If terrorists were to target the Camden Yards sports arenas, the State House in Annapolis or Baltimore-Washington International Airport, Maryland might find itself without insurance money to rebuild.
Like other governments and businesses living with financial ramifications from the Sept. 11 attacks, which are expected to cost the insurance industry at least $40 billion, Maryland found that renewing its annual insurance policy was anything but routine.
The state was dropped.
Maryland's coverage remains in force for now because it is contesting the cancellation. But the state is not alone in facing a problem. Commercial and public properties nationwide are getting caught in a double squeeze.
Insurers, reeling from Sept. 11 losses, sagging investments and 15 years of relatively flat rates, are boosting rates an average 30 percent at the same time that they are limiting or eliminating coverage for acts of terrorism.
"Businesses are being exposed to risk that they, quite frankly, had never contemplated until last year," said Robert P. Hartwig, senior vice president and chief economist for the Insurance Information Institute, a clearinghouse of industry research.
"Unlike cars and houses, no one has a good idea of the frequency or costs of [terrorism] claims, and insurance companies now don't want anything to do with terrorism insurance at all," he said. "The only reason there weren't mass bankruptcies after Sept. 11 was the risk was spread around to 100 insurance companies around the world."
But, he said, they can no longer take on the potentially bottomless pool of claims.
As annual policies expired after Sept. 11, insurers found that the companies they bought insurance from, so-called reinsurers, would no longer share the risk. So, the insurers - with the legal blessing of Maryland and 44 other states - specifically excluded terrorism from their policies in many cases.
The word terrorism had rarely shown up in all the fine print in the property and liability insurance policies before Sept. 11. Because it was not specifically excluded, it was covered by default.
As a result, payments arising from the attacks will cost the industry about three years worth of profit, according to the American Insurance Association. Last year the property-casualty insurance industry lost $7.9 billion - its first-ever loss - because of those costs and poor investment returns, according to the Insurance Services Office Inc. The industry earned $20.6 billion in 2000.
Insurers typically have excluded damage resulting from acts of war. And floods and crops are generally insured by the federal government.
"But Sept. 11 came out of the industry's pockets," said Julie Rochman, a spokeswoman for the insurance association. "Standard forms didn't mention terrorism. It was basically a freebie. ... We still can't price it, we don't know anything about it, and in our way of thinking, it's uninsurable. We can't insure things if we can't share the risk because we won't be around to pay the claims."
The industry, as well as many policyholders, are banking on legislation pending in Congress that would limit the industry's costs in the event of another catastrophic terrorist attack. Rochman said the federal government would offer stability to the industry and encourage insurers to return to the market by taking on the role of reinsurer.
The House and Senate have passed versions of the bill and must hammer out their differences. The federal backstop would stay in effect for one to three years and provide coverage after the industry and individual companies' payments reach a specified level. The House bill requires the money to be repaid, but the Senate version does not.
In the meantime, Maryland is seeking to force its insurer, the American affiliate of London-based Royal & SunAlliance Insurance Group PLC, to continue its property insurance.
The Maryland Insurance Administration, which oversees insurers in the state, has sided with the state treasurer's office, which bought the policy. An administration panel has heard the company's appeal, and a ruling is expected by the end of the month.
"Our renewal came up in February, and our carrier of 11 years sent a nonrenewal notice to us," said Thomas C. Kelley, director of insurance for Maryland. "We've deemed it not to be proper based on our regulations. They're fighting us."
If the company exhausts the administration appeals, it is expected to take the matter to court. And even if Maryland is ultimately successful in forcing Royal & SunAlliance to offer it property insurance, state officials expect to pay more, and they do not expect to retain terrorism insurance.
Premiums that had cost the state $1 million annually will likely cost $3 million for $500 million in coverage. The increases would be the result of rate increases and construction projects that have added to state holdings, Kelley said.
For its part, Royal & SunAlliance said it no longer offers much terrorism insurance. And even though Maryland now allows insurers to exclude terrorism from its policies in most cases, the exclusion was not in effect when the company was considering the Maryland policy renewal, said Dennis Haver, deputy general counsel at Royal & SunAlliance.
If the company were able to exclude terrorism coverage, state regulators still would require insurers to cover losses from fires resulting from terrorist acts, he said.
"Rather than rebid, we elected to take a pass," he said. "We had expected the state to accept our notice and take [its business] out to bid again. We were surprised and saddened to learn the state of Maryland was going to seek to universally force us to stay in a business transaction that we legally saw through to its completion."
