Building Owners Mull Terror Insurance Cost
BY MANDY JACKSON
Staff Writer
Now that a bill guaranteeing terrorism insurance coverage has been signed by President George W. Bush, local insurance brokers and real estate owners are waiting to see how much that coverage is going to cost.
After the terrorist attacks of Sept. 11, insurers began charging a high premium for terrorism coverage, limiting their protection or excluding terrorism coverage altogether.
Commercial real estate owners, investors, developers and managers have been waiting for relief on their insurance bills.
“Most of our lenders require us to carry terrorism coverage,” said Cybele Thompson, general manager of the La Jolla Executive Tower and president of the San Diego chapter of the Building Owners and Managers Association.
Local building owners have paid a high premium for terrorism coverage this year or have just gone without, Thompson said.
La Jolla Executive Tower’s owner, Atlanta-based TMW Real Estate Group LLC, saw its national real estate portfolio’s insurance costs increase 40 percent this year, Thompson said.
The insurance premium at the La Jolla Executive Tower alone is increasing from $32,000 this year to $120,000 in 2003, she said.
The Terrorism Risk Insurance Act of 2002 requires all insurers to provide terrorism coverage. It also protects insurance companies from having to pay the full cost of another major terrorist attack.
Under the new law, once insurance claims total $5 million, the federal government will cover 90 percent of the cost, after a deductible paid by insurance companies. Insurance companies’ deductibles will be 7 percent of all of the premiums they received in the previous year, increasing to 10 percent in 2004 and 15 percent in 2005.
Coverage At A Cost
During the three-year life of the law, the government will cover terrorism-related claims up to $90 billion in 2003, $87.5 billion in 2004 and $85 billion in 2005.
Insurance brokers such as Timothy Jablonski, senior vice president and chief operating officer in the San Diego office of Lockton Insurance Brokers, are still assessing the impact of the legislation.
“On the upside, people will get coverage for losses caused by acts of terrorism,” Jablonski said. “On the downside, they don’t know what they’ll pay for it yet.”
Jablonski thinks insurance companies are likely to continue charging high premiums for terrorism coverage. Scott Bedingfield, vice president at San Diego-based insurance brokerage Cavignac & Associates, agreed.
“Property owners will be able to get terrorism coverage, but at what cost?” Bedingfield said.
Congress had good timing with the new law, as insurance companies are in the process of renegotiating contracts with reinsurers , the companies that insure insurance firms, he said.
“Insurers are still saying it’s too early to tell what pricing will be,” Bedingfield said.
Insurance clients, brokers and providers will have to take time to understand the new law and disclose the impact to customers, Jablonski said.
“In the act, there are a lot of things that are unknown,” he said.
Bush said the bill should stimulate the economy in terms of real estate and construction.
According to BOMA International, headquartered in Washington, D.C., “The lack of (terrorism) insurance made it difficult, if not impossible, to insure, lease, build or sell properties.”
Thompson, of the local BOMA chapter, said, “The little guys bear the brunt of this.”
In the La Jolla Executive Tower, most of the tenants are small businesses. Each tenant will pay a share of the building owner’s increased insurance costs through their rents.
The La Jolla Executive Tower is 30 percent vacant, Thompson said, so the owner will pay 30 percent of the insurance increase.
“There’s still a lot of downward pressure on rents, plus higher insurance rates. It’s a tough time to be a building owner,” she said.
Thompson does not expect the recent legislation to help reduce her building’s 2003 insurance bill, but said she hopes it will provide some relief the year after that.