How Not Renewing TRIA Could Dramatically Impact Construction

As Congress begins a Lame Duck session to conclude its workload for the year, one piece of legislation remains to be passed that could have a positive impact on jobs and the economy.  The Terrorism Risk Insurance Act (TRIA) is up for renewal and if not extended, could dramatically harm our economy, particularly the construction industry.

In an era where there is little bipartisan agreement, the need to pass a new terrorism insurance legislation finds remarkable consensus on both sides of the aisle.  After the terrorist attacks on 9/11, most insurance companies stopped writing policies that covered the possibility of terrorism.  Banks, on the other hand, began to require that loans issued for major projects (aka "soft targets") have terrorism insurance to protect their investment.

Realizing the potential halt to the nonresidential construction industry, Congress reacted quickly and smartly by TRIA in 2002.

The law required insurers to offer certain types of coverage and formed a federal "backstop" for insurance claims related to acts of terrorism. The Act "provides for a transparent system of shared public and private compensation for insured losses resulting from acts of terrorism."  The program has cost the taxpayer nothing because it has never been used and it could be argued it has protected the economy by removing uncertainty associated with “what-if…” scenarios. Viewed another way, how would the nonresidential construction market have faired if there was no federal backstop? The legislation has been renewed twice, once in 2005, again in 2007 and is now up for renewal once again.

The Senate addressed the bill earlier this year, passing a seven-year extension of the program while the House of Representatives has struggled to pass its own extension plan.  In the House, the Chairman of the House Financial Services Committee Chairman Jeb Henersling, (R-TX), has been holding out for more reforms that limit taxpayer exposure in case of an attack.  He should be lauded for his efforts as his reforms are the first step in reigniting the private insurance market.

Some have suggested, however, that Henserling is playing a game of chicken with the bill in order to achieve even greater reforms.  This would be a grave error.  Hoping for the overnight creation of a private terrorism insurance market is a lot like the quick passage of ObamaCare -- only after a period of time would we know exactly how well thought out and costly the program would be. Given the nature of the insurance industry, which exchanges risk for premiums paid, needs time in order to properly reenter the space while ensuring one attack doesn’t put dozens of private insurance companies out of business.

As any CEO will tell you, businesses need certainly in order to properly allocate resources.  A six-month renewal of the program, instead of a longer term one as passed by the Senate, will foster uncertainty in the non-residential construction market -- a construction market that has slipped over the last two months.  Liquidity will dry up as banks will certainly refuse to make any loans until they know what the final legislation will look like.

A short-term renewal is no better than no renewal at all. It would be the equivalent of throwing a monkey wrench into the economic gears of the construction and building industry. If we do get a temporary renewal -- a band aid if you will -- we could shares of Jacobs Engineering (NYSE:JEC), Fluor Corp. (NYSE:FLR), Chicago Bridge & Iron (NYSE:CBI), Granite Construction (NYSE:GVA) come under pressure.

Voters just overwhelmingly sent a stern message to Washington, in large part based on the poor state of the economy. The consequences of a short-term extension or a lapse in this program would be a significant setback for job creation and a step in the wrong direction for Republicans who now control both Houses of Congress.