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Insurance

Disaster Prevention, Relief and Insurance

Background

IREM recognizes the fact that every piece of property is vulnerable to man-made and natural disaster. We also understand the serious human and economic hardships that can result from such disasters. Experience has proven that while some disasters are unavoidable, others are preventable. Furthermore, experience also shows that being prepared for a disaster can minimize its damage. We also recognize the importance of swift and efficient relief and restoration after a disaster strikes.

The Terrorism Risk Insurance Program and the National Flood Insurance Program are two examples of government programs which allow real estate managers to be prepared for and minimize economic damage as a result of unavoidable disasters.

Position

IREM urges all real estate managers to be prepared for disasters and emergencies by developing emergency procedure manuals, emergency procedure management teams and by understanding how their property's location, design, use, and occupancy will affect emergency procedure actions. Real estate managers should also establish cooperative relationships with the emergency management authorities in their communities. We urge all real estate managers and their management staff to take part in continuing education of emergency procedure techniques. Devising and distributing tenant and resident emergency information is one way in which to prepare properties for emergencies.

IREM also encourages real estate managers who have experienced a disaster to move quickly to prevent the immediate effects of the disaster from causing or allowing further damage. Managers should then return the property to its normal condition as soon as possible.

Adequate insurance is essential to a property's recovery after a disaster. Managers should encourage owners to carry sufficient coverage. In addition to maintaining private insurance, managers should be aware of any governmental insurance, relief, or aid available to them after a disaster.

IREM encourages the federal government to establish uniform rules for administering national disaster relief programs. We also encourage Congress and state legislative bodies to see that they maintain a healthy reserve of funds to administer disaster relief.

(11/90, updated 4/06, 4/10, 9/14)

Insurance Redlining

Background

Redlining, though illegal, is practiced by some commercial insurers across the United States. Redlining is, as it pertains to property insurance and insurance for property management companies, the discrimination in intent or in effect by an insurer or insurance representative against an applicant or property on the basis of age, geographic location, religion, race, national origin, ethnicity, or income of the applicant.

Many in the property management industry see an insurance company's refusal to offer property insurance to properties located in higher-risk, crime-ridden areas as unjust discrimination. Such properties experiencing location-premised redlining are often left to exist either uninsured, under-insured by substandard insurance carriers, or forced to pay unusually high insurance premiums based on their "risk factor" regardless of extensive security measures possibly enforced on the property.

Position

The Institute is opposed to insurance marketing and underwriting practices which result from discriminatory redlining.

(12/95, updated 10/07, 10/11, 3/16)

National Flood Insurance Program (NFIP)

Background

The National Flood Insurance Program (NFIP) is a unique partnership among federal, state, and local governments that helps mitigate flood risk and provides affordable flood insurance to those who need it most.  It was created by the U.S. Congress in 1968 through the National Flood Insurance Act of 1968.   NFIP flood insurance is sold through private insurance companies and agents and is backed by the federal government.

If the program expires, flood insurance will become more costly or even unavailable. The NFIP partners with over 22,000 communities to reduce flooding nationwide and holds 5.1 million policies representing 1.3 trillion in insurance coverage. It provides over 90% of all flood insurance nationwide and close to 100% of flood insurance coverage for individually owned properties and small- to mid-size commercial properties.

The NFIP aims to reduce the impact of flooding on private and public structures by providing affordable insurance to property owners, renters, and businesses and by encouraging communities to adopt and enforce floodplain management regulations. These efforts help mitigate the effects of flooding on new and improved structures. Overall, the program reduces the socio-economic impact of disasters by promoting the purchase and retention of general risk insurance, and specifically, flood insurance.

It is important to note that everyone lives in a flood zone; it's just a question of whether it is a low, moderate or high risk area. Land areas that are at high risk for flooding are called Special Flood Hazard Areas (SFHAs) or floodplains. A building located within an SFHA has a 26 percent chance of suffering flood damage during the term of a 30-year mortgage.

For a property that is located in a Special Flood Hazard Area (SFHA) and was financed through any federally-regulated entity (such as banks that carry FDIC insurance), by law the lender must require the owner to purchase and regularly renew flood insurance.

As it is currently structured, the NFIP is not financially sustainable over the long term. According to the Congressional Budget Office, the premiums paid into the program are not expected to cover claims in catastrophic loss years, and the program has already borrowed substantially to make up the difference.

The NFIP also offers contents insurance for renters, homeowners, and business owners. Renters can purchase up to $100,000 of contents coverage. Homeowners, who are made aware of this insurance assuming they purchase their home with a federally-insured lender, can purchase up to $250,000 of building coverage and up to $100,000 of contents coverage. Unless they are advised by the property manager or landlord, renters are not notified that they are in a SFHA or of the availability of flood insurance. Business owners can purchase up to $500,000 each of both building and contents coverage.

Position

IREM believes a strengthened National Flood Insurance Program (NFIP) combined with a robust private market is needed to maintain access to flood insurance in all markets over the long term so that it remains a viable option for property owners. For this reason, IREM supports the long-term reauthorization of the NFIP together with reforms to ensure its ongoing sustainability for property owners. Such reforms include:

  • Development of more robust, cost effective private flood insurance options,
  • provision of federal assistance and resources for property owners to build to higher standards, mitigate the risk of flooding, and keep insurance rates affordable,
  • improvements to flood map accuracy, and
  • improved and more affordable NFIP pricing policies.

