Congress Takes a Pass on Terrorism Coverage; Leaves Insurers, Owners out in Cold

NEW YORK CITY-The lights of Congress have been doused for the winter recess, and with them the hopes that real estate insurance premiums would be renewed with adequate coverage against acts of terrorism. The lack of action has left the industry shaking its head and shaking in its boots.

Left on the Senate floor was a House-passed bill that would have doled out to the insurance industry $100 billion in terrorism-coverage loans. Jeff DeBoer, president of the Washington, DC-based Real Estate Roundtable, states that the Senate was close “to final negotiations” when the clock ran out.

“Right now, insurance companies are regulated by the states, and the states tell them what kind of coverage to write if they want to do business there,” explains DeBoer. “The states are granting those exclusions. That’s going to increase the risk premiums for debt and equity participants.”

DeBoer, whose group is part of an industry coalition that is lobbying for the reform, is confident that the debate will be taken up again when Congress opens again for business, but by then, the deadline will be gone for policy renewals. “The game will start again,” he states. “Assuming there is some evidence of market disruption, the issue will be at the forefront.” Unfortunately, he says, there is bound to be market disruption since “70% of property or casualty insurance policies come due on Jan. 1.”

It’s going to be difficult,” states Steve Kohn, president of Manhattan-based Sonnenblick-Goldman Co. “It is going to have significant impact especially with securitized lenders because the rating agencies will have issues with how they rate the bonds on uninsured collateral.”

He illustrates how problematic the lack of action will be: “I just received a call from a client trying to close a loan, but the policy was going to mature six months post-loan closing. He’s facing uncertainty as to whether or not the coverage will be renewed. If so, it will probably be at exorbitant cost.”

And those costs couldn’t come at a worse time, states John Garippa, president of the American Property Tax Counsel and a partner at the Montclair, NJ-based law firm Garippa, Lotz & Giannuario. Given the state of the economy and the aftermath of Sept. 11, he says that “certain segments of the industry have been devastated. This is just another brick added to an overwhelming load. Net income is what determines a property’s worth, and that’ll be lessened because of substantially increased insurance coverage. Assessments will be reduced, and as that happens, the tax burden on the general population will go up.” It is impossible to predict exactly how much those assessments will be affected, Garippa and Kohn agree, since much of the valuation depends on location and type of property.

RER’s DeBoer explains that the Senate’s inaction was due to a combination of things, not the least of which was the relatively quick post-9/11 learning curve that Congress had to travel since “the insurance industry is not Federally regulated. There were also some differing views on how to solve the problem–should it be a loan program, which is how the House chose to deal with it, or a quota-share program where part is paid by insurance and part by the Federal government, with the percentages changing as damages rise.”But the death knell, he says, was a Republican-backed rider about tort-liability reform concerning punitive damages caused by terrorists. “It is such a divisive issue,” he explains, that it further bogged down progress.

DeBoer states that the course for the industry, and especially for lobbyists rallying around the issue, is clear. “All of this means that we are going to have to redouble our efforts next year,” he states, “refine our arguments, find real examples of where this is causing economic disruption and present the case on Capitol Hill.”

John Garippa is grimly confident that there will be no shortage of real examples. “This could go away in June,” he says, when premiums are once again up for renewal. “But there are people right now who are feeling it because they are planning and budgeting, and those budgets are already hitting rock bottom.”