Terrorism Insurance: Footing the Bill

A terrorism insurance bill, signed by President Bush in late November, is being lauded as vital to the shaky economy and the construction industry, in which many projects have stagnated because of the reported lack of affordable terrorism insurance. But this bill, which shifts fiscal responsibility to the government and ultimately to the taxpayers once damages hit a certain dollar sign, is making consumer advocates uneasy. Their concern is that since insurance companies will not be footing the entire bill, they have less incentive to require their clients to build secure infrastructures and buildings.

The Terrorism Risk Insurance Act (H.R. 3210), which defines terrorism as terrorism that originates from foreign interests, steps in to help insurance companies on any claims more than $10 billion, offering to pay 90 percent of damages that exceed that mark through 2003. If damages are less, the bill sets a graduated payment plan. The first year after one of these smaller claims, insurance companies will be required to pay 7 percent of the premiums they received the previous year. In 2004, this percentage jumps to 10 percent and then finally to 15 percent in 2005. The president states that this bill is crucial to more than $15.5 billion worth of construction projects that have been suspended because insurance agencies are reluctant to offer coverage without government backing. This pause in construction resulted in 300,000 unemployed Americans.

But the Consumer Federation of America (CFA) says that good insurance is already available, real estate loans are obtainable, and letting insurance companies off the hook will lead to an increase in building security problems. “The deductibles the insurance companies have to pay are far less than they can afford, so there is little financial incentive to take better risk assessment measures,” says CFA Legislative Director Travis Plunkett.

The CFA admits a handful of terrorism insurance seekers have had problems finding coveragelarge skyscrapers and properties with values of more than $500 millionbut most are able to purchase insurance at a reasonable rate. Furthermore, the CFA says lending has not slowed. In April, the Federal Reserve reported that lack of terrorist coverage was having a minimal lending impact. Just 10 percent of domestic banks upped their rejection rate for financing high-profile commercial real estate.

Those in favor of terrorism insurance call the measure a necessary move to correct a dysfunctional marketplace. Terrorism insurance is expensive and offered by only a few agencies that generally do not cover costs to replace an entire building, says Martin DePoy, vice president for government relations for the National Association of Real Estate Investment Trusts.

Even the proposed 7 percent premium the bill requires of insurance companies could cost some agencies billions if faced with another catastrophic event. “In this situation, we need the government to step in on a temporary basis and insure for catastrophic losses until the private market can return to some type of normalcy,” says DePoy.