The problem has affected other property owners, some more than others.
When Boston Properties, which owns the Candler Building and 100 E. Pratt in Baltimore's Inner Harbor, renegotiated insurance for its 144 properties nationwide in the second quarter, its insurer for the first time asked for a list of tenants.
Washington regional manager Mitch Norville said the company was hit across its portfolio with double-digit rate increases.
"I think everything mattered after Sept. 11: tenants, locations, everything," he said. "We did [the policy]on a portfolio basis. No one tenant was opted out."
Officials at Columbia-based Corporate Office Properties Trust, which owns suburban office buildings, said they aren't worried.
"We don't have high-profile buildings; we're not the central business district," said Randall M. Griffin, president and chief operating officer. "If the overall bill doubles, it would be of inconsequential impact. We pay about 3 cents a [square] foot per year including everything for insurance."
A number of other property owners declined to discuss their coverage.
Hard to escape
Peter W. Stanford, president of the local chapter of the Building Owners and Managers Association and a vice president at Colliers Pinkard, a commercial real estate company, said owners are not likely to escape the rising insurance premiums in general. In some cases, landlords can pass on the rate increases to tenants.
"Terrorism insurance has largely been a problem for high-profile, landmark buildings across the country," he said. "Baltimore is not like New York, Washington or Chicago, and we haven't seen a large impact locally yet. But it could trickle down to lesser buildings in places like Baltimore as rate increases in general will. It's something that has to be planned for."
Terry Mayer, executive vice president of HRH Insurance of Baltimore, one of the largest insurance brokers in the state, agreed that the rates are going up across the board. Companies with good claims records are paying 15 percent to 20 percent more, and those with less favorable histories are paying 50 percent to 100 percent more around the state.
Mayer said he has found terrorism insurance for many commercial buildings locally.
"For every 1,000 businesses, we might have three terrorism exclusions," he said. "The farther away from Washington you get, the less of a problem it is. Newspaper offices, any building with government offices in it, people who own those buildings are having trouble. The World Trade Center is high-profile and might have an issue."
The St. Paul Cos., a Minnesota-based insurer with a large Baltimore operation, said local buildings that get terrorism insurance might get less coverage. The company's loss from Sept. 11 claims was $941 million. But rates, up about 20 percent to 25 percent this year, are based more generally on the company's exposure to risk, he said.
"We have a limited amount available," said Patrick Hirigoyen, a company spokesman, about the level of terrorism insurance it can offer. "And we're excluding where we can large infrastructure buildings such as stadiums, medical centers, utility providers and buildings with high visibility - in Maryland, everywhere. It's case by case, and there are many factors to look at."
Terrorism insurance
About a dozen large companies are selling terrorism insurance by itself, although more will offer it as part of broader property insurance in limited quantities, said Martin DePoy, a spokesman for the Coalition to Insure Against Terrorism, which was formed by a collection of industries.
He said the lack of insurance and higher general rates will translate into higher rents to help property owners pay for their higher risks and costs. In some cases, property owners without terrorism insurance cannot sell, refinance or build. Some have been notified by their lenders that they are in default on their mortgages without terrorism coverage.
"It's affecting everyone," he said.
Before Sept. 11, businesses were paying an average of $5.50 of every $1,000 of their revenue for insurance, according to the Insurance Information Institute. Now, that figure is closer to $7.25.
An index compiled by the Council of Insurance Agents & Brokers shows that 45 percent of companies that have renewed insurance policies since Jan. 1 and paid premiums of more than $100,000 have seen increases of 10 percent to 30 percent.
An additional 27 percent of the companies saw increases of 30 percent to 50 percent. Six percent of the companies had 50 percent to 100 percent increases.
Umbrella policies
The highest increases were recorded for umbrella insurance policies. Commercial property insurance policies also showed some of the highest jumps, followed by business interruption, workers' compensation, general liability and commercial auto insurance.
Insurance also has changed, according to the Building Owners and Managers Association.
Karen Penafiel, an assistant vice president of advocacy for the group, said member surveys show that some property and liability policies also are limiting coverage for other hazards such as asbestos, mold and windstorms, as well as terrorism. That's coupled with premium increases, higher deductibles, cancellation clauses and restrictions on the amount of insurance companies will allow in specific geographic areas.
"It's a faulty product at a very high price," she said. "Nothing is the same since Sept. 11."