The Terrorism Risk Insurance Act of 2002 (as amended, TRIA)1 is set to expire on December 31, 2014. While the real estate industry is intimately familiar with TRIA and the normalizing effect it has had on the insurance and lending markets after the September 11th terrorist attacks, one suspects (or fears) the broader market may not fully recall the beneficial effects of the legislation. Recognizing its importance in past years, Congress extended TRIA in 2005 and, again, in 2007. In response to the looming expiration in 2014, members of Congress and industry lobbying groups have begun debating the future of TRIA once more.

Prior to TRIA’s enactment, the September 11th terrorist attacks had a far-reaching impact on the ability to obtain financing for commercial real estate projects. The acquisition, disposition and financing of trophy properties, especially in metropolitan centers, was jeopardized, as lenders continued requiring terrorism insurance and borrowers were unable to find sufficient coverage or unable to afford the cost thereof. Most practitioners at the time can offer one or more anecdotes exemplifying this recurring problem. On one acquisition, the purchaser budgeted $750,000 to obtain $300 million of insurance coverage prior to 9-11, but the same coverage cost over $6 million after 9-11.2  The deal reportedly never closed.3 The effects were also felt in the CMBS market. In September 2002, Moody’s downgraded $4.5 billion in CMBS based on the unavailability of terrorism insurance for owners of high-profile skyscrapers or the limitations or weaknesses in the coverage available to such owners.4

Congress passed TRIA in late 2002 to address this market disruption, which legislation is widely credited as having restored stability to the terrorism insurance market and, in turn, to commercial real estate lending. According to Sen. Charles Schumer (D-NY), “In a post-9-11 New York, Terrorism Risk Insurance has proven to be an absolutely essential partnership between the government and the private sector that has turned rebuilding downtown Manhattan from a question to a certainty.”5

TRIA requires insurance companies to make terrorism insurance available on terms that do not “differ materially from the terms, amounts and other coverage limitations applicable to losses arising from events other than acts of terrorism.”6  In exchange for insurance companies making coverage available, the federal government provides a backstop to the insurance industry for terrorism losses that exceed $100 million, in the aggregate.7   The aggregate losses of $100 million must stem from a single event certified as an act of terror by the Treasury Secretary in concurrence with the Secretary of State and Attorney General.8 Once the $100 million threshold is reached, the federal government will reimburse insurers for 85 percent of losses in excess of the insurers’ deductibles.9 The insurers’ deductible equals 20 percent of the premiums directly earned by a given insurer for property and casualty insurance in the previous year.10 TRIA caps the industry’s annual liability and the government’s annual payments at $100 billion, in the aggregate, after the application of the foregoing deductible.11  Finally, TRIA contains a reimbursement mechanism that enables the federal government to recoup its losses. Currently, when aggregate losses are under $27.5 billion, TRIA requires the Treasury Secretary to collect 133 percent of a mandatory recoupment amount, which is an amount that represents the federal government’s losses and  is calculated by formula as set forth in TRIA.12 The Secretary collects such losses through a surcharge on property and casualty insurance.13 For losses occurring during or after 2012, TRIA mandates that the Secretary complete the recoupment process by September 30, 2017.14 For aggregate losses that exceed $27.5 billion, TRIA provides the Secretary with the discretion to determine what, if any, additional amounts shall be subject to recoupment.15

Supporters of a further extension of TRIA are left concerned by what may transpire should the insurance backstop be removed. Senators Mark Kirk (D-Ill.) and Dean Heller (R-Nev.), in a joint letter to Senate Banking Committee Chairman Tim Johnson (D-S.D.) and Ranking Member Mike Crapo (R-Idaho), stated, “Unfortunately, the threat of TRIA expiration is a constant concern for many businesses throughout our states, particularly in Las Vegas and Chicago, where the threat of a terrorist attack is always high. The possible expiration of TRIA coverage threatens the economic recovery for many of our constituents, especially those in the event, travel, and tourism industries.”16 Pete Thomas, the Chief Risk Officer of Willis Re, believes “TRIA should be renewed because it is good for the economy. It is an economic national security issue.”17  Furthermore, recent studies of terrorism insurance indicate that many insurers would not offer terrorism coverage in the absence of TRIA and this would have a material effect on commercial real estate financing and construction.18

Notwithstanding such concerns, the future of the program is uncertain as the December 31, 2014 sunset of TRIA approaches. Though the past 16 months have seen the commencement of legislative activity in the Senate and House of Representatives, it is too early, at present, to determine the structure of the final legislation, if any.

Legislative activity on the reauthorization of TRIA was initially limited primarily to the House. In February 2013, eleven members of the House proposed the Terrorism Risk Insurance Act of 2002 Reauthorization Act of 2013 (H.R. 508), which would extend TRIA until the end of 2019.19 Two other bills introduced in 2013, Fostering Resilience to Terrorism Act of 2013 (H.R. 1945) and Terrorism Risk Insurance Program Reauthorization Act of 2013 (H.R. 2146), would each extend TRIA until the end of 2024.20  H.R. 1945 would also modify the TRIA program by requiring the Secretary of Homeland Security, instead of the Treasury Secretary, to take the lead in certifying “acts of terrorism.”21  Such certifications would occur in concurrence with the Treasury Secretary, Secretary of State and Attorney General.22  H.R. 508 and H.R. 2146, on the other hand, would extend TRIA without modifying the TRIA program.23

In April, 2014, legislative activity picked up in the Senate as Sen. Schumer and a bipartisan group of eight co-sponsors introduced the Terrorism Risk Insurance Program Reauthorization Act of 2014 (S. 2244), which would extend TRIA until the end of  2021.24  In addition to extending TRIA, the Senate bill proposes two changes to the current TRIA program. First, the bill would decrease the federal government’s reimbursement of insurers, after aggregate losses reach the $100 million threshold, from 85 percent to 80 percent of losses in excess of the insurers’ deductibles.25 This decrease in federal reimbursements would phase in over five years.26 Second, the bill would increase the threshold under which recoupment is mandatory from $27.5 billion to $37.5 billion.27  This aspect of the bill would also phase in over five years.28 On June 3, 2014, Republican and Democratic members of the Senate Banking Committee unanimously approved this bill by a 22-0 vote.29 The Senate bill is now expected to advance to the Senate floor for further debate and  a vote, though at present the Senate Majority Leader, Sen. Harry Reid (D-Nev.), has not yet scheduled a date on the Senate’s calendar.

