Battle Ends Over Terrorism Insurance

The U.S. House and Senate spent the last month of 2007 trying to show each other who's the boss of terrorism risk insurance legislation. The Senate won with the passage of its version of legislation re-extending the Terrorism Risk Insurance Act of 2002.

The legislation — which at press time was due to win President Bush's approval — spans seven years and covers both foreign and domestic terrorism risks. It doesn't, however, cover nuclear, biological, chemical, and radiological risks. The legislation directs the U.S. General Accounting Office to study those risks.

“The potential unavailability of terrorism risk insurance would have had a devastating impact on many commercial financing agreements and could have negatively impacted the commercial real estate market,” says Richard F. Gaylord, president of the National Association of Realtors (NAR) in Washington, D.C.

The long shadow of 9/11

Congress stepped into the terrorism insurance business after property reinsurers exited the market in response to the attacks on 9/11. To avoid catastrophic losses, insurance firms purchase insurance from reinsurers that kicks in when their losses go beyond a certain level.

When insurers learned that reinsurance would be unavailable, they told many property owners their policies wouldn't be renewed or new policies would exclude terrorism risks. With limited or no insurance available, especially in cities considered at risk for terrorism, financing for commercial properties undoubtedly would have dried up, causing paralysis in the real estate market.

Congress averted that crisis by passing the Terrorism Risk Insurance Act of 2002. The law created a federal reinsurance backstop program and required that insurers make terrorism coverage available with their property and casualty lines. In December 2005, Congress extended the 2002 legislation through Dec. 31, 2007.

In anticipation of the legislation's expiration, real estate groups began to lobby in early summer. Two major issues arose. One was the length of the renewal; another was coverage for nuclear, biological, chemical, and radiological risks. The NAR argued for a 15-year extension.

“A longer extension is more beneficial for commercial real estate because you can better map out your financing costs,” says Tom Heinemann, a former policy representative at NAR. “That eliminates some degree of uncertainty.”

And while having coverage available for nuclear, biological, chemical, and radiological risks is important, its cost is uncertain. “Nobody can price it because that kind of event has never happened,” explains Heinemann, “and the loss is so catastrophic that it's greater than the value of a property because of the remediation that has to be done.”

In September, the House moved to extend the program for 15 years and allowed coverage for nuclear, biological, chemical, and radiological risks. However, the White House promptly announced that President Bush would veto the House bill because he opposed the 15-year extension.

In November, the Senate passed its version of the legislation. It extended the legislation for only seven years and offered no coverage for nuclear, biological, chemical, and radiological risks. Instead, it called for a study of the issue.

The NAR preferred the Senate's approach to nuclear, biological, chemical, and radiological risks. “Our members were concerned that if it's required to be available, lenders might require owners to get it, and it might be a cost burden,” he says. “We liked the idea of studying it before getting it implemented.”

Dissecting the power play

A game of quien es mas macho, or who's more macho, between the House and Senate began in December, when the two chambers tried to reconcile the two bills. Senator Chris Dodd (D-Conn.) told Representative Barney Frank (D-Mass.) that the Senate's more limited bill was the best he could get passed, says Martin DePoy, coordinator of the steering committee for the Coalition to Ensure Against Terrorism in Washington, D.C.

Frank, however, didn't like the fact that the House was handed a take-it-or-leave it offer. In mid-December, he introduced a new bill that the House passed similar to the Senate bill, but with a few provisions Frank knew the Senate wouldn't accept. “The House needed to make its stand,” says a Washington, D.C., lobbyist. “Frank sent over the bill to say, ‘We're not beholden to the Senate. We're relevant.’ He was fully aware the Senate wasn't going to accept that bill.”

Having made his point, Frank reintroduced the House bill after stripping it of the provisions opposed by the Senate and inserting the Senate language. The House then passed the bill in late December.

Despite the obstacles, the real estate industry is breathing a sigh of relief. “You need to have market certainty,” says Heinemann of the NAR. “Without it, it's sort of like Congress passing the uncertainty extension act.”

G.M. Filisko is a reporter and attorney based in Chicago who writes regularly on legal and real estate issues. She can be contacted at [email protected].

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