Insurers and the Consumer
Terrorism: who would have thought terrorism risk would ever be an American insurance topic? The Terrorism Risk Insurance Act was enacted in 2002 because the private insurance marketplace did not have adequate terrorism insurance. Of course, we did not realize this until after 9/11 when we experienced terrorism in New York City from an outside source. Prior to 9/11 acts of terrorism on American soil were from Americans themselves, such as Timothy McVey with the Oklahoma incident. Americans apparently felt less threatened when it was from other Americans, rather than from other countries. Once the terrorism originated from outside of our borders we realized we were vulnerable to a different sort of threat.
What exactly is an act of terrorism? Generally, it is an act that is certified by the Secretary of the Treasury, in concurrence with the Secretary of State and the Attorney General of the United States to be an act of terrorism. It is further defined as a violent act or an act that is dangerous to human life, property, or infrastructure of the United States, which has resulted in damage within the United States, or outside the United States in the case of an air carrier or vessel or the premises of a United States mission, committed by an individual or group of individuals acting on behalf of any foreign person or foreign interest, as part of an effort to coerce the civilian population of the United States or to influence the policy or affect the conduct of the United States Government by coercion.
TRIA
The Terrorism Risk Insurance Act, called simply TRIA, was designed to make coverage available for acts of terrorism. Since few private insurers offered such coverage, it was designed to bridge the time until such coverage was available. Following the enactment of TRIA, terrorism insurance became readily available for those who felt the need to have it. Why was this legislation necessary? It was necessary for two primary reasons:
Although 9/11 was not the first terrorist act on American soil, it was the first time we realized how vulnerable we were to the terrorists of other nationalities. Americans generally feel we can control the Timothy McVeigh’s that we raise among ourselves, but we do not feel we have the same control over extremists from other countries. American policyholders are now interested in purchasing insurance to help them recover financially should another act of terrorism happen in the United States.
TRIA was a temporary measure, technically expiring on December 31, 2005. However, the law now requires that all insurance companies doing business in the U.S. to offer terrorism insurance coverage on the same terms and conditions under which they offer property and casualty coverage. This provision is known as the “make available” provision, which expired at the end of 2004.
Although the House Financial Services Committee approved H.R. 4634, “The Terrorism Insurance Backstop Extension Act of 2004”, Congress adjourned on October 9th, 2004 without passing the bill. This piece of legislation would have extended TRIA though 2007 and would have expanded its scope to include group life insurance.
With the federal government sharing in losses, the retention level is set by law. In 2003 it was seven percent of direct earned company premiums, in 2004 it rose to 10 percent, and in 2005 it increased to 15 percent.
TRIA was intended to be a temporary program allowing private insurance to stabilize after 9/11 and again begin to provide adequate capacity to meet the demand for terrorism coverage. However, many professionals feel the private insurance markets still have not completely stabilized. This can be seen in the lack of reinsurance available for the retained loss amounts held by private direct insurers, even though the potential loss is quantifiable as measured by the individual company retention amount. Additionally, there is little terrorism insurance coverage being offered by private carriers for such things as chemical, biological or radiological events, despite the fact that the federal backstop would cover these losses if they were insured against.
Insurers are notifying their customers of the terrorism insurance act. For example, commercial policies issued by Farmers Insurance Group states in part:
“Dear Valued Customer: You should know that as part of the Terrorism Risk insurance Act of 2002, coverage for certified acts of terrorism is made available as part of the coverage under your policy.
Coverage provided by this policy for losses caused by certified acts of terrorism is partially reimbursed by the United States under a formula established by federal law. Under this formula the United States pays 90% of covered terrorism losses that exceed the statutorily established deductible paid by the insurance company providing the coverage.”
The previous example was for commercial policies. Not all types of policies are the same, of course, so any policy should be examined by both the agent and policyholder for exact details.
President George W. Bush signed the Terrorism Risk Insurance Act of 2002 into law on November 26th, 2002. The law established a temporary federal Terrorism Insurance Program that provided for a transparent system of shared public and private compensation for insured losses resulting from certified acts of terrorism. To be certified acts of terrorism, they must meet the definition that was established. The intent is to protect consumers by addressing market disruptions and to ensure the continued availability and affordability of property and casualty insurance for terrorism risks. Additionally it allows for a transitional period for the private markets to stabilize, and resume pricing of this type of insurance, build capacity to absorb any future losses, and preserve state insurance regulation and consumer protections.
One of the reasons this was important legislation has to do with the financial climate in the United States following the tragic event of September 11th, 2001 (9/11). The law was intended to stimulate business investment that had slowed to a trickle following the act of terrorism against America. The law created a three-year federal program that backed up insurance companies and guaranteed that certain terrorist-related claims could be paid.
