SECTION: NEWS;Pg. A-1

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HEADLINE: Terrorism insurance difficult to get, costly; Before 9/11, it had been routine part of coverage

BYLINE: Kelly Thornton; STAFF WRITER

BODY:
Peter Yee, who gets paid to anguish about all sorts of catastrophes that could befall the city of San Diego, found something else to worry about when a letter landed on his desk in January.

It was a notice of cancellation, six months before the liability insurance for Brown and Montgomery airports was to expire. The policy was being scrapped because terrorism no longer was covered. A separate terrorism policy would cost $12,000.

Before Sept. 11, virtually every insurance policy in the United States provided terrorism coverage, simply because it wasn't singled out as an exclusion. But since the attacks, terrorism is going the way of earthquakes, floods, war, mold and mildew. It has become an exclusion, and anybody who wants terrorism coverage must pay for a separate policy, and pay dearly.

"Terrorism was never even a subject of discussion prior to 9/11," said Warren Johnson, a vice president of Carlsbad-based Driver Alliant Insurance Services Inc., the state's second-largest insurance brokerage firm. "I have never seen a terrorism exclusion prior to 9/11, but now it's going to be universal."

Yee, a supervisor in the city's Risk Management Department, decided to pay for a terrorism policy at the city airports. A month later he got another one of those letters.

This one said the city's property insurance policy was up for renewal, and terrorism no longer would be covered. What followed was a scramble to find affordable coverage before the March 31 expiration.

At the 11th hour, the city was able to buy a terrorism policy covering about a quarter of the city's properties, for about $200,000 a year. That's an estimated 30 percent higher than its property insurance policy. The properties include higher-risk facilities such as City Hall, the Convention Center, and water and sewer facilities.

"Initially it was very difficult to get," Yee said. "There were a lot of gloomy faces waiting to see if it would be offered. It was very expensive to get, but we felt that we had to have it."

Other governments and businesses in San Diego County and elsewhere are facing the same problem. And lenders are throwing their weight around, requiring terrorism coverage to protect their investments.

Johnson, of Driver Alliant, received a letter in June on behalf of a client, a Del Mar hotel. In bold letters in the first paragraph, the hotel's lender, Wells Fargo Bank, demanded that the hotel provide proof of terrorism insurance or jeopardize its loan.

As insurance companies brace for the estimated $40 billion payout for Sept. 11 damage -- the biggest insured loss in history -- they are shifting the risk to property owners and businesses.

The shift is largely fueled by the companies known as reinsurers -- those that insure the primary insurers. It is the reinsurers who have pulled the plug on terrorism insurance, forcing primary insurers to assume the entire risk of coverage. That's why primary insurers are canceling policies.

Going without

Today, many owners of large buildings and structures -- skyscrapers, stadiums and malls, for example -- go uncovered by insurance against terrorist acts. Some have seen their costs skyrocket for even the skimpiest of coverage.

The Metropolitan Transit Development Board, which oversees the San Diego Trolley system and many of the county's buses, renewed its insurance policies in April. Officials found that terrorism is excluded, and they also found that a terrorism policy is too expensive. They opted not to buy it.

"We did have to accept terrorism exclusions," said Jack Limber, lawyer for the board. "We were told terrorism insurance is either going to be unavailable or available at such a huge price that it doesn't make economic sense."

Going bare is an unsettling feeling, Limber said. "It would make us more comfortable if we had coverage for that for the benefit of people injured and replacement of property damaged, but it's also understandable from a business perspective why the insurance industry has reacted that way."

Some government agencies, like Caltrans, are self-insured, which means they set aside funds and assume the risk for any kind of loss. But others, like the city of San Diego, buy insurance through the California State Association of Counties, and are scrambling to find affordable terrorism coverage.

It's the same story around the country, for governments and businesses alike. Insurance rates have skyrocketed, with or without terrorism coverage.

Officials who oversee San Francisco's Golden Gate Bridge declined to buy a separate terrorism policy, which was offered at $550,000 a year for $90 million in coverage, said Christopher Ewers, vice president of the San Francisco office of Marsh Inc., a worldwide brokerage firm. Before Sept. 11 it was part of the bridge's regular policy.

The catch: To get the terrorism policy, bridge officials had to buy a property insurance policy from the same company at $1.2 million a year for just $10 million in coverage.

