The banking, insurance and real estate industries are warning that the economy could be further damaged if Congress does not put together some kind of backup plan for insurance companies hammered by terrorism claims.

In essence, the debate looks like this: Property owners worry that the burden of future terrorism losses will shift from insurance companies to policyholders. Alternatively, insurance companies say they do not want to face claims which could lead to huge losses and even bankruptcy.

According to Swiss Re, one of the world's largest reinsurers with offices in more than 30 countries and premiums worth $15.4 billion, preliminary estimates show that insured property and business interruption losses worth $19 billion were caused by the September 11th terrorist attacks. The total bill for all forms of economic loss is expected to reach $90 billion.

"The insured property and business interruption losses incurred on 11 September, estimated at $19 billion, constitute one of the largest property losses in the entire history of the insurance industry," said the firm.

The Republican-dominated U.S. House late last year passed industry-backed proposals on terrorism insurance and tax breaks. But the Democrat-led U.S. Senate did not accept the package.

Some real estate companies with January insurance renewal dates have been informed that their policies no longer will cover terrorism-related events, said Tony Edwards, senior vice president and general counsel for the National Association of Real Estate Investment Trusts (NAREIT).

However, federal action may prove to be unnecessary in most jurisdictions. Thirty-five states already have approved terrorism exclusions, according to the American Insurance Association.

"Therefore, they can't get financing or refinancing for projects," Edwards said. "They haven't even been able to get quotes for terrorism insurance."

An estimated 70 percent of property and casualty insurance policies are up for renewal. And some real estate firms are reporting insurance premiums that are skyrocketing 200 percent to 300 percent, not including terrorism coverage, Edwards added.

In December, the House passed a bill that would require insurance companies to cover the first $10 billion in claims for terrorist attacks. After that point, taxpayers would pay 90 percent of remaining claims. This package would last for one year, with the secretary of the treasury authorized to expand coverage for another year.

The Senate considered several proposals, most of which either required insurance companies to repay the government or imposed limits on punitive lawsuits. None passed.

"We hope the Senate will pass something soon after they return in late January," Edwards said, adding that the House has scheduled hearings later this month to examine differing terrorism insurance proposals.

NAREIT wants Congress to consider a long-term terrorism insurance solution, since real estate is a long-lived asset and lenders expect insurance to be in place over the life of a loan. The organization also would like terrorism insurance policies to carry "reasonable" deductibles, said Steven Wechsler, president and chief executive officer for NAREIT.

On the taxation front, the real estate industry continues to push for improved provisions regarding leasehold improvements. Currently, these building improvements must be written off over 30 years, even though their life typically is between five and 10 years. The industry wants leasehold improvements instead to be written off over 10 to 15 years.

In late 2001, the House included a provision in its economic stimulus package to depreciate some second-generation leasehold improvements over 15 years.

But both houses could not adopt a compromise bill, and so the matter remains unresolved.

Published: January 18, 2002

Use of this article without permission is a violation of federal copyright laws.

Lesley Hensell covers commercial real estate and financial issues for Realty Times. Based outside of Dallas, Lesley works with high-tech and real estate clients as an independent marketing and public relations consultant. She also writes for several publications, including the Dallas Morning News. E-mail Lesley at: lhensell@earthlink.net