Peter Korda and Dan Evans Published in the New York Law Journal

On January 17, 2006, a special report from The Real Estate Board of New York and the New York Law Journal published an article (“Covering the Risks of Terrorism”) by Peter Korda and Dan Evans which notes the changes in insurance coverage since the events of September 11, 2001. “The very nature of the effects of a terrorist attack and the potential magnitude of the damage resulting therefrom,” Peter and Dan wrote, “have kept the insurability of terrorism events among the key terrorism-related issues confronted by property owners and commercial lenders today.”

Insurance and reinsurance companies suffered severe financial losses after September 11, 2001, and responded by reducing or sometimes eliminating their terrorism coverage and by raising the prices on their policies. The cost increase produced a ripple effect through real estate related financial markets, which the federal government attempted to stablize with the enactment of the Terrorism Risk Insurance Act (TRIA) in late 2002. TRIA voided terrorism exclusion from certain types of insurance and provided a financial “backstop” to terrorism insurance losses. Intended as a temporary measure, TRIA was slated to expire on December 31, 2005 but was extended by Congress by the Terrorism Risk Insurance Act of 2005 (the TRIA Extension Act) to mitigate the economic damage which could result from a sudden withdrawal of federal protection. The TRIA Extension Act extends protection through December 31, 2007 and makes certain changes in the law which lessen the federal role in terrorism insurance and require insurance companies to shoulder an increasing burden of the total cost of any future attack.

“The end result of this reallocation of risk from the federal government to the insurance industry is that insurance rates may well rise as insurance companies undertake increasing amounts of risk,” Peter and Dan explain. “As the industry is further sensitized to aggregate exposures, the brunt of these increased insurance costs will most likely be felt by property owners in large metropolitan areas or with exposure to high-risk sectors of the economy (e.g., energy and food distribution). To be sure, these costs are far less than the costs that such insureds would otherwise have borne had Congress failed to extend TRIA, but the costs will increase nevertheless.”

“Ultimately, the severity of the impact on the insurance industry and real estate capital markets would depend upon any subsequent legislation designed to limit the effects of any reduction of the TRIA protections in the TRIA Extension Act. At present, industry representatives will continue to work with members of Congress to limit disruptions in the insurance and real estate financial markets by a sudden lack of terrorism insurance coverage. . . . The only certainty is that industry participants will watch closely as the dialogue continues in the months ahead.”