The Affect of Post-9/11 Construction and Insurance Practices on Landlords

Preventive Measures

Now, experts in construction practices and insurance have had time to look backward and forward and to consider necessary preventive measures. The construction industry has had opportunities to apply some of the building code changes recommended after 9/11, and an April 5, 2005 preliminary report by the Commerce Department's National Institutes of Standards and Technology (“NIST”) almost certainly will lead to others. TRIA will expire on Dec. 31, 2005, as the insurance industry and Congress ponder the act's renewal.

This article reviews some of the issues facing both industries and their respective legal counsel as the dust continues to settle.

Construction Industry

Among the primary building-related post 9/11 studies was the Federal Emergency Management Administra-tion's (“FEMA”) July 2002 World Trade Center Building Performance Study Report. While finding it remarkable that the towers and surrounding buildings “were able to sustain this level of damage and remain standing for an extended period of time,” FEMA recommended changes to several standards and building code requirements.

Task Force

These recommendations and other investigative reports received additional analysis from the World Trade Center Building Code Task Force, which convened on the authority of the New York Department of Buildings. The task force reviewed the FEMA report along with then-current building design, construction and operating requirements and other materials to assess the need for modifications to address “extreme events” and to ensure that the public will be safe in all buildings, both existing and new. The task force released its findings and recommendations in a February 2003 report, which itself has triggered or become the subject of additional studies and reports.

The task force recommended a number of measures including, among others, designing buildings to prevent collapse, prohibiting open web-bar trusses and requiring protected vestibules in elevator lobbies in new commercial construction over 75 feet high, using available impact-resistant materials, prohibiting scissors stairs in high rise buildings with floor plates of over 10,000 square feet, improving markings for exits, mandating full-building evacuations plans for emergency events other than fires and limiting the diameter of fuel oil transfer piping in systems using day tanks.

Among the several risks and concerns addressed in the ensuing studies are potential terrorist actions, such as explosions and releases of biochemical substances. Of particular concern are buildings used for public services or communications, such as courtrooms, municipal offices, hospitals, call centers, and other structures of high traffic and visibility. Further, in an emergency, some buildings can be evacuated to protect occupants, but some, such as hospitals and emergency command centers, cannot. In addition, school buildings often are designated gathering places in emergencies, yet most were not designed specifically to protect against the risks posed by terrorism and other catastrophic events.

NIST Draft Report

One of the most recent post-FEMA studies, released in draft form on April 5, 2005, is the preliminary report by the Commerce Depart-ment's NIST. Consistent with the task force's earlier findings, the NIST draft report stresses the necessity to develop more efficient methods of evacuating tall buildings and allowing more immediate access for rescuers. The NIST draft report notes that previous evacuation plans implemented evacuations in phases, based upon elevator, stairwell and other exit capacities. Sept. 11, on the other hand, mandated a full-scale evacuation. NIST released its final report in June, triggering a public comment period.

A later report will contain formal recommendations for potential building code changes. Possible changes, also consistent with the task force report, may include additional fire exits and stairwells, along with vibration-resistant, fireproof elevators. The International Code Council (“ICC”), which develops building and fire codes that many states adopt, has conducted an investigation that it expects will lead to the development of additional new building safety and fire prevention codes. The ICC's Ad Hoc Committee on Terrorism Resistant Buildings plans to propose code changes targeting the risks related to terrorist attacks against buildings.

Building risks generally arise from three basic categories of events: natural, which include earthquakes, floods, tornados, hurricanes and other events often described as “acts of God”; accidental, which include fires, chemical spills, train wrecks and other events stemming from human activities; and intentional, which include criminal acts, such as those driven by grievances or other vengeful motives, and terrorist activities compelled by political, religious or other ideological motives.

Most security and safety efforts focus upon methods by which building owners can protect buildings and occupants effectively during business hours and primarily address natural and accidental risks. By extension, these methods may mitigate the effects of some intentional acts as well. Safety equipment intended to mitigate the risks of natural and accidental events, such as devices designed to detect seismic activity, weather, fire and smoke may have the residual benefit of helping to alert building occupants to some intentional acts such as arson and explosions.

To date, studies, statistics, and other data regarding terrorist activities in the United States by necessity have been limited to information gathered following the events at the World Trade Center, Pentagon and Oklahoma City, all of which involved explosions. Because these events have provided more hard data about the results of explosions, most of the efforts to date have concentrated upon hardening the building envelope to protect against explosions and less upon resisting biochemical threats.