It is important to note that TRIA was designed
to be a short-term measure enabling the insurance market
time to recover and develop new solutions.
The 9/11 terrorist attack resulted in an estimated $32.5 billion in insured losses. Of course, there were additional uninsured losses. The insured losses involved many types of insurance coverage, including commercial property, business interruption, workers compensation, aviation, life and disability insurance. If we have another terrorist attack it is reasonable to believe these types of insurance markets will again suffer huge losses.
Terrorism insurance provides coverage to policyholders and insured businesses for potential losses due to acts of terrorism. Before 9/11/2001, 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 is more adequate in terms of current risk. Insurance losses that can be attributed to terrorist acts under these contracts are insured by private insurers and then reinsured or “backstopped” by the federal government as a result of the Terrorism Risk Insurance Act of 2002 (TRIA). Under TRIA, owners of commercial property, which would include such things as office buildings, factories, shopping malls, and apartment buildings, must be offered the opportunity to purchase terrorism coverage. The events of 9/11 obviously impacted how we looked at terrorism insurance since a June 2004 report from insurance broker Marsh, Inc. found that the proportion of U.S. businesses that purchased terrorism insurance during the first quarter of 2004 rose to its highest level following the enactment of TRIA. Marsh, Inc. stated that 44.2 percent of U.S. businesses purchased terrorism coverage in the first quarter of 2004. That compares to a 32.7 percent purchase rate for the fourth quarter of 2003.
While business property would probably be the most likely targets for terrorists, individual property owners would not be immune from damage as a side effect of terrorist activity. Standard homeowners’ insurance policies include coverage for damage to property and personal possessions resulting from acts of terrorism. Terrorism is not specifically referenced in most homeowner policies, but they do cover the homeowner for damage due to explosion, fire and smoke. Since this is the type of damage that is likely to happen during a terrorist attack the homeowner has coverage under these circumstances.
Condominium or co-op owner policies provide coverage for damage to personal possessions resulting from acts of terrorism since these types of structures are similar to apartment buildings. Damage to common areas of a building (including the roof, basement, elevator, boiler, and walkways) would only be covered if the condo or co-op board has purchased terrorism coverage.
Standard renter’s policies provide coverage for damage to personal belongings as a result of a terrorist attack. As before, damage to the apartment complex itself would only be covered if the owners had purchased such coverage for terrorism.
Auto insurance policies will cover a car that is damaged or destroyed in a terrorist attack, but only if the policyholder or certificate-holder has purchased “comprehensive coverage.” Most people who have loans on their vehicles or leases for their vehicles are required by the lenders and leasing companies to carry this optional form of coverage. People who buy liability coverage only are not covered for damage resulting from terrorist attacks.
Life insurance policies do not contain terrorism exclusions. Proceeds will be paid to the beneficiary as designated in the policy.
Under TRIA, for commercial policies to pay following a terrorist attack, the Secretary of the Treasury must declare the incident a terrorist attack. This would then be termed a “certified act.” Such a declaration by the Secretary of the Treasury is not required to trigger coverage under home and auto policies because there are no exclusions for terrorism.
In some states, a doctrine known as “fire following” applies. What does this mean? If a terrorist attack results in a fire that causes damages, insurers could be liable for losses attributable to the fire, but not necessarily for the explosion that caused the fire. Even if a commercial property owner had not bought terrorism coverage, he or she might be covered for the damage caused by the fire. Due to this fact, many insurers are now lobbying to limit fire coverage resulting from a terrorist attack, because commercial policyholders that choose to reject TRIA or other terrorism coverage are effectively paying no premium for the protection offered by fire-following coverage. Several states have responded to the requests of insurers by amending their standard fire policy laws to exclude acts of terrorism.
There are restrictions regarding war coverage and nuclear, biological, chemical and radiological events in both personal and commercial insurance policies. Nuclear, biological, chemical and radiological events are typically referred to as NBCR. War-risk exclusions reflect the fact that damage from acts of war is fundamentally uninsurable. Most people also realize that if we are under attack during a war, whether or not our insurance policy will cover the event is probably not our main focus at that point.
No formal declaration of war by Congress is required for the war risk exclusion to apply. Nuclear, biological, chemical and radiological (NBCR) attacks are another example of catastrophic events that are fundamentally uninsurable due to the nature of the risk. Under the Terrorism Risk Insurance Act, if some NBCR exclusions are permitted by a state, an insurer does not have to make available the excluded coverage.
