Lenders Lobby for Renewal of Terror Insurance Availability Clause

The approaching end-of-year deadline for the expiration of the "make-available" provision of the Terrorism Risk Insurance Act has pushed the commercial real estate financing industry to take proactive action. This provision requires insurers to provide terrorism insurance coverage on commercial property along with regular "all risk" coverage, rather than provide terrorism insurance coverage on a "standalone" basis as they were doing in the aftermath of the terrorist attacks of 9/11.

At that time, insurers had taken the position that they did not have sufficient information to model for the risks of terrorist attacks and price the insurance accordingly. This stance on the part of insurers caused the price of terrorism insurance to go up as market forces came into play. Once TRIA was enacted, an equilibrium of a sort emerged and terrorism insurance was said to be more widely available at more reasonable prices. The provision is set to expire this year unless it is extended through 2005 by the Treasury secretary. TRIA itself is set to expire next year unless further extended by Congress.

The Mortgage Bankers Association has assumed a front-end role in asking for the provision to be extended and has conducted a study to get information about the effectiveness of TRIA. The findings are to be presented to the Treasury Department. The MBA survey was done on a base of $656 billion of commercial/multifamily mortgage debt outstanding, of which 83.5% had terrorism insurance in place. The average loan size for the 122,811 loans in the study is $5.3 million. The MBA survey covered servicers representing one-third of the $2 trillion commercial/multifamily servicing market.

According to the survey, commercial servicers expect that only 20% of their portfolios, representing $132 billion in loans, overall will have terrorism risk insurance in place by next spring if the "make-available" provision of the TRIA is not extended. The mortgage bankers' trade association said this represents a reduction of 76%, or $416 billion.

Gail Davis Cardwell, senior vice president, commercial/multifamily group, MBA, said that the survey results demonstrate that terrorism risk insurance is widely used and more available and affordable today than before TRIA was enacted.

"It [the survey] underscores the significant need for an extension of the 'make-available' provision to ensure that terrorism insurance is priced within reach and that there is continued availability. MBA is urging the Department of the Treasury to extend this provision to avoid a potential market collapse," she noted.

With the "make-available" provision in place, 28% of the survey respondents expect to "force-place coverage," with the servicer purchasing the coverage and billing the borrower for the cost of coverage. In the absence of the provision, fewer servicers expect this approach to be successful. Also, the availability of the insurance means that 56% of the servicers seldom expect to declare an "event of default." As well, 67% of servicers expect to "never or almost never" use "litigation to require borrowers to purchase coverage" in the current environment.

One servicer, Robert Vestewig, chief operating officer, GEMSA Loan Services, Houston, said, "Without TRIA and 'make-available,' there would again be no or very few insurers offering the required coverage at an acceptable cost. TRIA and 'make-available' allow the risk of terrorism losses to be adequately insured against, just as other perils are insured against. Should TRIA and 'make-available' not be extended, the risk once again shifts from the insurance industry to the real estate finance industry, which will hit our lender and investor clients hard."

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