THERE IS MOUNTING CONCERN OVER THE long-term impact terrorism will have on the values and viability of commercial real estate. After Sept. 11, The Coalition to Insure Against Terrorism (CIAT), which represents more than 40 organizations, was formed. CIAT strongly supports federal legislation to address the problem of insuring properties against future terrorist attacks. Without such action, commercial property values may tumble to levels far below the bleak years of the late 1980s and early 1990s.

Here's what needs to be done:

  • Help from Capitol Hill — Congress should pass legislation that limits liability against property owners following terrorist attacks. Lawmakers in both chambers debated proposals that would establish a ceiling for the insurance industry against future claims. Late last year, the House passed HR 3210, “The Terrorism Risk Protection Act,” which limits the insured party to the first $1 billion in damages caused by terrorists. The federal government would pick up the remaining costs, up to $20 billion. The Senate introduced similar legislation. However, the bill stalled.

  • Cooperation from the insurance industry — Property managers have reported that insurance providers have proposed significant premium increases due to the growing potential for terrorism, yet some companies have indicated they will not cover claims resulting from terrorism. Clearly, there needs to be some cooperation from insurance carriers on what constitutes an act of terrorism vs. an act of vandalism. For example, was the deliberate crash of that light plane into a Tampa office tower in January of this year an act of terrorism, or was it an isolated act perpetrated by a deranged youth?

    Efforts have been made to set parameters for the industry. The Insurance Service Organization (ISO), an entity established by numerous insurance companies to develop standardized insurance policy language, has proposed new standards that define terrorism and set limits on loss that effectively negate any coverage from terrorist acts. To date, insurance regulators in 45 states have agreed to adopt the ISO proposals, virtually eliminating insurance coverage on properties located in those states.

    Although the stated intent of the ISO was to “clarify” the intent of terrorism coverage, the change would, in effect, exclude coverage from policies.

    The fallout from these “clarifications” would be nothing short of catastrophic for commercial real estate. Investors would stand to lose all equity held in property ownership, and lenders would lose indemnification from acts of terrorism.

    Both investors and lenders will be exposed to liability for damage to surrounding properties, as well as liability to people killed or injured in or around a property that is the target of terrorism.

  • Apply common sense regarding location — Anyone familiar with real estate understands the value of location. That's why property owners, governments and the insurance industry need to identify and implement solutions for properties that are considered high-profile terrorism targets. The prospect of a midtown Manhattan office tower being targeted by terrorists is much higher than a strip mall in the nation's heartland.



Once these decisions are made, insurers need to determine what additional costs high-profile customers should pay, and whether low-profile customers should pay higher premiums at all.

The terrorism insurance issue will impact more than just property values, equity and the ability to obtain insurance. Some $80 billion in loans for commercial properties are generated annually through the commercial mortgage-backed securities (CMBS) market. Most current loans require terrorism insurance, but borrowers may not be able to secure coverage as policies come up for renewal. In some cases, borrowers may be in default for not being able to provide insurance.

With so much at stake, the commercial real estate industry must do everything it can to make sure it is protected if terrorism again wreaks havoc on our nation.




Cynthia Shelton, CCIM, is the 2002 president of the CCIM Institute in Chicago. She also is vice president for corporate accounts at Commercial Net Lease Realty in Orlando, Fla.