Federal terrorism coverage may lower insurance costs

BY William Atkinson

Special to CONTRACTOR

WASHINGTON — The U.S. Senate passed the Terrorism Risk Insurance Act of 2002 on Nov. 19 by a vote of 86-11, following passage by the House a few days earlier. President Bush signed the bill into law the following week.

The law is designed to take financial pressure off insurance companies for excessive losses related to future terrorism attacks. Under the new law:

l The federal insurance backstop would be activated after the appropriate federal authorities certified that an act of terrorism had occurred.

l Each participating insurer would pay claims within a deductible that would be based on a percentage of its direct written premiums for the previous calendar year. (The percentage will rise from 7% in the first year to 10% the second and 15% the third.)

l The federal government would cover 90% of the insured losses above the insurer deductibles but would be able to recover a portion of its payments through a policyholder surcharge of up to 3% of premiums. In addition, federal government losses would be capped at $100 billion.

Bernard L. Hengesbaugh, chairman of the American Insurance Association and also chairman of Chicago-based CNA Financial Corp., praised the passage of the bill, as did AIA President Robert E. Vagley and other insurance executives nationwide.

The upshot is that, with federal protection as a means of support, the insurance industry will now be able to make terrorism coverage available on a broader basis and, in general, offer property insurance at more reasonable rates. Observers note that insurance should now be available for projects that were once unable to get off the ground due to the inability to find terrorism coverage.

President Bush echoed this sentiment while signing the bill, stating that its passage will encourage new construction projects. Prior to its passage, more than $15 billion in real estate transawctions and projects had been cancelled or delayed because of a lack of terrorism coverage, Bush said.

“Billions of dollars in investments will be more secure,” he added.

The law has an interesting twist, though. Many banks, while publicly stating over the past year that borrowers would be required to have terrorism coverage in place before being eligible for construction loans, tended to look the other way and actually provided loans without such coverage. Now, though, with the new law in place, banks may revert to their previous lending policies of truly requiring terrorism coverage.

Response to the new law from the Plumbing-Heating-Cooling Contractors - National Association has been positive, but Lake Coulson, director of government relations, is not sure it will directly have a significant impact on the association’s 3,800 members. The majority of them do not work on the large “trophy” buildings, stadiums and other structures that the law is meant to help, he noted.

“It will clearly help some percentage of our members, but certainly not all,” he told CONTRACTOR. “To the extent that any of our members are involved in these large projects, it is very good news.”

Of more widespread value, though, may be the possibility of a ripple effect. If the new law allows insurance companies to begin to breathe a little easier about the insurance market overall, it may have a positive effect in softening the current hard market in commercial insurance coverage in general.

“If this, indeed, turns out to be the case, then all of our members will ultimately benefit,” Coulson said.