At 2 o’clock on the afternoon of May 20, Douglas Durst was on the edge of his seat. He’d just received word from Cigna Investments, the firm to which his family-run real-estate organization pays its mortgage on the Condé Nast building, that his company was in default. Mr. Durst had made his payments, but his insurance carrier had dropped his terrorism coverage. It was a risk the investors were unwilling to take on without an insurance policy, regardless of price.
For his part, Mr. Durst and his lawyer, Warren Estis, had spent months lobbying in court to put off the default. The House of Representatives already had passed a bill providing for a federal backstop to cover uninsured losses to private property owners in case of a terrorist attack, and they were waiting for the Senate to hear the matter out and write the law.
But months after the House bill had passed, there was still no law. The courts appeared to be losing patience. A restraining order against Cigna, keeping it from declaring Mr. Durst in default, was set to expire at 3 p.m. on May 20-an hour after the letter from Cigna had arrived.
At the last minute, a judge extended the restraining order through the summer, and Mr. Durst’s control of the building was saved, at least until September.
“It was a spectacular victory,” Mr. Durst told The Observer.
At roughly the same time in Washington, D.C., a slugfest had developed between Senate Democrats, who favored a temporary measure committing the federal government to step in and stem potential losses to insurance companies from terrorist attacks, and Senate Republicans, who argued that such a measure constituted a government bailout of the insurance industry, and would expose the federal government to the same kind of lawsuits that the private insurance industry has been facing since Sept. 11. A deal to bring the bill to the Senate floor before Memorial Day, hatched early in the week between Democratic Senator Tom Daschle and Republican Senators Mitch McConnell and Phil Gramm, had floundered by the time the Senate recessed for the long Memorial Day weekend, sources told The Observer.
While work crews finished the cleanup of the World Trade Center site, Larry Silverstein, who holds the lease on the property, continued to fight his insurance carrier over $3.6 billion in potential payouts, to be used to begin the reconstruction of the site. At the same time, the Bush administration was issuing terrorist warnings by the day; insurance companies were dropping more terrorism-insurance policies, with a special focus on “trophy” properties and “high-risk” locations; and mortgage lenders began proceedings against borrowers who could not find-or could not afford-terrorism insurance.
Mr. Durst can rest easy for now. But his predicament seems to be only the tip of the iceberg. Industry watchers say the insurance problem is the next great shock wave to emanate from the destruction of Sept. 11. On the already high-risk island of Manhattan, the final costs of those attacks on commercial real-estate development are still a giant question mark.
In one day, assumptions that had long underpinned the insurance industry were upset, perhaps irrevocably. No longer would U.S. cities be perceived as immune from devastation at the hands of terrorists. “Now, with all of the warnings going public immediately, any time there’s a hint of something happening, that’s going to make it even more difficult to obtain terrorism insurance,” said Steven Spinola, who heads the Real Estate Board of New York. “And it’s going to make it especially difficult in New York.”
But more importantly, the United States has never had to confront the prospect of enemy attacks on private property. After World War II, the British government widely compensated property owners to help them rebuild after German bombardments. There is no such precedent in the U.S.-and a strong political animus exists against any government bailout of private industry.
Consider the $21 billion in federal aid streaming into New York City in the wake of Sept. 11, little of which is earmarked for use on the 16-acre World Trade Center site, and none of which is directed to Mr. Silverstein, the real-estate developer who holds a lease on the Trade Center that obliges him to rebuild it.
Instead, Mr. Silverstein will have to rely on money from his insurers to rebuild. And that insurance money has been tied up in months of litigation, most recently over whether the insurance policy he took out on the Trade Center interprets the September attackastwo”occurrences”-two planes, two towers, two collisions-or one single incident involving twin targets.
There is no dispute, however, that Mr. Silverstein’s insurers will have to fork over more than $3.5 billion.
Statistics from a May 23 report of the U.S. Congress Joint Economic Committee project that the insurance industry will pay out between $30 billion and $70 billion in the wake of the terrorist attacks. At the mid-range estimate, that’s more than the industry paid out for 1992′s devastating Hurricane Andrew, the Northridge earthquake of 1994 and 1989′s Hurricane Hugo combined.
In fact, the problem facing the U.S. in the wake of Sept. 11 is larger than any other country has had to deal with in recent history, according to Swiss Re, the primary company fighting Larry Silverstein over the extent of the payout in the wake of the Trade Center’s destruction. No country-not Israel, not Great Britain, not France-has been exposed to as much financial loss from a single act of terror over the last 30 years as the United States was in one day last summer.
Actuarial models in use before Sept. 11 took into account the likelihood of terrorist attacks and the insurance industry’s best estimates as to how significant financial losses from those attacks might be. While the likelihood of another attack remains open to question, even in the State Department, assumptions about the potential size of financial losses have been completely reversed.
In an April 2002 report, the American Academy of Actuaries wrote: “Extreme events such as the Sept. 11 terrorist attacks are infrequent, possibly unprecedented, unanticipatable and ‘unthinkable’ in their consequences.”
With no model to use when calculating how much to charge for terrorism coverage, the Joint Economic Committee concluded in its report that insurers are likely to drop terrorism insurance completely, or insure only low-risk buildings, or charge such high rates for insurance that obtaining terrorism coverage becomes a widespread deal-breaker in negotiating mortgages for high-profile properties.
Fitch Ratings, a firm that monitors the finance and insurance industries, reported earlier this month that the cost of terrorism insurance, when available, was “many multiples of basic all-risk policies.” A national agency representing the insurance industry reported in April that, in its survey of insurance agents and brokers, 72 percent said they had no clients who were willing to pay these high premiums to insure themselves against terrorism.