It is not surprising that many companies and businesses may not be able to conduct their trade as they normally would after a terrorist attack. After 9/11 many companies were able to quickly regroup, but many others were not able to. It often depends upon the nature of the business.
Many types of business rely on funds on a daily basis. For example, a restaurant, deli, or café must rely on daily trade to bring in a continual stream of income. These types of businesses have a very low profit margin and are unlikely to survive if that steady stream of income stops. Even if the business reopens at some point, during the time they were closed it is likely that their employees were forced to find other work so that they could maintain a steady stream of income. This means that the restaurant, deli, or café will have additional costs related to training new personnel.
Although this example relates to the food industry there are many types of companies that would experience something similar. Under such an extreme type of business interruption as a terrorist attack there are many expenses that the general public is not aware of. Having to train new employees is just one example of costs that the general public would not be aware of.
Property damage to commercial buildings following a terrorist attack may cause the inability of some companies to quickly resume the normal course of business. Therefore, their business has been interrupted as a result of the terrorist attack. Those that carry business interruption insurance will be submitting claims. Business interruption insurance is sometimes referred to as business income coverage. This type of coverage covers the financial losses that occur when a company is forced to suspend their normal business operations either due to direct damage or because civil authorities have found it necessary to limit access to the area that was attacked. Policies will vary, but typically coverage begins after a waiting period (called a “time deductible”). This waiting period will depend upon the policy written, but it is often two or three days. The length of benefits will also depend upon the policy. They are written for anywhere from two weeks to several months.
Business interruption losses associated with acts of civil authority, meaning the closure of specified areas around the location of the terrorist act, can only be triggered when there is physical loss or damage as a result of the covered peril. The peril would probably be explosion, fire, or smoke, but it could include additional perils. The damage does not have to actually occur to the actual business structure.
Example:
ABC insurer is located in the building next to one that was bombed during a terrorist act. Although the actual location of ABC insurer was not damaged, due to the fire of the building that was hit, there is heavy damage, causing the possibility of a building collapse along with smoke drifting through the area. In the name of safety, the entire area is closed off. Even though ABC insurer could operate from their building, since civil authorities have declared it off-limits, there business interruption policy will cover their losses, subject to policy limitations.
Workers compensation, which is a compulsory line of insurance for all businesses, covers employees injured or killed on the job. As a result, it automatically covers acts of terrorism if the injury or death results while in the workplace or while performing activities for the employer at the time of their injury or death. 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 three basic types of workers compensation benefits:
There may be additional benefits available under an individual’s life, health, or disability policy.
The Terrorism Risk Insurance Act (TRIA) was a federal law originally signed into law by President George W. Bush on November 26, 2002 following the terrorist attack of September 11th, 2001. It was designed as a federal backup for insurance claims related to acts of terrorism. TRIA has been amended since its creation by the Terrorism Risk Insurance Extension Act of 2005 (TRIEA). It was again amended by the Terrorism Risk Insurance Program Reauthorization Act of 2007 (TRIPRA).
The difficulty when writing continuing education courses are laws that continually update or change in some way. The original TRIA expired in 2005, so it was necessary to update it. TRIPRA would have expired in December, 2014. In this case the 113th Congress introduced a bill to further extend the Terrorism Risk Insurance Act of 2002, now referred to as the Terrorism Risk Insurance Act of 2002 Reauthorization Act of 2013, or simply the TRIA Reauthorization Act of 2013.
TRIA Reauthorization Act of 2013 provides a five-year extension of terrorism risk insurance. Basically, the year “2014” is removed and “2019” is inserted. The “Timing of Mandatory Recoupment” (Section 103(e)(7)(E)(i)(III)) is amended by changing “2017” to “2024.” Since this act then terminates terrorism insurance coverage in 2019, it is likely that it will again be amended at that time, extending it on into the future.
Prior to 9/11, business insurers did not typically charge or even specifically exclude acts of terrorism from coverage. Before the event of 9/11 many underwriters (and people in general) did not believe that outside terrorism would come to American soil. Unfortunately they were wrong. Certainly we have had other terrorism acts, such as that at the Boston Marathon, but luckily they have not compared to the 9/11 terrorist acts.
The 9/11 terrorist act was the worst on record for both property and fatalities. Nearly 3,000 people lost their lives in New York City, Washington D.C., and rural Pennsylvania. Reinsurers greatly suffered from this terrorist act since it is the reinsurers that spread the risk assumed by primary insurers. Unable to accurately model or price terrorism exposures, they largely withdrew from the market for terrorism coverage. Without reinsurance, primary insurers were also forced to exclude terrorism from their policies. This exclusion was primarily approved by most state insurance regulators.
