To the relief of building, engineering, and design interests, President Bush signed legislation last month that makes the government responsible for most of the cost of insurance claims related to future terrorist attacks. Industry groups, including the AIA, applauded the measure, hoping that the federal aid would spur construction spending and jumpstart building projects that have languished as a result of tightening and disappearing insurance and reinsurance markets.

“By helping to ensure that terrorism insurance is affordable and available, the Terrorism Risk Insurance Act will permit many construction projects to move forward and to help this economy grow. Billions of dollars in investments will be more secure,” Bush said at a White House bill-signing ceremony. Risks associated with the September 11, 2001, attacks and the possibility of further violence prompted carriers to pull the plug on terrorism insurance. Since that time, most new policies specifically exclude it, according to industry analysts.

Under the new law, during 2003, the first year of the program, the government will pay up to 90 percent of insured losses once the claims that result from a terrorist attack are greater than $10 billion, and insurance companies would be responsible for the rest. For lesser damages during 2003, insurance companies will pay up to the equivalent of 7 percent of their premiums toward damages, while the government kicks in the remainder. The deductible rises to 10 percent in 2004 and 15 percent in 2005, and, at the highest rate, the level of insured losses goes up to $15 billion. Federal payments would be capped at $87.5 billion the second year, and $85 billion in 2005.

Hope for improvement
Industry reports have indicated that an insurance shortage has restricted financing for acquisitions and construction of high-risk properties, such as skyscrapers, health-care facilities, sports stadiums, high-profile office buildings, and shopping malls. Other projects have been blackballed because of their location or are doomed to exclusion clauses in their liability policies because of the type of work or tenants slated for the building. Based on input from building and construction interests across the country, the Real Estate Roundtable estimates that there are about $15 billion in projects and about 650,000 architecture and engineering jobs on hold.

The law is a reprieve for businesses seeking insurance coverage because it reverses the terrorism exclusions approved in all but five states and requires that insurance companies make terrorism policies available to their commercial clients. This doesn’t mean the policies will come cheaply. Insurance companies still must work out what they will charge, and analysts and consumer advocates say prices could still be steep. Dan Wilson, the AIA’s director of Federal Affairs, cautioned that there will be many variables that will determine insurance rates: location and project type, size, and design are just some examples of elements that will inform pricing decisions.

President Bush remains hopeful about the overall market. “With this new law, builders and investors can begin construction in real estate projects that have been stalled for too long,” he said at the ceremony. The new law is effective immediately, but will take time to be implemented.

New law may aid A/E insurers
The new legislation does not affect architects’ and engineers’ professional liability insurance directly. But over the longer term, it is hoped that a stronger insurance and reinsurance market and a stronger construction industry will help to bring premiums back down.

Sharply rising premiums have been giving sticker shock to many firms in the past year—a trend that is likely to continue in the coming year. The AIA Risk Management Committee reports that because of factors in place even before the September 11 attacks, members are facing rate increases as their policies come up for renewal. Design professionals face a particularly difficult set of decisions when considering professional liability policies. The last several years have been very busy, and design professionals, with their claims-made-basis insurance policies, have to assess risk from possible claims from work they’ve completed as well as work yet to be done. The committee suggests that when professional-liability policies are up for renewal, members consider the allocation of total revenues, seek “first-dollar defense” policies if available and cost effective, think about the highest reasonable deductible for the firm, and consider, if available, multi-year policies.

“We hope that this new legislation assists the insurance companies, and the reinsurance market manages its assets and predicts liabilities better so that, in turn, our professional liability policies do not have further exclusions and limitations placed upon them,” said Cara Shimkus Hall, AIA, chair of the AIA Risk Management Committee.

Copyright 2002 The American Institute of Architects. All rights reserved.