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Congress closer to providing insurers with backstop against large-scale terrorist act

Now comes the hard part.

With the cost of insurance against acts of terrorism spiraling out of sight for many businesses, and completely unavailable for others, the U.S. Senate and House of Representatives have passed legislation that could cap insurance company losses in the event of another large-scale terrorist attack. But now it will get difficult: the two pieces of legislation are vastly different, and representatives of both houses must develop compromise legislation.

Some high-profile examples of the high cost of terrorism coverage since Sept. 11 include:

  • The New York Metropolitan Transit Authority (MTA), which owns the New York City subway system, among other bridges and roadways, is now paying $7.5 million per year for terrorism coverage. The policy comes with a $30 million deductible for $70 million in coverage. Prior to the catastrophe at the World Trade Center, the MTA was paying about $6 million per year for $1.5 billion in coverage that included terrorism.
  • Only one insurer offered to provide terrorist insurance for the 65-year-old Golden Gate Bridge in California after Sept. 11. The policy would have provided $100 million in coverage at a cost of $1.7 million per year. The Golden Gate Bridge Highway and Transportation Authority declined the policy, since $100 million wouldn't begin to cover the $2.1 billion price tag of reconstructing the bridge.
  • Simon Properties, based in Indiana, is the country's largest real-estate investment trust with 251 malls and shopping centers in 36 states. Simon has purchased $200 million in terrorism insurance to cover its entire portfolio. Of that, $100 million is dedicated solely to the Mall of America.

Joe Annotti from the National Association of Independent Insurers says commercial insurance rates were already on the rise at the end of 1999 because of tightening in the market, which was exacerbated by the events of Sept. 11. Insurance companies get their own protection from reinsurance companies, but reinsurers have balked at offering coverage for terrorism, so insurance companies have had to raise commercial premiums for businesses in order to maintain enough funds to protect their customers. Annotti says it's a trickle-down effect: Businesses have to pay more for insurance, affecting their bottom lines, which can lead to layoffs or lower salaries.

For some companies, the rise in insurance rates means they'll "go bare" by doing without terrorism insurance. According to Loretta Worters, vice president of communications for the Insurance Information Institute, "many airports are going bare because it's just too expensive." For example, the Salt Lake City Airport wasn't covered for terrorism during the Olympics because the premiums were prohibitive.

The insured loss from the Sept. 11 attack on the World Trade Center is now estimated $20.3 billion by the Insurance Services Office (ISO), a $3.7 billion increase over the number released immediately after the terrorist attacks. This pushes Sept. 11 into the slot formerly held by 1992's Hurricane Andrew in Florida as the world's most expensive catastrophe.

The ISO's original loss estimate was $16.6 billion. This number was based on the claims information available for personal and commercial insurance. After the attacks, a comprehensive review of losses had to be delayed because of rescue operations and the inability for many claims adjusters to access the areas of destruction.

New York has an estimated 49,000 property-loss claims, according to the ISO. Of the total, 30,000 of the claims are for personal property, 15,000 for commercial property, and 4,000 for auto damages.

The attack on the Pentagon has losses estimated at $6.5 million and has thus far generated 1,500 personal, 200 commercial, and 300 auto claims.

The ISO estimates on property loss include fixed property, personal property, vehicles, boats, related property items, and business-interruption losses.

Final numbers are still uncertain because of lawsuits and the possibility of more claims being filed in the coming months.

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