The co-op board received the letter on Dec. 10, 2002, and it wasn't good news. Before the bank would approve the co-op's request for a new loan, the lender wanted to see proof that the co-op had purchased insurance coverage for terrorism. If the coverage was commercially unavailable or not available at a "reasonable cost," the board was to notify the lender "as soon as possible."
For New York City co-ops still struggling to balance their budgets in the wake of a property tax hike and rising fuel costs, a new financial wrinkle has appeared on the horizon. Terrorism coverage, once a standard component of all insurance policies, has now become a required extra by banks considering mortgage requests. Co-ops that choose not to purchase additional insurance may well find themselves adrift in the world of mortgage refinancing.
The long and the short of it is more bad news for co-ops.
Arthur Weinstein, vice president of the Council of New York Cooperatives & Condominiums and a co-op attorney, says he has already heard from concerned boards that have received letters from prospective lenders warning them they must purchase additional insurance.
"Lending banks are starting to say that terrorism insurance must be maintained by all co-op corporation borrowers," he notes. "It seems that whatever the cost, co-ops are going to have to expand their insurance policies to include what may end up being an expensive additional item: terrorism insurance."
So far, at least two banks have sent out letters to would-be borrowers: HSBC Realty Corporation and the National Cooperative Bank (NCB). Both lenders maintain they are simply following the lead of one of the nation's most important mortgage underwriters, Freddie Mac. While Freddie Mac, a congressionally chartered corporation, does not make mortgage loans directly to borrowers, the corporation plays a key role in the secondary mortgage market. It buys loans made by banks, repackages them as securities, and sells them to investors, thus ensuring a steady flow of funds to banks that make loans.
Simply put, co-ops that don't have terrorism coverage are putting their loan collateral at risk, and Freddie Mac, as a purchaser of the mortgage loans, is apparently increasingly unwilling to underwrite that risk. "We're requiring it where Freddie Mac is requiring it," says HSBC spokeswoman Cathy Young.
But Linda Holmes, vice president of the multifamily division of Freddie Mac, says the corporation is still looking into the costs of terrorism coverage and has not made a final definitive ruling on whether it would maintain the requirements of terrorism coverage.
"It's still an interim policy, because we are waiting to see what's happening with the cost of insurance. We are still trying to collect information about that. We haven't made a long-term decision, but in general, we are tending to require the coverage if it's available at a reasonable cost." Holmes insists that boards should have the coverage, anyway. "It's not only to protect us, which we need to do, but to protect the co-op board. Everyone who has a stake in this equity should be aligned about having insurance coverage."
So if it is an interim policy, do co-ops still have to comply? According to the insurer of Greg Carlson's co-op in Forest Hills, yes they do. After his 424-unit complex was alerted last year by their insurer, John Hancock, that its mortgage lender was requiring terrorism coverage, the building went looking for coverage. It found some pricey riders. Carlson, vice president of his co-op board and executive director of the Federation of New York Housing Cooperatives, says the building was quoted premiums ranging $30,000 to $100,000. "We were told we needed this because we are in the flight path to LaGuardia." Finally, after much digging around, the board found a $5,000 rider with Traveler's Insurance.
While the Terrorism Risk Insurance Act of 2002, passed in November, requires insurers to make terrorism coverage available "on substantially the same terms and conditions as other casualty insurance," the law does not preclude insurers from carving out terrorism as a separate cost nor does it appear to set any limit on premiums, warns attorney Howard Schecter, a partner in the law firm of Schecter & Brucker.
Co-ops may need to weigh whether they can afford the cost of the additional insurance, and need to check with their lenders to see whether it is required when applying for a new loan or to refinance. What it all boils down to is extra costs for co-ops. "It's an added cost that wasn't there two years ago," agrees Edward Howe, senior vice president of the Manhattan office of NCB.
So what is the cost? In recommended guidelines laid out in February by the Insurance Services Office (ISO), the New Jersey based data collection and risk assessment agency that serves the national insurance industry, insurance companies were offered a baseline cost for covering risk: $.03 cents per $100 of insurance coverage for commercial buildings south of 59th Street in Manhattan, and $.018 cents per $100 of coverage for buildings north of 59th Street and in the other four boroughs.
The sums sound modest, until you start to add the figures up. A co-op south of 59th Street looking to take out an additional $10 million in insurance coverage will end up paying, at minimum, an additional $3,000 a year for the coverage. If insurance companies choose to use the baseline, and they may not, stresses Dave Dasgupta, a spokesman for the ISO, the companies will add their own additional costs on top of the baseline amount. "If insurance companies choose to use it they will add expenses to it," and those additional costs would then become "the basis for them to determine what they charge and the rate you pay."
The problem for co-ops, is when does the cost become "excessive" in the eyes of lenders? And how many lenders at present are demanding the terrorism coverage? That was the key question, says Weinstein. "The question before us now is whether or not we should be out there complying with this request. Do we respond to the bank's request or not? If we are told that Freddie Mac says this is an interim fact finding question, we may not have to be too aggressive in pursing this coverage right now."
But James Samson, a partner at Bangser Klein Rocca & Blum, took the opposite view. Since September 11, everything related to insurance and risk is up in the air, asserts Samson. Where once upon a time an act of terrorism was as likely as an earthquake in New York City, "Now we know it's a significantly greater possibility. Look at the penumbra of destruction at the World Trade Center area - it wasn't just the two buildings that fell down." Even if a bank wasn't requiring terrorism coverage, "maybe it's prudent to carry it anyway."