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FAQ: Terrorism Insurance | All Safe Insurance

FAQ: Terrorism Insurance

The cost of terrorism still looms large in United States history. After nine attack-free years, the $32.5 billion in losses paid out by insurers for the terrorist attack of September 11, 2001, places second in an Insurance Information Institute (I.I.I.) ranking of the most costly U.S. catastrophes – after just Hurricane Katrina (2005) . Nearly 10 years on, 9/11 also remains the worst terrorist act in terms of fatalities and insured property losses.

With a new decade underway, a number of converging factors point to the fact that terrorism is a reemerging threat. Failure to focus on and prepare for this threat will come at an enormous cost to the millions of individuals and businesses who rely on insurance contracts to offset the overall economic impact of a terrorist attack. For property/casualty insurers, the increasing share of losses that they would have to fund in the event of a major terrorist attack on U.S. soil suggests that now is the time to take stock of their terrorism exposures.


FAQ: TERRORISM INSURANCE – WHAT IT IS AND WHAT IT COVERS

Terrorism insurance provides coverage to individuals and businesses for potential losses due to acts of terrorism.

Businesses

Prior to 9/11, standard commercial insurance policies included terrorism coverage as part of the package, effectively free of charge. Today, terrorism coverage is generally offered separately at a price that more adequately reflects the current risk.
Insurance losses attributable to terrorist acts under these commercial policies are insured by private insurers and reinsured or “backstopped” by the federal government pursuant to the Terrorism Risk and Insurance Act of 2002 (TRIA). TRIA has been renewed twice, and the current law, known as the Terrorism Risk Insurance Program Reauthorization Act of 2007 (TRIPRA) runs until December 2014. Under the program, owners of commercial property, such as office buildings, factories, shopping malls and apartment buildings, must be offered the opportunity to purchase terrorism coverage.

Individuals

Standard homeowners insurance policies include coverage for damage to property and personal possessions resulting from acts of terrorism. Terrorism is not specifically referenced in homeowners policies. However, the policy does cover the homeowner for damage due to explosion, fire and smoke—the likely causes of damage in a terrorist attack.
Condominium or co-op owner policies also provide coverage for damage to personal possessions resulting from acts of terrorism. Damage to the common areas of a building like the roof, basement, elevator, boiler and walkways would only be covered if the condo/co-op board has purchased terrorism coverage.
Standard renters policies include coverage for damage to personal possessions due to a terrorist attack. Again, coverage for the apartment complex itself must be purchased by the property owner or landlord.
Auto insurance policies will cover a car that is damaged or destroyed in a terrorist attack only if the policyholder has purchased “comprehensive” coverage. Most people who have loans on their cars or lease are required by lenders and leasing companies to carry this optional form of coverage. People who buy liability coverage only are not covered in the event their vehicle is damaged or destroyed as the result of a terrorist attack.
Life insurance policies do not contain terrorism exclusions. Proceeds will be paid to the beneficiary as designated on the policy.

Under what circumstances is there coverage?

For the terrorism coverage to be triggered under TRIPRA for commercial policies, a terrorist attack has to be declared a “certified act” by the Secretary of the Treasury.
No such declaration is needed to trigger coverage under home and auto policies because there are no exclusions for terrorism.
In some states a doctrine know as “fire following” applies. This means that in the event of a terrorist-caused explosion followed by fire, insurers could be liable to pay out losses attributable to the fire (but not the explosion) even if a commercial property owner had not purchased terrorism coverage. Insurers have sought to limit fire coverage resulting from a terrorist attack, because commercial policyholders that choose to reject TRIPRA or other terrorism coverage are effectively paying no premium for the protection offered by fire- following coverage. Currently, there is coverage for fire following an act of terrorism in just five states – California, Maine, Missouri, Oregon and Wisconsin.

What is not covered?

There are long-standing restrictions regarding war coverage and nuclear, biological, chemical and radiological (NBCR) events in both personal and commercial insurance policies.
War-risk exclusions reflect the realization that damage from acts of war is fundamentally uninsurable. No formal declaration of war by Congress is required for the war risk exclusion to apply. Nuclear, biological, chemical and radiological attacks are another example of catastrophic events that are fundamentally uninsurable due to the nature of the risk.
Under the terrorism risk insurance program, if some NBCR exclusions are permitted by a state, an insurer does not have to make available the excluded coverage.

