Terrorism insurance bill differs in House and Senate?

Real Estate Weekly, July 31, 2002 by Michael Pollack

The impact of the events of Sept. 11 continues to reverberate through the real estate industry in profound ways. The insurance industry, by excluding future terrorist acts from coverage, has created an additional obstacle to consummating significant real estate transactions and contributed to a general slowdown in economic activity.

Eliminating this newly added exclusion from property and casualty insurance policies has proven uncertain and expensive, particularly for high-profile properties. Examples abound of staggering premium increases upon the renewal of existing policies and an inability to obtain sufficient coverage. Significant tension is being created between owners and lenders. The recently reported disputes affecting 4Times Square are one example. Even where the parties agree on the need and level of coverage, no one seems to know what constitutes a reasonable and fair premium. These issues are now winding their way through the federal government.

Both Houses of Congress agree on the need for the federal government to provide a back-stop to the private insurance industry in the event of future terrorist acts. A report of the Joint Economic Committee of Congress published in May of this year indicates estimates of insured losses from the Sept. 11 attack range between $30 - $70 billion. The previous largest loss from. terrorist acts was from the. 1993 bombing in London with an insured loss of $907 million. After that, the next largest insured loss resulted from the first World Trade Center bombing in 1993 and is estimated to be approximately $725 million.

Prior to the Sept. 11 attacks, the JEC estimates the industry-wide insurance surplus was approximately $300 billion, with other parties estimating the surplus far lower. Viewed in this context, the Sept. 11 attacks consumed nearly one-third of this surplus and future similar attacks could potentially render the U.S. insurance industry insolvent unless its exposure is limited. (See Economic Perspectives on Terrorism Insurance, JEC, U.S. Congress, May 2002). Compounding the magnitude of the exposure for high profile properties is the lack of loss history to handicap future risks.

The House and Senate have responded with different bills to address this problem. H.R.3210 was passed by the U.S. House of Representatives in November of 2001. S.2600 was passed by the U.S. Senate in June of 2002. While each of these bills provides different approaches, the underlying aim of both is to preserve the insurance industry's capital surplus, thereby promoting economic stability and encouraging economic activity. Each of these bills achieves this goal by spreading the risk of future losses over a broader base, limiting the insurance industry's loss exposure and providing the industry with a window within which to underwrite and price the risk of exposure to future terrorist acts.

Beyond sharing this general goal, the House and Senate solutions are markedly different and we will analyze certain similarities and differences in the remainder of this Article.

Each bill requires a declaration that a loss occurred due to a terrorist act. Such declaration is to be made by the Secretary of the Treasury. The criteria for such a declaration vary between the bills. Once that has occurred, each bill has a different trigger for coverage.

The House bill provides coverage where either: (i) the industry-wide losses exceed $1 billion, or (ii) industry-wide losses exceed $100 million and a particular insurer's losses exceed 10% of its surplus and premiums. The Senate bill contains no separate industry-wide trigger. Neither bill, however, will cover industry-wide losses of less than $5 million.

Once coverage is triggered, each bill contains a deductible above which the federal government will contribute. In the House bill, coverage is 90% of insured losses. This percentage is applied to the applicable. triggering threshold (see (i) or (ii) above) which has been satisfied.

The Senate bill reimburses participating insurance companies for losses exceeding the product of $10 billion multiplied by each company's market share. Market share is computed with reference to each company's proportion of industry-wide property and casualty insurance premiums collected during the two-year period preceding the act of terrorism. To the extent that insured losses are less than $10 billion, the Senate bill provides for 80% reimbursement; above $10 billion, reimbursement is increased to 90%. The $l0billion multiple is increased to $l5billion if the bill is extended.

Both bills provide only temporary assistance or coverage. The House bill is a one-year bill, subject to a two-year extension. The Senate bill is also a one-year bill subject to an additional one-year extension. Both extensions are to be made by the determination by the Secretary of the Treasury.

The primary difference between the two bills is that the Senate bill provides for reimbursement to the insurers above the deductibles while the House bill provides financial assistance which is to be repaid by imposing future assessments and/or surcharges on insurance customers. As a result, the Senate bill spreads the burden over all taxpayers, whereas the House bill ultimately recovers losses paid from future purchasers of property and casualty insurance.