None of the bills formally introduced in the Senate or the House currently address a coverage option that Congress left open for further study at the time of the last TRIA extension. In 2007, TRIA instructed the Government Accountability Office (GAO) to study the availability of insurance coverage for losses due to nuclear, biological, chemical and radiological (NBCR) terrorism.30 Terror attacks that use NBCR materials are typically excluded from terrorism insurance policies, as these policies often limit coverage to attacks using conventional weapons.31  The GAO made several proposals in its report,32  and while the current versions of the Senate and House bills do not incorporate any of these proposals, certain of these proposals are being discussed in drafts of the proposed, but not yet introduced, Terrorism Risk Insurance Modernization Act of 2014 (“TRIM”). A proposed outline of the TRIM Act was distributed among Republicans on the Subcommittee on Housing and Insurance by Rep. Randy Neugebauer (R-TX), the Chair of the Subcommittee, in early May.33 The TRIM draft represents a departure from previously proposed legislation and, for reasons discussed below, has expanded the discussion as to the form a TRIA extension may take.

Prior to the issuance of the TRIM proposal, the Senate bill and one of the House bills (H.R. 508) had achieved a measure of bi-partisan support, though considerable discussion and debate were still expected before the passage of any TRIA extension. The introduction of the TRIM Act, which seeks to shift the risks of coverage away from government and towards the private sector more quickly than other proposals, appears to have gained support from some politicians who might otherwise have voted against an extension. By way of example, Rep. Jeb Hensarling (R-TX), the Chairman of the House Financial Services Committee, initially indicated he would oppose an extension of TRIA, but has reportedly recently evidenced support for the proposed TRIM Act.34 As other members of the Republican leadership, including, Majority Leader Eric Cantor (R-VA), have also reportedly evidenced support for the proposal,35  one could make an argument that the momentum in Congress appears,  at least at present, to have shifted from a question of whether TRIA will be extended to the form such extension may take, though it is still too early to tell with any specificity.

The TRIM proposal varies from the introduced legislation in a number of ways and would, among other things:

  • extend TRIA for three years;
  • reduce the federal backstop for non-NBCR events from  an 85 percent (government) - 15 percent (private industry)  copayment split to an 80/20 split in 2016 and a 75/25 split  in 2017;
  • provide for a newly created distinction between NBCR and  non-NBCR events, by covering NBCR events with a federal  backstop utilizing an 85/15 copayment split and a $100  million per year program trigger;
  • increase the program trigger for non-NBCR events from  $100 million per year to $250 million in 2016 and $500  million in 2017;
  • decrease the annual cap on insurer liability and government  payments for non-NBCR events from $100 billion to $75  billion, after the application of the insurers’ deductible, in  2017; 36
  • require insurers to establish a capital reserve fund to  address future costs and losses;
  • increase the recoupment of federal payments to 150  percent from 133 percent; andProperty Lines  |  June 2014 13
  • permit a voluntary opt-out of TRIA coverage for small  insurance companies. 37

One of the arguments against the renewal of TRIA in its current form has been the concern that the existence of TRIA is hindering the development of a private market for terrorism insurance. This concern is especially evident in the proposed TRIM Act, which seeks to lessen government involvementin providing a backstop for losses and increase regulation of insurance companies to ensure the insurers maintain adequate reserves on hand to cover losses. The Senate bill also seeks to pull back some of the protections afforded insurance companies under TRIA, albeit to a lesser extent and at a slower pace than that sought by the proposed TRIM Act.

Included among the arguments for the renewal of TRIA without material modification are studies which suggest that a private market solution may not be possible without government support. By way of example, the 2013 Terrorism Risk Insurance Report, issued by Marsh & McLennan Companies, states, “Although there is private market capacity for terrorism insurance, it may not be enough to meet the demand in the marketplace should TRIA not be reauthorized. In that case, despite an ongoing exposure to terrorism events, insureds may be unable to secure adequate capacity to insure their risks, or may be unable to do so at commercially viable prices.”38  Fitch Ratings has also concluded that “it is unlikely that substantial private market capacity would arise as a substitute to [TRIA] coverage if the program is allowed to expire.”39  Moreover, the decreased availability of terrorism insurance may very well impact the CMBS market, as Fitch, among other rating agencies, “may decline to rate . . . CMBS transactions with inadequate terrorism insurance” or may lower its ratings on such transactions.40

Regardless of what legislation Congress may ultimately pass, most would agree that TRIA provided reassurance to the markets and helped maintain the continued availability of terrorism insurance after the September 11th attacks. Notwithstanding such past successes, the effect on the markets will almost certainly be substantial if TRIA is allowed to expire  at the end of 2014. Even if TRIA is extended beyond 2014, the details of such extension, together with the timing thereof, could impact the marketplace by affecting the availability and cost of terrorism insurance coverage. These are issues that will gather more and more attention as the TRIA sunset date draws closer and the final form of any ultimate legislation becomes apparent.