 (Adopted 6/07, updated 9/19)

Terrorism Insurance

Background

IREM originally took a position on terrorism insurance in November, 2001, shortly after 9/11, in response to the insurance industry’s announcement that they would no longer cover terrorism claims. The insurance industry, as well as a coalition of real estate groups, petitioned the federal government to step in and assist the real estate industry. Without proper insurance, it would be very difficult for property owners to manage or acquire properties or to refinance loans.

The Terrorism Risk Insurance Act (TRIA) was enacted in 2002, establishing a federal backstop for commercial property and casualty insurers arising from terrorism. TRIA required property and casualty insurance companies in all fifty states to offer terrorism insurance coverage when they underwrote property and casualty insurance; and any existing state exclusions to the contrary were voided. The Treasury Department would pay insurers 90 percent of claims after insured losses exceeding $10 billion in year one, $12.5 billion in year two, and $15 billion in year three. The Treasury would pay until insured losses exceeded $100 billion. The law did not have a federal standard for the awarding of punitive 3 damages in terror-related suits brought against property owners and as a result state laws on punitive damages prevailed.

TRIA was designed to provide a bridge to a time when the private insurance markets would function again. Following TRIA's enactment, terrorism insurance coverage became readily available, thus enabling billions of dollars of transactions previously stalled to go forward. The primary reasons TRIA successfully expanded terrorism insurance capacity are: 1) the program required the federal government share the risk of loss from terrorist attacks with the insurance industry; and, 2) the program required insurers offer terrorism insurance coverage to policyholders on the same terms and conditions as other property and casualty insurance.

IREM lobbied for legislation extending TRIA, which was set to expire at the end of 2005, during the 2005 IREM Capitol Hill Visit Day. Fortunately, the Terrorism Risk Insurance Extension Act of 2005 was signed into law by the President in December, 2005, ensuring that terrorism coverage would still be available and affordable to the commercial real estate industry. The program has been extended through 2007.

In response to a request from the House Financial Services Committee, the Government Accountability Office (GAO) undertook a study on the availability of Nuclear Biological Chemical and Radiological (NBCR) insurance.

The findings of the GAO report on the market for NBCR insurance were released in September, 2006 and illustrated that property/casualty insurers still generally sought to exclude such coverage from their commercial policies. In doing so, insurers rely on long-standing standard exclusions for nuclear and pollution risks. Commercial property/casualty policyholders generally reported that they could not obtain NBCR coverage. The report showed that commercial property/casualty insurers generally remain unwilling to offer NBCR coverage because of uncertainties about the risk and the potential for catastrophic losses, according to industry participants. Insurers face challenges in consistently estimating the severity and frequency of NBCR attacks for several reasons, including accounting for the multitude of weapons and locations that could be involved and the difficulty or perhaps impossibility of predicting terrorists' intentions. Without the capacity to reliably estimate the severity and frequency of NBCR attacks, which would be necessary to set appropriate premiums, insurers focus on determining worst-case scenarios.

On December 26, 2007, President Bush signed into Law the Terrorism Risk Insurance Program Reauthorization Act of 2007 (TRIPRA). The seven-year extension of the federal terrorism risk insurance program makes three major changes to the TRIA program: (1) the definition of "act of terrorism" under TRIA is expanded to allow the certification of acts "domestic terrorism"; (2) the legislation clarifies the operation of the $100 billion annual program cap; and (3) the new law changes the manner in which the mandatory portion of post-event policyholder surcharges would be collected.

IREM partnered with other industry leaders and joined the Coalition to Insure Against Terrorism (CIAT). In July 2010, IREM reached out to members and inquired about their experiences with terrorism insurance and their ability to obtain the coverage. The questions mainly focused on the availability, affordability, and need of coverage as well as the impact of the Terrorism Risk Insurance Program Reauthorization Act of 2007. In short, there was little awareness by the members of this type of coverage. Those who were aware mentioned it was provided by their carrier and grouped along with other perils such as flood and earthquake insurance. Members also mentioned that the threat may be geographical in nature and some areas/cities may be more prone to this type of activity. The responses and comments were compiled and sent on behalf of the Coalition to Insure Against Terrorism to the President’s Working Group on Financial Markets (“PWG”) in August, 2010.

On December 31st, 2014, the 2007 TRIA reauthorization was allowed to expire after Congress could not come to agreement on the terms of an extension.

On January 12, 2015, President Obama signed the Terrorism Risk Insurance Program Reauthorization Act of 2015 into law. The law renews TRIA for six years, through 2020. The new law changes the trigger amount for the federal backstop to $200 million, an increase of $100 million. Also the mandatory recoupment amount is raised to $37.5 billion, from $27.5 billion.

Position

The Institute of Real Estate Management is very concerned about escalating insurance costs and the lack of coverage for events related to terrorism and war. Prior to the events of September 11, 2001, property and casualty and general liability insurance policies typically covered damages resulting from acts of terrorism, although most excluded damages relating to acts of war. Without this coverage, the real estate industry will be at grave risk. A healthy real estate market is critical to our nation’s economy. We urge Congress and the Administration to pass legislation that would provide federal reinsurance coverage for the nation’s property and casualty insurers against losses caused by acts of terrorism or war.

(11/01, updated 10/06, 10/10, 4/15)

 

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