemma, please turn to Page 60.