Terror Insurance Act May Leave Servicers in the Dark.

Servicers who have spent a lot of time in the post-9/11 environment battling with additional administrative tasks relating to terrorism insurance might be expecting that the recently enacted Terrorism Risk Insurance Program will ensure that these problems will not carry over into 2003. Unfortunately, the legislation in its current form is likely to bring forward the administrative merry-go-round into this year.

While the legislation requires that insurers offer terrorism insurance to policyholders within 90 days from the Nov. 26, 2002 enactment of the legislation in the case of existing policies, it does not mention that lenders and servicers need to be kept informed about what the borrower decides.

The omission is significant since the borrower could choose to opt out of the insurance - if they decide, for instance, that they are not happy with the price - and leave the servicer in the dark. The legislation is expected to make the insurance more readily available by requiring insurers to offer terrorism insurance as a part of property and casualty insurance programs, but it leaves the pricing up to the insurance carriers. And insurance carriers are expected to price the premiums taking into account the risk involved. This means that "trophy properties" in major metropolitan areas are likely to be considered at the highest end of the risk spectrum and the insurance premiums on such properties accordingly priced higher. In the case of lower profile properties in smaller cities though, pricing is likely to be more favorable as more insurance capacity becomes available.

Bob Vestewig, COO of Houston-based GEMSA (he is also the chair of the Mortgage Bankers Association's Commercial and Multifamily Board of Governors insurance task force), said that "we are in a transition period now" with everyone still "trying to figure out what this law means." He believes there will be a "period of turmoil" for several months on the pricing front. Mr. ...