Developers Find Ways to Get Around Insurance Shortage

Earlier this year, John B. Levy was trying to arrange financing for a big office building in New Carrollton, one close enough to Internal Revenue Service offices that it might well be a victim of collateral damage in a terrorist attack on the perennially unpopular tax agency.

"We had zero problem acquiring inexpensive terrorism insurance," he said. Levy's experience is far from universal; others involved in commercial real estate transactions in the Washington area describe lengthy hurdles in insuring their buildings against destruction by terrorists. But as Congress gears up to consider a federally funded backstop against massive terrorist-induced losses, it shows the unpredictable ways in which the Sept. 11, 2001, attacks have affected those who buy and sell real estate here.

Nationally, insurance and real estate experts say that insurance companies, uncomfortable with the hard-to-quantify risks of terrorist attack, simply cannot or will not offer such coverage, sometimes even at high prices.

"Very few insurance companies are out there writing terrorist insurance, driving prices very high," said James Branigan, president of insurance consultancy Omega Risk Management in New York. "Many real estate deals have been either delayed or stopped."

"The main problem in the market is one of capacity," said Jeffrey D. DeBoer, president of the Real Estate Roundtable, the industry group that is one of the leading proponents of terrorism insurance legislation. "There is simply not enough capacity nationwide to provide the amount of terrorism coverage that is needed."

This problem will be ameliorated, he argues, once long-discussed terrorism insurance legislation is passed. The House and Senate passed different versions of such a government backstop earlier in the year, and last month they reached a tentative agreement with the White House for a compromise. If anything, the Republican victory in the Senate last week made quick passage more likely, though the Bush administration and congressional supporters have said they hope for votes on the legislation in the upcoming lame duck session of Congress instead of waiting for the new House and Senate early next year.

But through all that talk, a funny thing has happened, in the Washington area at least: Those in the industry have found ways around the hurdles of finding terrorism insurance. In some cases, lenders have put aside their normal demands that a building be fully insured before lending money for purchase or construction of a building. In others, landlords have pooled their buildings and bought terrorism insurance that would cover only a portion of potential losses, on the logic that it is unlikely that dozens of buildings all over the region would be simultaneously destroyed. And often when building owners do buy insurance, they do so for less than the full replacement cost of the building, on the logic that they could more economically bear some of the risk of a terrorist attack themselves.

And while it is unquestionable that the high price of terrorism insurance will ultimately get passed along to tenants, to the tune of 10 cents to 15 cents per square foot per year, and some in the industry have heard of delayed projects and other complications posed by terrorism insurance, many in the Washington area say deals are not generally being killed outright by insurance problems.

"It's become a threshold question that's asked in every deal," said Frederick L. Klein, a real estate lawyer with Piper Rudnick. "But I don't know of any transaction that has not occurred because of an inability to get insurance."

Since last fall, when the issue entered the forefront of the minds of investors and financiers, a wholesale change has occurred in who bears the risk of a terrorist attack on a building. It used to be that an insurer would take on such risk for minimal charge and with few questions asked. Now that insurance companies are wary, often either the owner of a building or that owner's lender must take on the risk, or some of it at least.

That is where negotiations come in, often as buildings are being financed: Will a lender allow the owner to buy little or no high-priced terrorism insurance? If not, is the owner liable if the building is destroyed in an attack? Such questions would never have been asked before last year's attacks, but they are now commonplace, said Levy, the real estate investment banker.

"This is all about who bears the risk of a problem that on Sept. 10, [2001], nobody thought about," Levy said.

Blake Real Estate, a Washington developer, shows the kind of in-between solution that landlords have adopted.

Its longtime insurance carrier agreed to sell terrorism insurance for a price that wasn't exorbitant, Executive Vice President Stephen F. Lustgarten said, as long as it included an "NBC Exclusion," that is, the coverage excluded damage from attacks by nuclear, biological and chemical weapons.

"In general, it's extremely difficult to find carriers that will underwrite terrorism" insurance, he said. "But we figured out a way to make things work. We're just hoping that next year the legislation will have gone through and there won't be such a hurdle."

© 2002 The Washington Post Company