By Dave Gatton
March 4, 2002

The United States General Accounting Office (GAO) has told a key House financial services committee that terrorism insurance is becoming a growing problem for the nation's real estate and lending industries.

Speaking before a key Congressional oversight subcommittee on February 28, Richard J. Hillman, Director of Financial Markets and Community Investment for the GAO, said, "reinsurers and insurers have begun shedding their exposure to terrorism risk as insurance contracts come up for renewal, leaving policy holders increasingly exposed to losses from a terrorist attack."

In his testimony, Mr. Hillman cited several examples of commercial real estate firms that own "trophy" properties and office buildings in center cities that could not find adequate terrorism insurance coverage. Some firms were able to find coverage, but for one-fifth the value of their properties at double the premiums.

The issue is gaining prominence as major newspapers reported last week that the Mall of America, the largest shopping center in the U.S., was going to court over a controversy with its bank over the level and cost of terrorism insurance the bank said was necessary to stay within compliance of its loan.

The issue for cities and the commercial real estate industry goes beyond existing properties. Many fear that current real estate projects under development will be stalled or die because of the failure to obtain terrorism insurance. The concern is that banks will not provide financing for properties not properly insured against terrorist acts.

For example, Deborah B. Beck, Executive Vice President of the Real Estate Board of New York, gave to the committee numerous examples of how the problem was rippling through the New York real estate industry, including the developer of a proposed thirty story residential project in the Lincoln Center area of Manhattan who has been unable to finance construction due to the absence of terrorism insurance. The project represents $130 million of investment to New York, and 500 construction jobs.

The greater long term concern, according to Ms. Beck, is that failure to obtain adequate coverage will eventually lead to a drop in the sales price of properties, which in turn will trigger drops in property assessments. For cities that depend on real property tax revenues, significant loss in revenues could have devastating effects on city budgets and the over all competitiveness of cities in general.

The House passed the H.R. 3210, the Terrorism Risk Protection act in November of 2001 in an effort to address the post 9/11 insurance issue. The bill would provide a federal backstop to the the insurance industry in the case of a future terrorist attack. The Senate has yet to take up the issue.