Little data exists to support studies of risks arising from biochemical attacks, which are more insidious. The discovery of anthrax in post offices in the fall of 2001 caused five deaths and great expense for governmental agencies that must respond not only to the actual events, but also to the perceived threat. According to the Building Diagnostics Research Institute, most of the $33 billion in FEMA response costs associated with the anthrax threat resulted from the necessity to address numerous threats that ultimately proved groundless but had to be addressed to assuage the public's fear.

'Green' Building Programs

Some of the code provisions intended to protect building occupants may conflict with other programs that are intended to support other concepts, such as “green” or high-performance building programs, in which participants may receive tax credits for incorporating design features to enhance environmental conservation. These programs are intended to target rising fuel costs and respond to the public's growing demand for eco-friendly design. New York, Maryland, and a few cities offer tax incentives for green buildings. Washington state recently announced the passage of a green building law, effective last summer, which will apply to new publicly funded buildings, of over 5000 square feet including, among others, offices, schools and colleges. The law will require such buildings to meet the “silver level” of Leadership in Energy and Environmental Design (“LEED”) ratings, which are administered by the non-profit U.S. Green Building Council, and will award points for energy and water efficiency, indoor air quality, and recycled materials use.

While the green building concept is intended to protect the environment and natural resources, some provisions may conflict with developing building codes that are intended to protect buildings and their occupants from terrorism and other risks that arise from intentional acts. For example, while certain green building guidelines suggest incorporating underfloor air vents to improve airflow, such vents could be more difficult to secure and protect from foreign substances than conventional overheard air vents.

Insurance Industry

Under TRIA, the government would help insurance companies by paying a portion of insureds' claims for damages arising from specifically defined terrorist acts. Under the act, the federal government requires primary insurance companies to make terrorism coverage available and to notify commercial insureds of the availability. TRIA coverage is triggered when any foreign person or foreign interest commits a certified act of terrorism that results in at least $5 million in insured losses in the United States. If such an act of terrorism occurs, the federal government, primary insurers, and policyholders share the risk of loss. The federal government is responsible for paying 90% of an insured's primary property-casualty losses after an insurer's exposure exceeds 7% of its direct earned premiums (“DEP”) for 2003, 10% of its DEP for 2004, or 15% of its DEP for 2005. The federal fund payments are limited to $100 billion for each program year.

TRIA will expire on Dec. 31, 2005, and its renewal remains in question. According to some experts, if TRIA is not renewed, underwriters probably will lack capacity to provide terrorism coverage in major U.S. metropolitan areas, such as New York, Washington, D.C., Chicago, San Francisco, Boston and Los Angeles. The concern is that a failure to renew TRIA could cause a return to the crisis period of 2002, when underwriters' coverage capacity dipped precipitously, causing insurance to become a national economic issue. About $10 billion in new construction was held up due to a lack of terrorism insurance. The resulting unemployment, drop in building materials sales, and other effects dealt a major blow to the construction industry in particular and to the economy in general. At that time TRIA was enacted as a means of helping insurers to fill the gap in capacity.

A small handful of insurers currently are offering terrorism hedges, which allow qualified insureds to reserve terms and limits at a pre-determined rate. For example, for 15% of the premium price, an insured may reserve capacity at a set rate, to become effective if TRIA is not renewed. All current policies have sunset clauses that are triggered by the expiration of TRIA.

'Blast Modeling'

As the construction industry, FEMA, NIST and others have done, insurers also have studied the building damage wrought by the 9/11 attacks. At the request of insurance rating agencies, major underwriters have conducted “blast modeling” in New York and Washington, D.C., to assess the damage that 5-ton truck bombs would inflict upon target buildings. Data gathered from the modeling effort will help insurance underwriters to estimate the amount of insurance reserves necessary to cover acts of terrorism.

This article originally appeared in the New York Law Journal, an ALM publication.

The fourth anniversary of the 9/11 attacks reminded us that the mortal damage to the World Trade Center and adjacent buildings represented a level of destruction never experienced previously in the United States. Among other well-documented effects, the collapse of these structures gave rise to both hindsight and foresight among those who design, build, own and insure buildings. The disaster illustrated that even the tallest and apparently strongest of buildings are vulnerable, and even the deepest insurance reserves can be pumped dry. (The recent destruction caused by a natural disaster ' Hurricane Katrina ' further underscores this vulnerability.)