As a result most businesses were not able to buy terrorism protection. This posed a serious threat to industries where lenders and investors required terrorism protection, especially for some high risk companies. Real estate, transportation, construction, energy, and utility sectors of America’s economy were vulnerable since those are the types of targets terrorists would be considering.
Congress originally responded by passing TRIA in 2002 providing government reinsurance as a backstop in case of large-scale terrorist attacks, requiring business insurers to offer terrorism coverage for the types of insurance this act included. TRIA was extended by Congress and amended in December 2005 and again in December of 2007. In 2014 it was extended to 2019.
When the 2007 TRIA was extended, the Congressional Budget Office forecast a net federal budget cost of zero dollars for TRIA through 2017; with the 2014 extension that date became 2024. Although the federal government would help insurers cover losses if a terrorist attack again occurred (under certain conditions) it also imposes assessments on the insurance industry to recoup the government’s expenditures in part or whole. If costs occur to the insurance industry they will somehow be woven into the premiums charged.
It is the Secretary of the Treasury that oversees the Terrorism Insurance Program, with the assistance of the Federal Insurance Office. The Secretary has the authority to establish regulations and procedures to implement whatever current program is in place.
Several provisions of the original TRIA Act changed in the 2007 extension. Some of the more significant changes included:
1. Revising the definition of a certified act of terrorism to eliminate the requirement that the perpetrators must be acting on behalf of any foreign person or foreign interest.
2. Extending the program by seven years (taking it to 2014).
3. Requiring clear and conspicuous notice to policyholders of the existence of the $100 billion cap.
4. Fixing the Insurer Deductible at 20% of an insurer’s direct earned premium, and the federal share of compensation at 85% of insured losses that exceed insurer deductibles.
5. Fixing the program trigger at $100 million for all additional program years.
6. Requiring the U.S. Treasury to promulgate regulators for determining pro-rata shares of insured losses under the program when insured losses exceed $100 billion.
7. Requiring the Comptroller General to study the availability and affordability of insurance coverage for losses caused by terrorist attacks involving nuclear, biological, chemical, or radiological materials and issue a report not later than one year after the enactment of the Terrorism Risk Insurance Program Reauthorization Act of 2007.
8. Requiring the Comptroller General to determine whether there are specific markets in the United States where there are unique capacity constraints on the amount of terrorism insurance available and issue a report within 180 days after the enactment of TRIPRA in 2007.
9. Requiring the President’s Working Group on Financial Markets to continue an ongoing study of the long-term availability and affordability of terrorism risk insurance.
10. Accelerating the timing of the mandatory recoupment of the federal share through policyholder surcharges.
There is little doubt that without the federal backstop on potential terrorist losses, there will be no private insurance sector coverage available. Everyone must be involved from the various insurance sectors to continue having coverage available.
The original Terrorism Risk Insurance Act (TRIA) was a combination of public and private risk sharing between the federal government and the insurance industry. The program was designed to ensure that adequate resources were available for businesses to recover and rebuild if they become the victims of a terrorist attack. There were originally specific requirements of the legislation, which included:
The initial Terrorism Risk Insurance Act applied only to provisions of policies written after the legislation’s enactment. There were several key benefits:
Pricing terrorism coverage is never easy. Because the frequency and severity of an attack is so unpredictable (and insurers have little past statistical information to use during ratemaking) it is difficult to determine the potential loss. There are some valuations that can be made however. For example, it is more likely that a sporting arena would be targeted than a residential area; a shopping mall is a more likely target than a neighborhood dry cleaner; and buildings of an outstanding nature are more likely to be targeted than would a smaller, unknown structure. Despite the difficulties in pricing terrorism insurance, it does appear that TRIA had a stabilizing influence.
TRIA required all property and casualty insurers in the United States to make terrorism coverage available. The “make available” provision applied to commercial lines of property/casualty insurance. Insurers were required to make an offer of coverage for “certified acts”. If the insured rejects the coverage, the insurer may then reinstate the terrorism exclusion. Once terrorism became excluded in the policy, a terrorist act would trigger no compensation for damages or loss. An individual having homeowners’ or renters’ coverage might be covered, depending upon their policy. If payment were received, it would be received according to the individual terms of their policy.
When a date is not extended, which means that government backing stops, any commercial insurance policy with an inception date beyond the date of expiration includes a period of time where no federal “backstop” is in place. Attacks occurring on or after the expiration date could be financially destabilizing and lead to insurer insolvencies. Insurers and regulators have developed language allowing insurers to exclude losses associated with terrorist attacks, except for workers compensation, which continues to cover them. The majority of the states approved such exclusions before the need for terrorism coverage was known.
Thank you,
United Insurance Educators, Inc.
2014