Congress—at Last—Takes a Stand
On Terrorism Insurance

A terrorism insurance backstop finally has hopes of making it into law--if Congress doesn't drop the ball yet again. GlobeSt.com launches its feature series with this in-depth Roundtable discussion.

It's about time. After a year of much wrangling and little progress--a year in which the real estate industry was essentially left to its own devices in terms of terrorism insurance coverage--the House and Senate finally put their heads together to create a workable draft for legislation. The draft calls for up to $100 billion of support to the insurance industry for future terrorist attacks and mandates participation in the program--under the bailiwick of the US Department of Treasury--by property insurance carriers. But a draft is not a law, and the document has yet to become a conference report signed by a majority of the House and Senate conferees, after which it must be voted on before being ushered to the White House. The view of the participants in GlobeSt.com's first Roundtable discussion is very optimistic--even though they all remember all too well when, almost a year ago, the Senate shuttered its doors for the Christmas recess with nothing left on the table. Is relief at hand? And if so, what does the legislation mean in terms of cold, hard reality?

SALUSTRI: You all hail from different disciplines. What has the past year been like for each of you?

CARDWELL: The word I would use is uncertainty, and it has affected us in terms of originating loans and who has the risk--especially when it comes to existing loans. Remember, while our loans are three, five, seven and 10 years, our commercial insurance policies on those properties come due annually. We used to have what was called an all-risk policy. Since Sept. 11, terrorism insurance has been carved out from that all-risk policy, causing great confusion and a shift of liability from the commercial-insurance industry to the lenders and to the master, sub- and special-servicer community.

DeBOER: Uncertainty is definitely the case. There has been an increasing concern for high-profile properties. We saw problems with getting financing on new transactions and refinancing on existing transactions. We've seen increases in litigation involving policyholders and CMBS servicers burning up resources that could probably be put to better use elsewhere.
A lot of people saw this as a New York, Chicago or Los Angeles phenomenon. But we found that roughly $15 billion worth of real estate transactions had either been killed or delayed--and that this was going on in roughly 17 states.

effect from the Moody's and Fitch downgrades.

BREEN: It's been a large challenge. We were faced with a renewal on March 1, which gave us a little time to prepare for the reality of losing terrorism insurance under our all-riskpolicies. But we've spent the year communicating as much as we could with all of the players we work with and trying to understand exactly what we could expect from the insurance market. We spent a large period of time with our lenders. Certainly, the perceived higher-risk properties in our portfolio were more of a challenge for us to deal with as far as our lenders go. We put our terrorism insurance across the entire portfolio so our lesser-risk properties in the suburban areas were covered the same as our perceived higher-risk properties.

SCHAKE: Risks have shifted--not only to lenders but also to the equity side. So owners know that they are absorbing more risk and the equity is exposed more than it was prior to the 11th. In the beginning of the year there were maybe five or six main players on the standalone terrorism side. But in some geographic areas, certain carriers have run out of capacity. They provided to the limits they were willing to provide and said that's it, we can't provide anymore. The capacity has shrunk and either stand alone placements don't provide the limits or the deductibles are substantial.

SALUSTRI: Does the draft legislation put your collective minds at rest?

SCHAKE: Prior to there being any legislation, they really can't quantify a terrorist act. By its nature, terrorism is random, and actuaries don't like that. Hopefully, the legislation will provide some stability and some way for insurance companies to quantify their risks.

BREEN: We are certainly very hopeful. But I think that the reality of the legislation is going to take several months if not a year to show its true colors.

SALUSTRI: Does it need to be proved or disproved only by a terrorist act?

BREEN: No, but rather by how carriers price the risk. Basically, at some point, our exclusions under our all-risk policy will become null and void and the carriers will offer us a premium.

SALUSTRI: Gail, are you cautiously optimistic?

also have an immediate impact on the rating agencies.

SALUSTRI: What does HUD Secretary Mel Martinez announcing that HUD would no longer require terrorism insurance on FHA properties mean to you?

CARDWELL: Obviously, this demonstrates the administration's continued commitment to resolving the affordability and availability of terrorism insurance. And it provides support to a critical segment of the market.

SALUSTRI: We've touched on the rating agencies. Jeff, what about those portfolios that are already in default?

DeBOER: My guess is that it's not going to be a quick fix. It seems to me that the legislation will take the pressure off of Moody's to do additional downgrades. They are continuing to watch assets. The immediate benefit will be to those securities and single-asset financings that they are looking at now.

SALUSTRI: Eric, why isn't this a bailout of the insurance industry?

SCHAKE: There is a significant amount of retention--deductible--for the insurance company, plus there's the provision that there can be a surcharge on the policy to actually pay back the federal government. I believe the first year it's 7% of the premium.

SALUSTRI: Who would that payback come from?

DeBOER: Ultimately, from the policyholder through an increase in premiums over time. But the payback feature would kick in only at catastrophic levels of loss.

SALUSTRI: What is the likelihood that Congress could--once again--drop the ball?

CARDWELL: We have to be ever vigilant and keep the pressure on. They have come back from the elections, and there are competing priorities.

BREEN: It does seem somewhat tenuous that this will actually pass. But we are keeping the pressure on--as an industry--and are hopeful that it will.

SCHAKE: At the end of the day, is it really an insurance or a real estate issue? No. It's an issue that speaks to the future of the US economy.

DeBOER: I want to be realistic, but there is significant reason to be optimistic, and that starts with the president of the US, who continually talks about the need to do this for both economic purposes and security reasons. It's a bipartisan agreement in principal and that bodes well. There are some bumps in the road, but we are optimistic.

SALUSTRI: What sort of bumps?

DeBOER: Congress is like a bunch of adolescent boys. They take the garbage out only when their parents hound them. Last year, these adolescent boys got off the hook, and we have to sit this body down and focus them. Also, there are members of Congress who frankly don't believe there's a market failure large enough to warrant federal involvement. The people who don't like the bill can try to undermine the agreement and convince others to reopen it and take another look at the litigation-management provisions and the definitional issues of length of coverage or types of coverage. Nevertheless, we are optimistic. While you can't go to the bank on this bill yet, we are near the goal line.

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