Landlords remain affected by the evolving construction and insurance practices, as both industries continue to assess the past in an attempt to control the future. In the weeks and months that followed 9/11, government agencies, construction experts, building owners, their insurance companies, along with the respective legal counsel of all interested entities, scrutinized in minute detail every structural aspect ' from the largest steel beams to the thread on the smallest bolts ' of the impacted buildings. Teams of experts evaluated and re-evaluated design, construction, and insurance decisions from decades earlier, in part to understand the calamity and prevent recurrence and in part to make realistic assessments of building vulnerability and insurability.

The depletion of insurance reserves for losses caused by terrorist activities affected not only the payment of claims arising from the event, but also put the damper on new building construction for months after 9/11. The loss of jobs and revenues had a horrific effect on the U.S. economy. In reaction and to ensure that terrorism insurance would remain available, the insurance industry and federal agencies assessed the disaster, and Congress acted promptly to pass the Terrorism Risk Insurance Act (“TRIA”) in 2002.

Preventive Measures

Now, experts in construction practices and insurance have had time to look backward and forward and to consider necessary preventive measures. The construction industry has had opportunities to apply some of the building code changes recommended after 9/11, and an April 5, 2005 preliminary report by the Commerce Department's National Institutes of Standards and Technology (“NIST”) almost certainly will lead to others. TRIA will expire on Dec. 31, 2005, as the insurance industry and Congress ponder the act's renewal.

This article reviews some of the issues facing both industries and their respective legal counsel as the dust continues to settle.

Construction Industry

Among the primary building-related post 9/11 studies was the Federal Emergency Management Administra-tion's (“FEMA”) July 2002 World Trade Center Building Performance Study Report. While finding it remarkable that the towers and surrounding buildings “were able to sustain this level of damage and remain standing for an extended period of time,” FEMA recommended changes to several standards and building code requirements.

Task Force

These recommendations and other investigative reports received additional analysis from the World Trade Center Building Code Task Force, which convened on the authority of the New York Department of Buildings. The task force reviewed the FEMA report along with then-current building design, construction and operating requirements and other materials to assess the need for modifications to address “extreme events” and to ensure that the public will be safe in all buildings, both existing and new. The task force released its findings and recommendations in a February 2003 report, which itself has triggered or become the subject of additional studies and reports.

The task force recommended a number of measures including, among others, designing buildings to prevent collapse, prohibiting open web-bar trusses and requiring protected vestibules in elevator lobbies in new commercial construction over 75 feet high, using available impact-resistant materials, prohibiting scissors stairs in high rise buildings with floor plates of over 10,000 square feet, improving markings for exits, mandating full-building evacuations plans for emergency events other than fires and limiting the diameter of fuel oil transfer piping in systems using day tanks.

Among the several risks and concerns addressed in the ensuing studies are potential terrorist actions, such as explosions and releases of biochemical substances. Of particular concern are buildings used for public services or communications, such as courtrooms, municipal offices, hospitals, call centers, and other structures of high traffic and visibility. Further, in an emergency, some buildings can be evacuated to protect occupants, but some, such as hospitals and emergency command centers, cannot. In addition, school buildings often are designated gathering places in emergencies, yet most were not designed specifically to protect against the risks posed by terrorism and other catastrophic events.

NIST Draft Report

One of the most recent post-FEMA studies, released in draft form on April 5, 2005, is the preliminary report by the Commerce Depart-ment's NIST. Consistent with the task force's earlier findings, the NIST draft report stresses the necessity to develop more efficient methods of evacuating tall buildings and allowing more immediate access for rescuers. The NIST draft report notes that previous evacuation plans implemented evacuations in phases, based upon elevator, stairwell and other exit capacities. Sept. 11, on the other hand, mandated a full-scale evacuation. NIST released its final report in June, triggering a public comment period.

A later report will contain formal recommendations for potential building code changes. Possible changes, also consistent with the task force report, may include additional fire exits and stairwells, along with vibration-resistant, fireproof elevators. The International Code Council (“ICC”), which develops building and fire codes that many states adopt, has conducted an investigation that it expects will lead to the development of additional new building safety and fire prevention codes. The ICC's Ad Hoc Committee on Terrorism Resistant Buildings plans to propose code changes targeting the risks related to terrorist attacks against buildings.

Building risks generally arise from three basic categories of events: natural, which include earthquakes, floods, tornados, hurricanes and other events often described as “acts of God”; accidental, which include fires, chemical spills, train wrecks and other events stemming from human activities; and intentional, which include criminal acts, such as those driven by grievances or other vengeful motives, and terrorist activities compelled by political, religious or other ideological motives.

