Terrorism Risk Insurance And Construction
The construction industry was hit especially hard by the newly turbulent terrorism insurance market. Because the frequency and severity of terrorist activities are virtually impossible to predict, the pricing of terrorism coverage depends heavily on a number of factors, including location.
As a result, many owners and construction contractors on high-profile projects in "targeted" areas were left struggling to find affordable terrorism coverage. Some projects came to a grinding halt, while others moved forward with little or no insurance, exposing owners and contractors to potentially huge losses.
Terrorism Insurance Laws
In 2002, the federal government stepped in to help bring stability back to the construction marketplace. On Nov. 26, 2002, President George W. Bush signed into law the Terrorism Risk Insurance Act (TRIA) of 2002.The law established a federal Terrorism Insurance Program, which provides for a transparent system of shared public and private compensation for insured losses resulting from acts of terrorism, in order to ensure the continued availability and affordability of property and casualty insurance for terrorism risk.
Under the law, the federal government covers 90 percent of the losses above a company's deductible, while insurers provide the remaining 10 percent. By sharing potential losses between private insurers and the federal government, TRIA limits the exposure of private insurers in the event of a catastrophic attack, helping add much-needed capacity to the terrorism risk insurance market.
The law is set to expire Dec. 31, 2005, and many industry groups have already begun to take action to ensure that the program is extended for another two years. The extension is especially important for the construction industry, where projects are scheduled years in advance and insurance must be purchased long before a project is launched.
Introduced by U.S. Reps. Pete Sessions, R-Texas, Richard Baker, R-La., Sue Kelly, R-N.Y., and Eric Cantor, R-Va., the Terrorism Insurance Backstop Extension Act of 2004 (H.R. 4634) would extend the TRIA through 2007. The measure was approved earlier this year by the U.S. House of Representatives' Financial Services Committee and is strongly supported by a number of construction trade organizations, including Associated Builders and Contractors.
The passage of the TRIA in 2002 brought stability back to the construction marketplace. If the TRIA is allowed to expire, the lack of viable insurance options will severely impact the construction industry. Without an extension of this necessary coverage against new terrorist acts, banks will not lend to new construction projects and companies will be reluctant to invest, restricting the flow of financing for many projects and, more importantly, reducing the number of new jobs that these projects would create.
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Guest columnist Carole Bionda is national chair of Associated Builders and Contractors (ABC) and vice president of Nova Group in Napa, Calif. She can be reached by telephone at 703-812-2069.
Publication date: 10/25/2004