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TERROR INSURANCE WOES

Smaller centers hit by big premiums

By Susan Thorne

Shopping centers in remote locations are unlikely targets, but many are compelled to buy costly terror insurance nonetheless.

Even some in the insurance industry admit that smaller, open-air shopping centers are unlikely terrorist targets. Yet the owners of these centers are caught in the same insurance maelstrom that has for the past year perplexed their counterparts at some of America’s most prominent enclosed malls.

These center owners are being obliged by lenders and others to obtain terrorism policies, even though most of their properties are in locations considered too tucked away to interest terrorists; these landlords have seen premiums for every kind of insurance skyrocket since last September’s terrorist attacks.

“Our rates have increased 25 to 50 percent over the last year,’” said Gary D. Rappaport, SCSM, SCMD, CLS, president of The Rappaport Cos., Vienna, Va., and ICSC’s current chairman. His company is the developer of 22 open-air centers in the suburbs of Washington, D.C. The increase works out to between 10 cents and 15 cents per square foot, yet Rappaport said he doesn’t feel there has been any corresponding increase in risk. “Even with our proximity to the Capitol and White House, we don’t believe that our locations have been rendered any more dangerous,” he said. “We have not seen that there is a justification of such increases in insurance rates.”

Open-air centers include a variety of venues, from 30,000-square-foot neighborhood strips anchored by a grocery store to lifestyle centers several times that size with upscale fashion shops. Though some of the better-known, prestigious centers could conceivably be singled out for terrorist activity, risk-assessment professionals agree that most properties in this category are not seriously threatened. Moody’s Investors Service classifies smaller shopping centers in the low-risk portion of its credit analysis hierarchy, while premier properties such as enclosed malls tend to rank in the medium-risk grouping.

“These [smaller centers] are low-profile properties, unlike larger properties,” said John Kriz, managing director of real estate finance at Moody’s New York City office. “When you attract profile, you may attract a lot of other things, too.”

Eric Schake, a managing director at New York City-based commercial insurance brokerage firm Marsh, makes a similar distinction.

“From an underwriter’s perspective, we would see an open-air center as relatively more attractive [for insurance against terrorism] than an enclosed regional or super-regional mall, depending on the geographic location,” he said. An open-air center in Omaha, Neb., would have relatively less risk than an enclosed center in Los Angeles, Schake explained, but this will be qualified by proximity to the central business district, or CBD. Generally speaking, a center inside an urban CBD will require 25 to 50 percent more coverage than one that is outside; open-air centers tend not to be located in the CBD, he noted.

Yet for all their apparent insignificance to terrorists, some small centers have been losing the blanket coverage that used to include acts of terrorism as their all-risk policies have come up for renewal. Even where select properties can still get policies without the exclusion clauses, rates and deductibles vary according to the portfolio of centers being covered, and there may be a fairly low cap on the restitution paid per incident. Center owners who want additional coverage must go to one of a small number of companies offering separate, stand-alone (i.e., terrorism only) policies.

While they adjust to these new practices, landlords are simultaneously dealing with across-the-board insurance premium increases of 20 percent to 50 percent this year — the fallout from the insurance industry’s difficulties both before and since last September.

The situation is similar in Canada, where terrorism exclusions are being adopted, and Canadian companies are looking to U.S. insurers for stand-alone coverage. Danny Kissoon, vice president of operations at RioCan Real Estate Investment Trust, Toronto, anticipates premium increases of 30 percent to 40 percent overall (including terrorism insurance) as policies expire for the firm’s portfolio, which consists of about 150 centers across Canada, 85 percent of them neighborhood and power centers.

But why, if the risk is so low, are small-center owners bothering to insure at all? They have little choice, landlords say. Lenders sometimes require proof of terrorism coverage before opening their wallets. Kissoon and other landlords interviewed have received inquiries about their centers’ insurance from mortgagers and other lenders since the attacks — which they characterize as a form of pressure to get that coverage.

“The reason we seek terrorism insurance rolled into our primary property policy is not because we feel our centers in Illinois, Indiana or Missouri are targets,” said Cathy Woolley, a senior vice president at the Hartford, Conn.-based Hutensky Group. “Our goal is to keep insurance from interfering with financing and leasing. When we are buying new or additional properties, we want to maintain the largest number of potential lenders … Knowing some lenders will require terrorism insurance, we want to be sure that we can place it, so that insurance never becomes a deal-breaking issue.”

The same reasoning applies when selling a shopping center, Woolley said, because a prospective buyer’s lender may want terrorism insurance in place on the property.

As with other operating expenses, increased insurance costs will generally be passed along from center owners to tenants. But this creates a competitive disadvantage for open-air center managers who want to keep their centers financially attractive for tenants.

“A 30 percent increase in insurance rates can be a lot for a small-center tenant,” Woolley pointed out. “They might just decide to leave and locate their store down the street.”

Some landlords face premium hikes of 20 percent to 50 percent this year.

