Since 9/11, terrorism has become a palpable new threat against the lives and property of American citizens. Not only has our peace of mind been compromised, but the attack on the WTC has affected lives in other, less obvious ways.
Consider the issue of insurance for a moment. The cost of the damage done on September 11 is estimated at close to $50 billion–and has thrown the insurance industry into crisis as the country tries to assess the scope of this new threat. While we’re still reeling from the blows dealt us this past fall, it is crucial that building managers and shareholders understand how their building’s insurance policies may be affected by the upheaval in the industry so that they can effectively protect their property–and their budgets.
What it Means
Before September 11, terrorism was not really considered a serious threat on US soil. As a near-inconceivable happenstance, terror was not explicitly addressed in most standard insurance policies. "In the past, terrorism was not differentiated from vandalism," says Alex M. Seaman, senior vice president of Kaye Insurance-Long Island, "and few major carriers attempted to exclude it."
Although virtually every insurance policy contains a war exclusion, this did not apply to the property damages caused by the WTC attack. Those damages were allegedly caused by individuals–rather than by a sovereign nation–and therefore they did not fall within any policy’s war exclusion clause.
Property owners who were affected by the September 11 attacks will be covered for their losses, but according to Robert Mackoul, president of Mackoul and Associates Inc., insurance brokerage firm in Lynbrook, New York, "the insurance industry is concerned about another series of attacks, be it bombs or the release of anthrax into a building."
Currently, many reinsurance companies–companies that insure primary insurance carriers–are adding terrorism exclusions to their policies. Insurers cannot assume the risk of covering large properties wherein a single loss could push them into bankruptcy. This means that primary carriers will be forced to add terrorism exclusions to policies. State insurance regulators, however, have thus far not permitted primary carriers to exclude terrorism. This sounds good for policyholders, but in reality it could make it impossible for primary carriers to insure commercial and residential properties for their full value–not just for terrorism, but for any peril. According to Warren Heck, Chairman and chief executive officer of GNY Insurance Company in Manhattan, "Primary carriers assume risk, but also spread their risk. GNY insures buildings with values in excess of $200 million, and without reinsurance we couldn’t survive as a company if we lost even one of them,"
At the root of these issues is the uneasy feeling that no one can predict what will happen next in America’s "War on Terrorism." The possibility of future attacks, and the damage they might cause is uncertain; the fear is that there might very well be more, possibly of the same magnitude as the World Trade Center disaster. The insurance industry operates by assessing the likelihood of different types of damage before assuming risk, and that cannot be done in this situation, "it’s too hard to underwrite or even explain," says Heck.
Specialized terrorism insurance has never existed in the US, and it is unlikely that primary insurance carriers will offer their insurance carriers this type of policy in the near future. However, some reinsurance companies are now offering this type of insurance to the primary insureds at excessive rates. These increased costs, if borne by the primary carriers, would be passed on to their carriers.
There is No Crystal Ball
In the next few months, there will undoubtedly be new developments in the industry. "It’s going to be a real interesting year," says Mackoul, "None of us in the industry have a crystal ball."
The way that the Federal government deals with this problem will affect the industry’s ability to provide commercial properties with adequate insurance. Paul O’Neill, Secretary of the United States Treasury, recently addressed the Senate Committee on Banking, Housing and Urban Affairs, recommending the Federal government assume responsibility for 90 percent of the damages caused by terrorism over the next three years, with an annual deductible of $10 billion. In his statement, O’Neill said, "After January 1, the vast majority of businesses in this country are at risk for either losing their terrorism risk coverage or paying steep premiums for dramatically curtailed coverage….A key part of the government’s response to the events of September 11 is to ensure that our economic stability is not undermined by terrorist acts."
In addition to O’Neill’s statement, Congress has heard statements from prominent figures in the insurance industry–it’s likely that they will make a decision as to how this issue should be addressed in the near future. Although reinsurance companies, as global networks, are not subject to the same regulations as primary carriers, a legislative decision to assume some of the financial costs incurred by terrorist acts could potentially make them more willing to include terrorism in their policies.
According to Seaman, "It is imperative that the government address this issue by assuming a certain percentage of the risk that reinsurance will not cover. And we thoroughly expect that they’ll pony up, as it is not economically feasible for insurance companies to take on the entire risk indefinitely."
Although Congress has acknowledged the economic ramifications of the situation and shown a willingness to take action, it is possible that they will not reach a decision by the end of the year. With 70 percent of reinsurance policies expiring on the first of the year, this poses serious problems. As policies expire, property owners may have problems getting full coverage for valuable commercial properties. It is likely that landmark buildings–or buildings close to landmarks that might be considered potential targets for terrorist attacks–will be more affected by this issue than co-ops and condos in lower-risk residential areas.
How Policyholders Can Protect Their Property
In addition to the difficulty of getting adequate commercial insurance, rates on all types of insurance policies are likely to go up dramatically in the new year. Boards should prepare for this by budgeting extra money for rate increases. "Expect an escalation of premiums of 50 to 300 percent, with bigger buildings being affected more, as well as buildings with a bad claim history," Mackoul says.
Building operations insurance and personal insurance will be largely unaffected by this new business climate in terms of the risks for which policyholders are covered. However, it is likely that there will be some rate increases directly attributable the World Trade Center disaster and the faltering economy. "The economy was booming in the 1990s, and the insurance industry made money on the stock market just like everybody else," says Mackoul, "and that’s part of the reason why people were able to get lower rates."
Operations policies cover loss of income if a residential building becomes uninhabitable due to an act of terrorism that displaces residents and thus deprives the building of maintenance. However, it’s a good idea for boards to examine their policies and make sure that they cover operations costs for an adequate amount of time.
Thinking it Over
Personal insurance companies have greater diversification than commercial companies because they cover many smaller properties, rather than a small number of extremely valuable ones. Thus, they do not rely so heavily on reinsurance and are less affected by this problem than commercial companies.
However, everyone should reassess their policies on a regular basis. Mike Trevino, spokesman for Allstate Insurance in Manhattan, says, "What you always want to do is make sure that you’re adequately covered. Always understand what you’re covered for, it’s always good to reevaluate."
When thinking about current problems faced by the insurance industry, it is important to remember that they will primarily affect commercial policies. The other types of insurance that residential buildings possess may suffer from rate increases, but there should not be any trouble renewing these policies under the same conditions as before September 11.
Insureds may need to do some research to get their property covered for its full value. "Building owners and co-op boards will need to find insurance companies that are willing to give as much coverage as possible without a terrorism exclusion. If full coverage is not available, they should obtain surplus coverage to fill in the gaps." Heck says. Surplus carriers are unlicensed carriers in a given jurisdiction that are not under the same strict regulations as primary carriers. Although these companies are unlicensed, they provide a reputable service and are subject to some government regulations.
The uncertainty of how the government will protect the insurance industry–and property owners–from the threat of terrorism combined with the unpredictability of future attacks make this a difficult issue to address. Until America has a clearer idea of how great the immediate threat of terrorism actually is, it is difficult to predict how this threat will affect insurance premiums and the availability of coverage. Until this situation is addressed by the government, or otherwise stabilized, co-op boards and building managers should be prepared to adapt to changes in their policies and to pay increased premiums; to do whatever is necessary to get adequate coverage for their home.
Ms. Baker is a freelance writer living in Brooklyn, New York.