Most security and safety efforts focus upon methods by which building owners can protect buildings and occupants effectively during business hours and primarily address natural and accidental risks. By extension, these methods may mitigate the effects of some intentional acts as well. Safety equipment intended to mitigate the risks of natural and accidental events, such as devices designed to detect seismic activity, weather, fire and smoke may have the residual benefit of helping to alert building occupants to some intentional acts such as arson and explosions.

To date, studies, statistics, and other data regarding terrorist activities in the United States by necessity have been limited to information gathered following the events at the World Trade Center, Pentagon and Oklahoma City, all of which involved explosions. Because these events have provided more hard data about the results of explosions, most of the efforts to date have concentrated upon hardening the building envelope to protect against explosions and less upon resisting biochemical threats.

Little data exists to support studies of risks arising from biochemical attacks, which are more insidious. The discovery of anthrax in post offices in the fall of 2001 caused five deaths and great expense for governmental agencies that must respond not only to the actual events, but also to the perceived threat. According to the Building Diagnostics Research Institute, most of the $33 billion in FEMA response costs associated with the anthrax threat resulted from the necessity to address numerous threats that ultimately proved groundless but had to be addressed to assuage the public's fear.

'Green' Building Programs

Some of the code provisions intended to protect building occupants may conflict with other programs that are intended to support other concepts, such as “green” or high-performance building programs, in which participants may receive tax credits for incorporating design features to enhance environmental conservation. These programs are intended to target rising fuel costs and respond to the public's growing demand for eco-friendly design. New York, Maryland, and a few cities offer tax incentives for green buildings. Washington state recently announced the passage of a green building law, effective last summer, which will apply to new publicly funded buildings, of over 5000 square feet including, among others, offices, schools and colleges. The law will require such buildings to meet the “silver level” of Leadership in Energy and Environmental Design (“LEED”) ratings, which are administered by the non-profit U.S. Green Building Council, and will award points for energy and water efficiency, indoor air quality, and recycled materials use.

While the green building concept is intended to protect the environment and natural resources, some provisions may conflict with developing building codes that are intended to protect buildings and their occupants from terrorism and other risks that arise from intentional acts. For example, while certain green building guidelines suggest incorporating underfloor air vents to improve airflow, such vents could be more difficult to secure and protect from foreign substances than conventional overheard air vents.

Insurance Industry

Under TRIA, the government would help insurance companies by paying a portion of insureds' claims for damages arising from specifically defined terrorist acts. Under the act, the federal government requires primary insurance companies to make terrorism coverage available and to notify commercial insureds of the availability. TRIA coverage is triggered when any foreign person or foreign interest commits a certified act of terrorism that results in at least $5 million in insured losses in the United States. If such an act of terrorism occurs, the federal government, primary insurers, and policyholders share the risk of loss. The federal government is responsible for paying 90% of an insured's primary property-casualty losses after an insurer's exposure exceeds 7% of its direct earned premiums (“DEP”) for 2003, 10% of its DEP for 2004, or 15% of its DEP for 2005. The federal fund payments are limited to $100 billion for each program year.

TRIA will expire on Dec. 31, 2005, and its renewal remains in question. According to some experts, if TRIA is not renewed, underwriters probably will lack capacity to provide terrorism coverage in major U.S. metropolitan areas, such as New York, Washington, D.C., Chicago, San Francisco, Boston and Los Angeles. The concern is that a failure to renew TRIA could cause a return to the crisis period of 2002, when underwriters' coverage capacity dipped precipitously, causing insurance to become a national economic issue. About $10 billion in new construction was held up due to a lack of terrorism insurance. The resulting unemployment, drop in building materials sales, and other effects dealt a major blow to the construction industry in particular and to the economy in general. At that time TRIA was enacted as a means of helping insurers to fill the gap in capacity.

A small handful of insurers currently are offering terrorism hedges, which allow qualified insureds to reserve terms and limits at a pre-determined rate. For example, for 15% of the premium price, an insured may reserve capacity at a set rate, to become effective if TRIA is not renewed. All current policies have sunset clauses that are triggered by the expiration of TRIA.

'Blast Modeling'

As the construction industry, FEMA, NIST and others have done, insurers also have studied the building damage wrought by the 9/11 attacks. At the request of insurance rating agencies, major underwriters have conducted “blast modeling” in New York and Washington, D.C., to assess the damage that 5-ton truck bombs would inflict upon target buildings. Data gathered from the modeling effort will help insurance underwriters to estimate the amount of insurance reserves necessary to cover acts of terrorism.

This article originally appeared in the New York Law Journal, an ALM publication.