Because of recent retailer consolidations and bankruptcies, many open-air centers are fighting higher-than-normal vacancy rates at present, “so this all comes at a bad time,” she said. Some landlords are carrying part of the cost of terrorism insurance themselves to keep tenants in the center, Woolley noted, a practice that may become more common with time.

Not all owners, however, see terrorism insurance as an unnecessary appendage imposed by lenders and buyers so there is a debate among small-center landlords over the issue. Though open-air centers are seen as a low-risk category today, that could change overnight, notes Norman M. Kranzdorf, chairman of Kramont Realty Trust, Plymouth Meeting, Pa.

“Tomorrow we could have somebody blow up a supermarket, and that would change the whole picture,” he said. “Terrorism is an important issue for all shopping centers, because no one knows where the pressure is going to come from next.” Norris R. Eber, SCSM, CLS, executive vice president of Joseph Freed & Associates, Wheeling, Ill., suggests that being covered is a matter of prudent management.

“As an asset manager for an open-air portfolio, I want to have it,” he said. “I like to have coverage for all realistic possibilities.”

That applies to Canada, too, even if it has escaped the attention of terrorists so far, said RioCan’s Kissoon. “We can’t be so naive as to think it won’t happen here.”

Feelings of obligation to third parties are yet another consideration.

“As a publicly traded company, we see it as our duty to our shareholders to own insurance,” said Kissoon, whose company is topping up its coverage with separately purchased, stand-alone terrorism insurance. “As an owner of a shopping center, I have an obligation to my tenants as well.”

But those for and against such coverage agree on one thing, at least: They all say it’s too expensive. Alan E. Smith, executive vice president of development at Konover & Associates, Farmington, Conn., says there is insufficient value delivered for the sizable terrorism insurance premiums.

“We’ve looked at it internally, and the numbers just don’t add up,” he said. “The coverage doesn’t justify the cost.” Smith, whose company has developed more than 100 open-air centers, said he feels that the insurance industry is engaged in a money grab. “There’s just one word for it: greed.”

Eber estimates that insurance premiums for his company’s centers are up by 25 percent to 50 percent over last year, depending on the nature of the properties and the particular pool of centers covered in a policy. But identifying the specific proportion charged for terrorism insurance is difficult, in his company’s case, he said, because terrorism is rolled in with other risks in setting the total premium.

There appears to be little chance that premiums will come down anytime soon. Efforts by the real estate industry this past year (ICSC included) to have the government serve as a backstop to insurers for large claims rising from terrorism came to naught when the U.S. Congress recessed without sending legislation to the president to sign; the House and Senate each passed bills, but failed to reconcile their differences.

Having made the decision to buy terrorism insurance, landlords could then have difficulty getting the coverage they want because of limited capacity in the insurance industry. Herb Feldman, president and CEO of Alpha Risk Management, Great Neck, N.Y., says smaller shopping centers may be in a good position because they require less insurance capacity (a lower coverage amount) than larger centers. Some insurers, however, don’t want to bother with small-premium policies, he noted, suggesting that small-center owners group together in portfolios to increase their chances of getting coverage in such situations.

On a brighter note, though open-air center owners find themselves pressured to get terrorism coverage, their insurers are not forcing them to take the same measures in the name of enhanced security that many high-profile enclosed malls are now obliged to take. Rappaport said his company’s centers have not made any significant security changes. Indeed, Rappaport Cos. has renegotiated insurance policies in the past few months without any demands from the insurer for new security conditions.

Marsh’s Schake said insurers are looking to real estate owners for best practices where security is concerned, but they will look for measures that are appropriate for the type of center. In the case of an open-air center, Schake said, his company wouldn’t expect such precautions as blocking all entrances and checking cars.

“That would not be cost-effective or appropriate,” he said. “However, we might ask whether they have people spot-checking the parking lot, so that they would notice something like a tractor-trailer parked next to a movie theater, for example.”

Some open-air center owners are taking the initiative by reviewing their security measures and emergency plans, and a few of their larger retail tenants are taking additional precautions (checking their truck loading bays more frequently, for example), though the drastic security revamping is generally being left to the regionals and super-regionals.

But though security measures are not onerous to policyholders, applying for coverage can be. One of the biggest legacies of 2001 for open-air center managers is the growing complexity of insurance procedures.

“Insurance companies and underwriters have become very cautious since Sept. 11,” said Eber. “They’re scrutinizing every bit of information and being very careful about replacement values. Blanket coverages across a portfolio of properties seem to be going away.”

Hutensky Group’s Woolley said companies are demanding lead times of 90 days for policy applications and more exacting information standards.

“Until this year, when we were asked about the distance from the center to a hydrant, we could estimate — ‘around 500 feet’ — and that was fine,” she said. “Now you need to measure the distance more precisely. Landlords have to know their properties intimately and have that information ready.”

Woolley predicts that questions about insurance will take up more of center owners’ and managers’ time and attention in the future; expertise about insurance issues will become more valued. As the individual who handles insurance-related matters at her company, she said, since Sept. 11, “suddenly, I’ve become one of the most needed persons in the office!”

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