The Federation of Jewish Philanthropies, which includes Beth Israel Medical Center, last year held a policy that provided $8 billion in coverage, including coverage for damages due to terrorist attacks. Its new policy excludes terrorist acts, and in February, federation officials testified before Congress that they were still looking for separate terrorism insurance to fill the gap. One quote they received from an insurer offered just $50 million in coverage-on $8.5 billion in assets-for $4.24 million.
One of two major lenders, GMAC Commercial Holding Corp., which loaned $20 billion for real-estate development in 2001, has announced that it will no longer make loans for “trophy-type” developments without terrorism coverage. Mutual of Omaha no longer even lends for developments near trophy properties. Fleet Bank, based in Boston, has halted negotiations on $400 million in real-estate development financing in New York City alone.
But the impact is not just a matter of the industry’s perception of risk. The insurance industry was hobbled by the Sept. 11 attacks, according to the May 23 report. At the time of the attacks, the industry was enjoying approximately $300 billion in surplus cash. While that’s plenty to cover the Sept. 11 losses, it significantly reduces the industry’s ability to respond to future attacks of a similar magnitude.
Aside from the business slowdown associated with insurers’ withdrawal from terrorism coverage, there is the very real threat-emphasized daily in the media-that another attack could occur. The impact of such an attack on the U.S. economy, following on the heels of Sept. 11, would be devastating. According to a February report from the General Accounting Office, with insurance companies refusing to absorb the risk of future terrorist attacks, the fallout from another attack becomes even more dire.
“Another terrorist attack similar to that experienced on Sept. 11 could have significant economic effects on the marketplace and the public at large,” the report concludes. “The effects could include bankruptcies, layoffs, and loan defaults.”
The private sector is not the only loser. Last year, for example, the Metropolitan Transportation Authority paid $6 million for a $1.5 billion all-risk insurance policy; since Sept. 11, the M.T.A. has had to renegotiate, and is presently paying $18 million-three times as much-for a policy that covers a third of the dollars in losses and excludes acts of terrorism. For an additional $7.5 million, the M.T.A. purchased a separate terrorism-insurance policy that covers only $70 million in losses. Recent warnings from the Attorney General’s office that terrorists may be plotting an assault on major metropolitan transit systems are unlikely to strengthen the M.T.A.’s position to negotiate better terms.
More often, as in Mr. Durst’s case, the renegotiation of insurance terms has led to less, not more, coverage. His company’s insurance policy on the Condé Nast building was set to expire April 18, and his insurers sought to negotiate a new “all-risk” insurance policy that excludes acts of terror from coverage.
Cigna, which represents the certificate holders, or investors, in Mr. Durst’s mortgage on the building, quickly acted to protect itself from being exposed to the risk of terrorism.
“They sent us a notice that we were in default [on the mortgage] because we did not have [terrorism insurance],” Mr. Durst explained.
“We went to court and got a temporary restraining order, which prevented them from acting on their notice of default,” he continued. “The notice of default would have created a ‘lock box.’ All the income from the building would go into a lock box, and Cigna would control the money; they would spend it as they saw fit, including the ability to buy insurance.”
On April 25, the case was heard in Manhattan State Supreme Court, and the temporary restraining order against Cigna was extended one more time; it was now set to expire on May 20.
At 2 p.m. on May 20, Cigna sent out another letter defaulting the Dursts on the building. But the restraining order on the default wasn’t set to expire until 3 p.m. Mr. Durst’s lawyer, Mr. Estis, got a last-minute hearing before the judge, who reinstated the restraining order till 3:30 p.m. At 3:15 p.m., the Appellate Division decided to impose a stay on Cigna to prevent it from defaulting the Dursts until September, reasoning that some time had to be given to the federal government to determine whether it was going to intervene in the sprawling insurance debacle that has developed since Sept. 11. The stay saved-temporarily, at least-Mr. Durst’s control of the building.
“It would have been extremely unpleasant,” the soft-spoken developer said of the prospect of losing his case in the Appellate Division-and losing control of 4 Times Square’s assets.
By the following Monday, as Mr. Durst scrambled to protect his assets in the Condé Nast building, operatives for Senate Majority Leader Tom Daschle were trying to cobble together a deal with Senators McConnell and Gramm, who opposed the Democrats’ version of the Senate’s terrorism-insurance bill. But those talks fell apart before Memorial Day. The issue, according to sources in the Capitol and in the insurance and real-estate industries, is not whether the government supports some form of federal backstop for the insurance industry, but what is arguably a completely unrelated issue: tort reform.
It was an issue in the House of Representatives as well. The measure passed there would have the government act as an “insurer of last resort,” protecting insurance companies from unlimited liability in the case of terrorist attacks on the properties they insure. This would allow the insurance industry to offer more reasonably priced coverage to its clients. The measure is temporary: For one year, in the House bill, the government would provide up to $100 billion in loans to the industry to cover losses from future terrorist attacks. The loans would cover 90 percent of claims over $1 billion in industry losses.
But to pass it, House Democrats had to include controversial tort-reform measures, a favorite with the President and the Republican leadership on the Hill. The measure would ban punitive damage awards against the federal government and property owners in the case of terror attacks. But in the Senate version-substantially the same as the House’s-the Democrats have refused to include the tort-reform measures, and the Republicans won’t allow any measure that doesn’t contain them to come up for discussion or a vote.
Meanwhile, Mr. Durst crosses his fingers and hopes that the Senate will pass a terrorism-insurance bill before his final stay expires in September.
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