Banking & Finance and Real Estate

Terrorism insurance lapse could impact real estate

Cost for commercial coverage could rise if risk insurance act isn’t renewed.

November 28, 2014
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On Sept. 10, 2001, few insurance companies in America were seriously concerned about a need for terrorism insurance. On Sept. 11, 2001, the world and those concerns changed.

Ever since the World Trade Center towers fell, terrorism has become an unpleasant household word and a business liability in America. Now, an act that was created to give insurance companies confidence and federal backing could be coming to an end, meaning trouble for the local commercial real estate industry, said Gene Szpeinski, associate broker at Grand Rapids-based Signature Associates.

Szpeinski, president of the Michigan Association of Realtors and a member of the Commercial Alliance of Realtors West Michigan’s political affairs committee, explained that the ripple effect of that Tuesday morning 13 years ago initially led to a sharp rise in insurance rates as insurance companies became fearful of what more attacks could mean financially to the commercial real estate industry.

This reaction led the federal government to step in and create the Terrorism Risk Insurance Act, which was signed into law in 2002 by President George W. Bush.

TRIA essentially works as a government backstop for insurers, Szpeinski said, and it was created in direct response to commercial real estate insurance rates rising in the wake of 9/11.

“What happened is that insurers became very uncertain about terrorism, and what building owners were experiencing was a situation where they were either not able to get insurance or the rates went (really high) because insurance companies were uncertain,” he said.

“Basically, it is a federal backstop for a catastrophic event, like a terrorist act. (Because of TRIA,) insurers know they have a fallback position and it makes them more comfortable to insure. … It keeps rates down.”

In 2005, the year TRIA was slated to end, the act was extended and has continued to be extended by the federal government. However, the act is reaching the end of its life and is currently set to expire Dec. 31 unless the federal government extends it again, Szpeinski said. But TRIA is currently “bogged down in the House,” he said, and many in commercial real estate, both locally and nationally, are concerned it will lapse unless Congress acts on it.

“We’re hoping (during) lame duck that we see some activity on it, but we haven’t seen any real movement from the House. We’ve had a call for action from the National Association of Realtors,” he said.

“We just want them to re-enact what they had and put it in place again.”

If the act lapses, Szpeinski is concerned the lack of federal backing could have a domino effect with negative long-term implications on commercial real estate. Without a backstop, many sales could get parked on the sidelines, he said, adding this is exactly what happened in the real estate markets whenever the government’s National Flood Insurance Program lapsed before being re-enacted.

The National Association of Realtors has sent the federal government thousands of letters in just the last week requesting that TRIA’s extension be made a priority.

“We’re hopeful the act will get in place. I think our preference would be that it gets done during lame duck so it doesn’t lapse,” he said. “But for us it’s really up to our lobbyists and the National Association of Realtors, who are a great group of people, to keep working on this issue.”

Does terrorism insurance really matter here in Grand Rapids? Szpeinski looks at this way: In recent years, the city has developed what he considers “a pretty decent profile nationally.” The city makes a new Top 10 list almost monthly, he said, and that newfound attention, although appreciated, could paint a bulls-eye on the city in the mind of crazed and sadistic individuals, he said.

“Could a community like Grand Rapids become a target because of all the good press? I’d say it’s possible,” he said.

“Terrorists bombed Oklahoma City. It was an internal group, but still. … Whoever thought (something like that would happen in) a place like Oklahoma City?”

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