The bridge officials ended up going with another company. Even without the terrorism policy, the premium jumped from $550,000 to $1.1 million when the policy was renewed in April, Ewers said. In addition, the amount of liability covered was cut to $50 million from $125 million, he said.

Pricey premiums

Insurance brokers said even if terrorism policies can be found, the premiums can be as much as 200 percent higher than regular property insurance, and most of those policies contain a set of exclusions for nuclear, chemical or biological attacks. Most companies are rejecting the policies and assuming the risk.

"The majority of the insureds are not buying it unless they're forced to because of a lending requirement or they feel they are a high-profile, high-risk type of exposure," Ewers said.

However, some are being forced to buy terrorism insurance by lenders holding mortgages on high-risk properties.

The owner of Mall of America in Bloomington, Minn., won a temporary restraining order after its lender tried to force it to buy terrorism coverage. The dispute was settled recently when the owner, Simon Property Group, agreed to buy a $100 million policy.

Prices for terrorism insurance have dropped a bit since January, brokers said.

"The pricing is still expensive relative to property insurance, particularly in light of the fact that this coverage was included within policies at really no charge for years and years, so it's kind of a sticker shock for a lot of the clients who are now buying this," said Robert Howe, managing director of Marsh Inc. in New York.

Prices for terrorism policies are averaging a half percent to 2 percent of the coverage purchased -- for instance, as much as a $2 million a year premium for a $100 million policy. Deductibles are much higher than for property policies.

Terrorism policies generally cover property damage and business interruption but not biological, nuclear or chemical attacks.

It's mostly shopping malls, office buildings, theme parks and manufacturing plants in urban areas interested in terrorism insurance, Howe said.

Many businesses are wary of talking about their coverage. Representatives of the Empire State Building and Rockefeller Center in New York, Chicago's Sears Tower, Salt Lake City's Mormon Temple, Detroit's Ambassador Bridge, the San Francisco Giants' Pacific Bell Park and Seattle's Space Needle decline to discuss premiums.

Fewer targets here

In San Diego, terrorism insurance is easier to get and less expensive than in cities like New York, San Francisco, Washington or Los Angeles, which have higher-profile landmarks that would be more likely targets for terrorists, brokers said.

"It's probably going to be more readily available here," Johnson said. "Just add 30 percent to your property insurance. It hasn't changed our lives drastically here. If you're insuring large high-rise buildings in San Francisco and Los Angeles, especially notable buildings like the TransAmerica pyramid, you're going to have some problems.

"I would imagine the zoo and SeaWorld have been seriously impacted by the whole 9/11 terrorism insurance issue," Johnson said. "With the absence of landmark buildings, that's where the emphasis is going to be."

A SeaWorld spokesman declined to discuss insurance coverage; representatives from the San Diego Zoo and Wild Animal Park did not return calls for interviews.

Howe estimated that fewer than 25 percent of clients obtaining quotes on terrorism insurance have bought the policies. "Some of that's due to price, some due to clients wanting to wait to see what happens with any federal mechanism."

Meanwhile, Congress and the Bush administration are trying to iron out a plan that will provide a backstop for insurance companies in the event of another debilitating attack.

Under a Senate bill approved June 18, the insurance industry would have to pay $10 billion of insurance costs for terror attacks for two years. Beyond that level, the government would cover 90 percent, with the insurance industry paying the remaining 10 percent.

There would be a $100 billion cap; the Treasury secretary would have to go to Congress if costs exceeded that. The secretary could extend the program for a third year, with the industry responsible for the first $20 billion in costs.

The scene is set for a showdown with the House over how to help businesses survive disasters.

This is a rare instance in Washington where big business and big labor, landlords and commercial tenants, and a variety of other interest groups essentially agree that the federal government is the only answer.

Robert Hartwig, chief economist of the Insurance Information Institute in New York, the trade association for the property insurance companies, said against the backdrop of terrorism, "the federal government is going to become the insurer of last resort."

Kelly Thornton: (619) 542-4571; kelly.thornton@uniontrib.com



GRAPHIC: 1 CHART; Source: Study by Robert Hartwig, chief economist at Insurance Information Institute; U.S. General Accounting Office; and Council of Economic Advisers. | UNION-TRIBUNE; Calculating costs -- The estimate of damage in the Sept. 11 attacks in the United States dwarfs the costs in other terror attacks in the world. And insurance companies will pay out more for damage related to the Sept. 11 attacks than they have for any natural disaster in the United States. (A-12)

LOAD-DATE: July 3, 2002