For more than a year, the National Association of Office and Industrial Properties (NAIOP) and other organizations representing commercial real estate owners pressed for enactment of The Terrorism Insurance Act of 2002. The bill, signed into law by President George W. Bush late last year, gives the industry a shot of optimism needed for a faster recovery.
The bill should moderate skyrocketing insurance costs and put an end to concerns over insurance cancellation clauses. Now many of the $15 billion in real estate transactions that have been delayed or cancelled can be re-evaluated with an eye toward the next market upswing.
Shared Responsibility
The act establishes a three-year Terrorism Insurance Program within the Department of Treasury and creates a system of shared public and private compensation for insured losses. Prior to the tragic events of Sept. 11, 2001, the largest single economic loss in United States history was incurred after Hurricane Andrew in 1992, with insured losses of $19.6 billion (in inflation-adjusted dollars). The insured losses of 9/11 are estimated at more than $50 billion.
The new law requires all insurers to participate in the program and offer terrorism coverage. Through the end of 2004, insurers must make terrorism insurance available under all property and casualty insurance policies — including business interruption — on the same terms and conditions as the underlying policy. For example, an insurer covering biological risk through an environmental policy is required to offer the policyholder supplemental coverage for biological risk from a certified terrorist attack. The Secretary of the Treasury can extend this requirement for an additional year.
The federal government, insurers and policyholders will share the risk of loss from future terrorist attacks. The bill provides a formula for determining an insurance company's exposure, enabling the firms to price policies accordingly. And while the bill does not set the price for terrorism insurance, competition among vendors should reduce owner cost.
The law also provides a uniform definition of a “terrorist act.” Such an event must cause more than $5 million in damages, and only applies to acts that are committed on behalf of a foreign person or foreign interest. No domestic acts of violence are covered.
One of the most overlooked advantages of the bill is that it provides continuity in the market if there is another attack. The act guarantees continued coverage and eliminates the 30-day cancellation clause. It also voids any commercial property and casualty terrorism insurance exclusion, as well as any state approval of terrorism coverage exclusions that were in effect on the date of enactment. However, the exclusion may be reinstated if a policyholder fails to pay an increased premium.
Effective Medicine
Already, the bill has reduced the economic risks related to the threat of future terrorist attacks. As a result, insurers are expected to provide terrorism coverage for sizeable construction projects, including skyscrapers that have been delayed or scaled back since 9/11 due to unavailable or unaffordable insurance. Trophy buildings that have had their credit ratings lowered are now expected to obtain sufficient coverage.
As the results of the legislation become clear, so will any necessary adjustments and additions that need to be made. But as a first step, the industry is optimistic that the act will set the stage for economic recovery and the continued security of the nation's businesses.
Thomas J. Bisacquino is president of the National Association of Industrial and Office Properties in Washington, D.C. For more information, visit www.naiop.org.