By Carol J. Patterson
& Alana Sliwinski,
Zetlin & De Chiara LLP
With the advent of 2015, the 114th Congress began its legislative session faced with an immense pressure from the real estate, construction and insurance industries to reauthorize the Terrorism Risk Insurance Act (TRIA).
The legislation creates a public-private collaboration guaranteeing federal assistance to the private sector for certain insurance losses caused by acts of terrorism.
Congress allowed TRIA to expire on December 31, 2014 but reauthorized it on January 8 with a 93-4 vote in the Senate.
Before then, however, current and anticipated construction projects faced an uncertain future of lost coverage that could have undermined the viability of projects under construction and resulted in many lost jobs.
The threat was palpable as within days of its expiration, approximately 750,000 private insurance policies were canceled.
Without federal support, the insurance industry would have been forced to reassess its ability to underwrite the potential losses due to terrorist attacks, and many owners and developers would have been forced to search for additional coverage with few available options.
Many loan documents for development projects obligate borrowers to maintain insurance levels including the coverage provided under TRIA.
By quickly reauthorizing TRIA, the fear that lenders would promptly declare borrowers in default for not carrying sufficient coverage was allayed. The magnitude of the disruption that could result from the absence of TRIA coverage was likely a factor in the 416-5 vote, held in the House of Representatives on January 7, in favor of extending the Act into 2020.
Congress originally enacted TRIA, effective November 2002, in an effort to spur commerce after the September 11 attacks.
The legislation mitigates the risk of catastrophic losses from acts of terrorism by having the government share in the loss.
The expired TRIA triggered federal involvement when insurance losses reached $100 million, but capped assistance at $100 billion.
TRIA stabilized the insurance market by encouraging the industry to cover costly terrorism acts knowing the federal government would share a portion of the loss.
TRIA was extended in 2005 for two years, and again in 2007, but that extension expired December 31, 2014.
The 2015 version of TRIA extends the legislation until December 31, 2020, and doubles the amount of losses required before government intervention occurs.
Each year, the loss trigger will increase by $20 million to reach a $200 million threshold in 2020, before federal assistance is provided.
These modifications shift to the private sector a greater allocation of losses sustained at potential terrorist targets, such as airports, sports stadiums, major office buildings and bridges and other infrastructure facilities.
While 9/11 placed a focus on New York as a potential terrorist target, the risk of terrorism affects facilities nationwide. The 1995 bombing of a government building in Oklahoma City was estimated at $192 million in insured property losses.
Despite nearly unanimous support in the House of Representatives, the Senate failed to pass TRIA (S. 2244) before the December legislative session ended.
Many objections arose to because of a provision concerning Dodd-Frank regulations to exempt from Wall Street regulations certain counterparties and swaps.
Ultimately, TRIA never reached the Senate floor for a vote in December because of retiring Senator Tom Coburn’s objections and demand to add a provision allowing States and insurance agents to opt-out of registering with a national, non-profit clearing house. The 2015 TRIA as enacted kept the Dodd-Frank provision and no opt-out language was added.
For over a decade, TRIA has provided economic security to the insurance, real estate and construction industries through the shared risk of terrorism between the public and private sectors.
Generally, to finance large scale commercial developments, lenders require owners and developers to secure terrorism insurance. Many insurance policies including terrorism coverage were based on the express requirement that TRIA be effective.
Otherwise, as happened, TRIA’s expiration would trigger sunset clauses causing terrorism coverage in the policy to no longer continue.
Consequently, a series of consequences cascaded from TRIA’s expiration: an owner whose insurance policy was linked to TRIA was without terrorism coverage on pending and future projects and was in default under financing agreements that required terrorism insurance.
The uncertainty whether Congress would pass TRIA created a serious problem for developers exposed to an uninsured risk if a terrorist attack occurred. Those owners scrambled to secure additional insurance to avoid a default. But it was unknown if coverage was commercially available and if it was, whether it would be prohibitively costly for some borrowers.
Congress avoided eroding that economic stability by quickly passing the legislation.
On January 7 the House of Representatives passed 2015 TRIA (H.R. 26) and pushed through the Senate a day later. The President is expected to sign the bill shortly.
The 2015 proposed legislation is essentially identical to the 2014 version. Regulatory guidance will determine retroactivity of TRIA for those who were briefly without coverage. ■