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WASHINGTON – As national security experts warn of the increasing threat of terrorist attacks in the United States, Congress is about to let lapse the Terrorism Risk Insurance Act, or TRIA, which provides government financial backing for private businesses against terrorism-related losses.
The legislation, put into effect after 9/11, kicks in when insured losses for a certified terrorism act exceed $100 million.
However, the legislation, which provides a $23 billion financial safety net for businesses, expires at the end of the year, and it’s increasingly doubtful that Congress will renew it in the final 2014 session.
Some 60 percent of businesses require terrorism coverage.
The TRIA is designed to protect the federal treasury by imposing responsibility for financial recovery on the private sector, except in the most catastrophic events. It allows the government to recoup losses up to a $100 billion cap.
A recent RAND Corporation study estimated that the potential cost of another terrorist attack of the magnitude of 9/11 could be $50 billion. Without the TRIA in place at the time of a terrorist attack, the federal government would be unable to recover the billions of dollars it would have to spend. The law requires the government to recoup money it spends on the first $27.5 billion in terrorism losses.
“It’s a national issue that affects all businesses that have to have property and casualty insurance – not only large scale offices and hotels, but also industrial parks, shopping centers, universities, stadiums,” Real Estate Roundtable President Jeff DeBoer said. “Any property that needs insurance requires terrorism coverage.”
Such insurance against terrorism is needed to secure bank financing for construction projects in addition to being required in 49 states as part of workers’ compensation insurance.
If the legislation isn’t reauthorized, the greatest impact will be on the real estate and construction industries, with the projected effect of virtually halting new construction.
After the 9/11 attack, insurance companies stopped writing terrorism insurance coverage affecting some 300,000 jobs in the construction industry.
“It will definitely impact construction and construction jobs,” said Real Estate Roundtable chairman-elect Bill Rudin. “Automatically, you’re required under your mortgage to have insurance. It would have a very negative impact on the economy rippling through.”
Construction and real estate experts say the lack of such insurance will affect the commercial mortgage-backed securities market, which provides capital to real estate investors and commercial lenders.
Terrorism insurance coverage is required by investors and rating agencies while lenders require it in loan documents.
Without passage of the legislation, a severe financial strain will be placed on businesses purchasing terrorism insurance coverage. Many policies specify the condition that if the TRIA isn’t in effect, then coverage won’t be enforced.
“If terrorism coverage is not available or affordable, (commercial mortgage-backed security) borrowers face the threat of default,” according to a statement by the Commercial Mortgage Securities Association. “Rating agencies may downgrade related bond ratings and investors that see the value of their investment fall may be required to divest if the bonds no longer satisfy their mandatory investment parameters.”