Terror Insurance Act May Leave Servicers in the Dark

Servicers who have spent a lot of time in the post-9/11 environment battling with additional administrative tasks relating to terrorism insurance might be expecting that the recently enacted Terrorism Risk Insurance Program will ensure that these problems will not carry over into 2003. Unfortunately, the legislation in its current form is likely to bring forward the administrative merry-go-round into this year.

While the legislation requires that insurers offer terrorism insurance to policyholders within 90 days from the Nov. 26, 2002 enactment of the legislation in the case of existing policies, it does not mention that lenders and servicers need to be kept informed about what the borrower decides.

The omission is significant since the borrower could choose to opt out of the insurance - if they decide, for instance, that they are not happy with the price - and leave the servicer in the dark. The legislation is expected to make the insurance more readily available by requiring insurers to offer terrorism insurance as a part of property and casualty insurance programs, but it leaves the pricing up to the insurance carriers. And insurance carriers are expected to price the premiums taking into account the risk involved. This means that "trophy properties" in major metropolitan areas are likely to be considered at the highest end of the risk spectrum and the insurance premiums on such properties accordingly priced higher. In the case of lower profile properties in smaller cities though, pricing is likely to be more favorable as more insurance capacity becomes available.

Bob Vestewig, COO of Houston-based GEMSA (he is also the chair of the Mortgage Bankers Association's Commercial and Multifamily Board of Governors insurance task force), said that "we are in a transition period now" with everyone still "trying to figure out what this law means." He believes there will be a "period of turmoil" for several months on the pricing front. Mr. Vestewig was part of an MBA delegation that met with Treasury Department officials last December to discuss some matters of concern to the commercial real estate finance industry relating to the implementation of the legislation. Among the concerns they raised is the exclusion of lenders and servicers from the insurance notification process by the legislation.

The MBA delegation made known that these parties would like to be notified about the borrower's decision. The issue of borrowers who have dual coverage from standalone terrorism insurance policies as well as coverage under an all-risk policy was also brought up.

GEMSA, a servicer of commercial mortgage-backed securities loans, has seen some renewal of terrorism insurance policies subsequent to the passage of the legislation, Mr. Vestewig said, but not a "whole flood of them." On some of these policies, the premiums have been minor, while others have been at "thousands of dollars." He expects more data on this front to become available in the next several weeks. Mr. Vestewig remains hopeful that lenders and servicers will be a party to the notice process. If not, he expects that servicers "will be in the same position as last year."

In one positive post-legislation development, Moody's has indicated that they could upgrade the commercial mortgage-backed securities deals that were downgraded last year on terrorism insurance-related concerns if adequate insurance policies are procured on the collateral properties. Daniel Rubock, a Moody's analyst, said that Moody's is concerned however that there could be delays by the Treasury secretary in certifying a terrorist act as one of foreign terrorism (the act does not cover domestic terrorism). This could cause some delays in proceeds being paid out and cause further uncertainty for servicers in the interim.

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