Business Interruption Insurance

Property damage to commercial buildings from a terrorist attack also may include claims for business interruption. Business interruption insurance (sometimes referred to as business income coverage) covers financial losses that occur when a firm is forced to suspend business operations either due to direct damage to its premises or because civil authorities limit access to an area after the attack and those actions prevent entry to the business premises. Coverage depends on the individual policy, but typically begins after a waiting period or “time deductible” of two to three days and lasts for a period of two weeks to several months.
Business interruption losses associated with acts of civil authority (e.g., closure of certain area around the disaster) can only be triggered when there is physical loss or damage arising from a covered peril (e.g., explosion, fire, smoke, etc.) within the area affected by the declaration. The loss/damage need not occur to the insured premises specifically. Reductions in business income associated with fear of traveling to a location, in addition to closure to areas by authorities because of a heightened state of alert, would not be covered by business interruption policies.

Workers compensation and other coverages

Workers compensation — a compulsory line of insurance for all businesses — covers employees injured or killed on the job and therefore automatically includes coverage for acts of terrorism. Workers compensation is also the only line of insurance that does not exclude coverage for acts of war. Coverage for terrorist acts cannot be excluded from workers compensation policies in any state.
There are essentially three types of workers compensation benefits. The first reimburses workers for lost wages while they recover from their injuries. The second covers workers for all medical expenses incurred as a result of the injuries they sustain. The third type of benefit provides payments to the families of workers killed on the job.
Life/health and disability insurance policies may provide coverage for loss of life, injury or sickness to individuals in the event of a terrorist attack.

What is the Terrorism Risk Insurance Act (TRIA)/Terrorism Risk Insurance Program Reauthorization Act (TRIPRA)?

TRIA is a public/private risk-sharing partnership between the federal government and the insurance industry. The program is designed to ensure that adequate resources are available for businesses to recover and rebuild if they become the victims of a terrorist attack.
TRIA was extended for another two years in December 2005 and for another seven years to 2014 in December 2007. The new law is known as the Terrorism Risk Insurance Program Reauthorization Act (TRIPRA) of 2007.
Specific provisions of the legislation are:

  • An event must cause at least $100 million in aggregate property and casualty insurance losses to be certified by the Secretary of the Treasury as an act of terrorism.
  • The definition of a certified act of terrorism has been expanded to cover both domestic and foreign acts of terrorism.
  • Each participating insurer is responsible for paying out a certain amount in claims – a deductible – before Federal assistance becomes available.
  • For losses above a company’s deductible, the federal government will cover 85 percent, while the insurer contributes 15 percent.
  • The aggregate insurance industry retention in 2007 is $27.5 billion, up from $25 billion in 2006 and $15 billion in 2005.
  • Losses covered by the program are capped at $100 billion.
  • Lines originally excluded from the program are: personal lines (auto and home), reinsurance, federal crop, mortgage guaranty, financial guaranty, medical malpractice, flood insurance provided under the NFIP and life & health. Additional lines now excluded are: commercial auto, professional liability except for directors and officers liability, surety, burglary and theft, and farmowners multi-peril insurance.
  • The Terrorism Risk Insurance Program Reauthorization Act (TRIPRA) of 2007 – is due to sunset on December 31, 2014.


Does the terrorism risk insurance program affect the availability and price of coverage?

Yes, by sharing potential losses from terrorist attacks between private insurers and the government, the terrorism risk insurance program has brought much needed additional capacity to the terrorism market. Before the program existed, businesses were left with little or no terrorism coverage, but since it came into effect they are able to purchase the cover they need.
Terrorism coverage is very difficult to price because the frequency and severity of an attack is so unpredictable. Pricing of terrorism coverage varies according to the individual risk (based on factors such as location and industry, for example), but it is clear that the terrorism risk insurance program has had a stabilizing influence on the market.

Does an insurer have to make terrorism coverage available?

Yes. Under TRIPRA, all property and casualty insurers in the U.S. are required to make terrorism coverage available. The “make available” provision applies to commercial lines of p/c insurance. Insurers are required to make an offer of coverage for “certified acts” to policyholders. If the insured rejects an offer, the insurer may then reinstate a terrorism exclusion.

What if terrorism coverage has not been purchased and a loss occurs?

A business that has not purchased TRIPRA or other terrorism coverage will not be covered for damage caused to their property by a terrorist attack. An individual that has homeowners or renters coverage may be covered, according to the individual terms of their policy.

Source: Insurance Information Institute report

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