Five Ways to Protect Yourself from Unexpected Terrorism Insurance Costs
If you're like many owners, you may not get insurance to protect your building or center from acts of terrorism because you think it's an unlikely terrorist target. The risk doesn't justify the extremely high cost of that insurance. But a new decision from a New York State appeals court offers some disturbing news for owners regarding terrorism insurance. Basically, the New York court decision says that a lender may force an owner to pay for terrorism insurance even though the owner doesn't want it or think that it's needed.
If your state court adopts a similar position, you could end up being forced to pay for terrorism insurance, and find your insurance expenses have increased to unexpected or unaffordable levels, warn New York attorney Robert Epstein and San Francisco attorney Richard C. Mallory. And you may be forced to take all those terrorism insurance costs out of your own pocket, because language in your leases may cap or bar any pass-throughs of terrorism insurance costs to your tenants, warns Epstein.
With Epstein's and Mallory's help, we'll tell you about five protections that you can try get in your loan agreement to help you control unexpected terrorism insurance costs.
Lender Forces New York Owner to Pay for Insurance
Here's what happened in the New York State case and why loan protection is so important: In February 2001, an owner took out a mortgage on a Manhattan office building. The mortgage agreement required the owner to get an insurance policy protecting against perils “now or hereafter” included within the classification of “special perils” under an “all risk” insurance policy. It also required the owner to get any “other insurance” that the lender might reasonably request for hazards which at the time are “commonly” insured against for comparable buildings in Manhattan. After Sept. 11, 2001, the owner took out some terrorism coverage on its building, but the lender wanted more. So the lender took out additional terrorism coverage and demanded that the owner pay for it. The owner refused and sued the lender, claiming that the lender couldn't force the owner to get or pay for the additional terrorism coverage.
A New York appeals court ruled that the lender could require the owner to get the additional terrorism coverage, and that the lender had been reasonable and had properly gotten the coverage at the owner's expense. The court said that the owner was obligated by both the “all risks” and “other insurance” requirements in the mortgage agreement to get the additional terrorism coverage. According to the court, the “now and hereafter” language in the “all risks” requirement meant that the owner's insurance obligation would be flexible and change as the market recognized new insurable risks, such as acts of terrorism. Plus, the terrorism insurance qualified as “other insurance” because it involved a hazard “commonly” insured against [BFP 245 Park Co., LLC v. GMAC Commercial Mortgage Corp.].
Seek Five Cost-Control Protections
When you negotiate your loan agreement with a lender, consider seeking some or all of the following five protections, suggest Epstein and Mallory. These protections can help you control terrorism insurance costs. They also may help you control the cost of any other insurance products that a lender may require:
Increase in total insurance premiums is capped. Set an annual cap on any increases in insurance premiums you may incur from any new policies that the lender may require you to get or that it gets for you, as well as on premium increases resulting from increased coverage the lender requires in your existing policies, advises Mallory. This way, you'll have some control over insurance costs.
Increased premiums mustn't cause default. Have the lender agree not to take out or require you to take out additional insurance coverage if doing so will drain your funds, make you unable to pay your loan, and put your loan in default, says Epstein. One way to do that is to say in the loan agreement that the additional coverage can't cause you not to meet your “debt service coverage ratio” (or whatever terminology the loan agreement uses). That's the ratio used to calculate whether you've got a sufficient cash cushion to pay your monthly mortgage payments and other costs, he notes.
Lender must give you new loan to cover cost. If the lender wants the right to require you to get additional coverage, or to take out additional coverage at your expense, then have the right to require the lender to lend you additional loan proceeds to cover the cost of that additional coverage, advises Epstein.
Deductible must be large. If you're forced to pay the cost of an expensive insurance policy, you'll want to keep the premiums for it as low as possible. One way to do that is to require a high deductible, says Epstein. The higher the deductible, the lower the insurance cost, he notes.
Get experts to settle coverage disputes. If there's a dispute over whether or not a lender acted reasonably in getting for you or requiring you to get additional insurance coverage, you'll want the dispute settled by experts in the insurance industry—not by a judge who's unfamiliar with insurance matters, notes Epstein. So try to get the lender to agree that if you two have a dispute over the reasonableness of getting additional insurance coverage, you'll submit it to arbitration by arbitrators who are expert in insurance matters, he advises.
CLLI Sources
Robert C. Epstein, Esq.: Of Counsel, Finkelstein Newman LLP, 225 Broadway, 8th Fl., New York, NY 10007; (212) 619-5400; repstein@finkelsteinnewman.com.
Richard C. Mallory, Esq.: Partner, Allen Matkins Leck Gamble & Mallory LLP, 333 Bush St., 17th Fl., San Francisco, CA 94104-2806; (415) 837-1515; rmallory@allenmatkins.com.