Partial protection

Congress may yet push through a legislative package of federal terrorism insurance, but many commercial real estate owners aren’t waiting for a government bailout.

Congress may yet push through a legislative package of federal terrorism insurance, but many commercial real estate owners aren’t waiting for a government bailout. They’ve already gone back to insurers to see what’s available from the private sector. The owners’ assessment? Surprisingly, they can get coverage against certain forms of terror - so long as they’re willing to pay a lot and live with significant restrictions.

Edward Linde’s experience is typical. When the CEO of Boston Properties, an office real estate investment trust, went looking for terrorism insurance after the September 11 attack on the World Trade Center, insurers told him they would cover up to $150 million - a small fraction of his total portfolio of office buildings, which had an insured value of $6 billion. The annual cost for the new coverage would be $4.5 million, on top of the company’s existing yearly insurance bill of $7 million. What’s more, the policy excluded acts of biological or chemical terrorism.

“It seemed pretty steep for such limited coverage,” says Linde, who shopped around some more and finally found an insurer that covered property for up to $250 million, at an annual cost of $3 million. He still couldn’t get biological or chemical terrorism coverage. “Even at these rates, which are extremely high, it took a major effort to get the coverage,” says Linde.

Currently, about a dozen insurance companies offer terrorism insurance. Among them: American International Group, Berkshire Hathaway’s General Re Corp. and Lloyd’s.

In addition to excluding biological and chemical terrorism, insurers have long refused to offer protection against nuclear accidents or attacks. Since September 11 some insurers have also written clauses into their contracts that allow them to cancel policies with just 30 days’ notice. If, say, there’s a terrorism attack on a property in Washington, D.C., the insurer could cancel coverage on any policyholder in the city, even if its buildings were unaffected by the attack.


A number of real estate companies that have securitized their properties believe they must buy whatever terrorism insurance they can. That’s because they fear that credit rating agencies will downgrade their debt without it.

In late March, for example, New York’s SL Green Realty Corp. announced the $480 million acquisition of a 1.7 million-square-foot Times Square office tower, 1515 Broadway.

According to Lehman Brothers chief REIT analyst David Shulman, SL Green managed to secure just enough terrorism insurance to satisfy the rating agency and its lenders. Shulman explains that the realtor obtained $200 million in insurance on the building and an additional $50 million in coverage for a mezzanine loan and then self-insured the remaining $230 million. By selling a 45 percent interest in the property to a French partner, SITQ Immobilier, SL Green reduced its self-insurance exposure to $126.5 million, according to Shulman.

Real estate industry lobbyists on Capitol Hill argue that the government must subsidize the insurance industry to offer adequate terrorism coverage. Says John Levy, who runs the Richmond, Virginia, real estate investment banking firm that bears his name, “The cost of a future terror attack could be huge.”

The Bush administration has endorsed a draft of a House bill that would provide up to $100 billion in government loans to insurers in the event of a future terrorist attack. Senate Republicans want to include in any terrorism insurance bill tort reform measures that would put stringent caps on personal liability, but Democrats have balked at that prospect. Some compromise on tort reform may yet emerge, with legislation possibly coming to a vote in early June.

Says Jeffrey DeBoer, president and COO of Real Estate Roundtable, an industry group: “I figure the chance of a terrorism insurance bill passing during this session is about 60 percent.”