Questions of Coverage for Terrorism

It seems like almost every day there is a major news story concerning a terrorist act in the Middle East, Europe, or Asia. While the United States has been largely immune to the almost daily attacks of domestic terrorism undertaken around the world, the aftermath of September 11th will not soon be forgotten.

Luckily, domestic terrorism in the United States is a topic that has been relegated to presidential politics rather than a discussion of recent devastation and loss of life. The horrible effects of the September 11, 2001, attacks affected virtually every segment of American society.

The insurance industry was hard hit with an estimated payment of more than forty billion dollars related to September 11th. Confronted with the real possibility that future terrorist attacks within the United States could cause additional economic harm, insurers became very hesitant to offer insurance protection for terrorism related losses.

Almost immediately after September 11th, there were questions as to whether insurers with “acts of war” exclusions would rely upon them to deny coverage. While the “act of war” exclusion was not relied upon to deny September 11th related claims, the real question of whether the insurance industry should (or was capable) of providing coverage for domestic terrorism was extensively discussed. In response to growing unrest, the federal government passed legislation designed to address the developing void in the insurance market for terrorism coverage.

President George W. Bush signed into law the Terrorism Risk Insurance Act of 2002 (“TRIA”). The TRIA initially addressed three major pressing questions. First, the Act required insurers to make terrorism insurance available in all property and casualty policies. Second, the Act nullified all then existing terrorism exclusions. Third, the Act created a government fund or backstop to reimburse insurers for up to ninety percent of their losses above certain deductibles described in the Act.

Also of significant importance, the TRIA has at least three significant limitations. TRIA coverage is only available for acts that occur in the United States, to a United States air carrier, or on the premises of a United States mission. In addition, losses must result from acts “committed by an individual or individuals acting on behalf of any foreign person or foreign interest.” Thus, there is no coverage for acts such as the Oklahoma City bombing. Finally, coverage will only be provided for those acts certified by the Secretary of the Treasury as “acts of terrorism” under the Act. The Act specifically states that the Secretary of the Treasury will not certify any act committed as part of a war declared by Congress or an act that results in less than $5 million in aggregate property and casualty losses.

In addition to limitations that affect all aspects of the Act’s operation, more discreet issues have also been extensively discussed since the Act’s passage. For instance, the TRIA did not address to whom disclosures about the availability of terrorism coverage must be sent. This seemingly small issue has created significant concern in the real estate industry as lenders have been deprived of information from their clients as to what disclosures have been made and whether a borrower purchased terrorism coverage.

Notably, the TRIA is set to expire on December 31, 2005, unless Congress renews it. Thankfully, we have not had to confront the applicability of TRIA to any particular situation. Correspondingly, we have not been confronted with any coverage questions under newly designed terrorism insurance or potentially applicable exclusions. The most pressing issues of terrorism insurance were answered by TRIA. The difficulty that remains after TRIA is its implementation. While the Insurance Services Office has been very involved in drafting terrorism coverage related forms, the industry has had some difficulty in setting premiums. Obvious indicators for premium calculation are loss experience and forecasting.

Fortunately, there has been little guidance in these areas. While it appears the premium structure for terrorism coverage is at a significantly reduced level than before the introduction of TRIA, it has also been reported that a majority of businesses are not choosing to purchase terrorism coverage. The result?

Only those businesses in urban areas with the greatest risk of loss to domestic terrorism are purchasing coverage under the current premium structure. In many ways, the insurance industry is providing terrorism coverage in the same manner as if it were to provide hurricane insurance to residents of coastal communities in the southeastern part of the United States without guidance as to how frequently hurricanes might affect the area and what kinds of losses could typically be expected.

Clearly, the Terrorism Risk Insurance Act answered many problems that the insurance industry and the U.S. economy had following September 11th. Certain provisions of the Act are set to expire at the end of this year and some members of Congress have already called upon the Secretary of the Treasury to extend the provisions so as to coincide with the TRIA’s overall stated expiration at the end of 2005.

More globally, others have already begun actively calling for an extension or re-initiation of TRIA. Few have commented that it seems early to engage in a meaningful discussion concerning the Act, but the debate surrounding the government’s future role in establishing a system of coverage for terrorism losses will be a complicated and time-consuming effort. In fact, there are questions as to whether the federal government will have any meaningful role in the terrorism coverage when TRIA expires, but that determination cannot be made until debate and discussion begins.

What is clear is that insurers may begin issuing policies later this year with policy periods extending beyond the expiration of TRIA with uncertainty as to how terrorism coverage may be addressed in 2006.

Andrew S. Boris is a partner in the Chicago office of Tressler Soderstrom Maloney & Priess. His practice is focused on litigation and arbitration of insurance coverage and reinsurance matters throughout the country, including general coverage, directors and officers liability, professional liability, environmental, and asbestos cases. Questions and responses to this article are welcome at aboris@tsmp.com The Tip of the Month runs each month on claimsguides.com.