Runaway insurance costs threaten NYC.

The rapidly approaching deadline for the Terrorism Risk Insurance Act (TRIA) might be the insurance story that everyone is talking about these days, but a new report points to a potentially bigger threat involving building owners throughout the nation.

According to commercial property insurance specialists Affiliated FM, roughly three-quarters of commercial policy holders are currently under-insured by nearly 40% and, in the event of a disaster, such as a fire, hurricane or earthquake, would be unable to meet the full cost of rebuilding. And New York--a city whose real estate market many believe impervious to the peaks and troughs of the national market--could suffer the brunt of a nationwide insurance premium hike, according to some experts.

"I don't think any submarket will be able to escape international pricing mechanisms," said construction law expert, Andrew Stephenson, a partner at the firm Holland + Knight.

Steep increases in construction costs are being blamed for creating the insurance crisis. According to the Associated General Contractors of America, construction costs are expected to increase by 10 to 15% over the next 12 months. "Property owners have to be aware that many of their properties might be under-insured because of double digit increases on many materials," said Joseph Morrello, operations vice president for Affiliated FM. "The real, true solution to that is to ensure that properties are evaluated on a regular basis by a professional appraiser."

According to Affiliated FM, the price of steel has doubled since June 2003. Copper has also seen steep price hikes of 61% annually, while rebar has seen a hike of 41%; lumber, 27%; gypsum, 19%; plastic, 18% and concrete, 11%. The cost of fuel and more expensive labor are a problem for developers as well.

The construction booms in China and India over the past couple of years also had a major effect on building costs, putting high demand on an already limited supply.

"China made a demand on the market place for steel. Then the price of scrap went up, bringing up the price of new steel products," said Stephenson. "There was already a very hot construction market in the United States. Then you had these booms take place in China and India compounding an already hot market."

Not only are building owners finding themselves severely under-insured because of the increase in construction costs, but renewal insurance rates and rates for new buildings are expected to skyrocket also.

"We expect the property market to experience rate increases," said Kevin Madden, managing director of national real estate practice at Aon Risk Services, a consulting company that specializes in insurance and risk management. "And increasing [property] values could only compound the rate increases for renewals,"

Madden expects 2006 to be a hard insurance market. "Rates will increase and increasing property values will only compound the rate increases, making the overall rate that much higher."

According to Michael F. Power, CPCU, senior vice president of Acordia Northeast, a branch of national insurance brokerage, Acordia, "The recent significant claims incurred by insurers due to the major hurricanes which have occurred has had a rippling effect through the property marketplace, with insurers increasing pricing across the board.

"This combination of higher values, along with rate increases, is resulting in sometimes dramatic price changes year to year."

In New York, where construction costs and insurance premiums are already higher than most other markets, could be hit the hardest.

"We expect to see increase of 525%, or more, in New York City," Madden said. "In New York City we're experiencing rate increases not only as a result of traumatic hurricane losses, but because more and more carriers are cautious with their capacity as a result of terrorism. I expect rates in New York to go up. We're already experiencing that and I expect it to go on through 2006."

Experts don't see a silver lining any time soon. Until there's a lull in the construction industry, "There's clearly not going to be a reduction in the replacement cost of buildings, in addition to inflation costs," said Morrello.

"Until such a time someone finds a way to provide building materials more cheaply, [construction and insurance costs dropping] is not a foreseen circumstance."

Robyn Ice, a partner in the construction, litigation and insurance group of national law firm, Alston and Bird, agreed. "I don't see prices dropping appreciably, unless a greater supply of materials develops. Insurance costs probably will continue to rise as well.

"This climate makes it especially important for building owners to keep a close watch on their coverage limits to ensure that their insurance is adequate to meet the cost of replacement and repair."