In the wake of the 9/11 attack, the US government passed the Terrorism Risk Insurance Act (TRIA) of 2002 to address the fast-growing concerns around Terrorism Risk insurance coverage and its availability, or lack thereof in the insurance marketplace. But terrorism coverage is often misunderstood, in part due to the complexity of the regulation. Read on for a look at the history of the TRIA, a high-level review of what it covers and excludes, and the factors that impact your terrorism insurance premiums.
How the TRIA Came About
Prior to 9/11, terrorism generally was not considered a named peril on a commercial insurance policy, but losses resulting from an act of terrorism were not expressly excluded from coverage, either. Although terrorist attacks had occurred in the US in 1993 (at the World Trade Center in New York) and in 1995 (at a federal building in Oklahoma City), insurers did not consider terrorism as an insurable risk for a few reasons: past losses were historically limited, there was little data for predicting future losses, and such acts are not accidental. Since the resulting damage tends to be geographically concentrated, it is also difficult for insurance carriers to spread the risk properly.
Most pre-9/11 commercial insurance policies did not explicitly address or exclude terrorism. As a result, most insurers were unprepared for the massive losses that resulted from the 9/11 attack – estimated at $50 billion. Soon after, many insurers began to explicitly exclude terrorism from commercial property and casualty policies.
Recognizing that this shift resulted in widespread coverage availability and affordability challenges, congress enacted the Terrorism Risk Insurance Act of 2002 (TRIA). TRIA mandates that the Treasury Department manage a program wherein the government shares losses with private insurers in certified terrorism events. It makes insurers offer terrorism coverage to all property / casualty policyholders in the U.S and creates a fiscal liability for the government. Thus, ensuring adequate resources are available for businesses to recover and rebuild if they are the victims of a terrorist attack.
Since 2002, the TRIA has been renewed four times, mostly recently in 2019, extending the program through 2027. If you’d like to learn more about the TRIA, visit the US Treasury’s Terrorism Risk Insurance Program webpage.
How the TRIA Program Works
For coverage to be triggered, the event must be certified as an act of terrorism by the US Secretary of the Treasury in conjunction with the Attorney General and the Director of Homeland Security, based on several criteria. Triggering coverage also requires that the aggregate insured losses exceed a certain minimum threshold, and there is a cap on the aggregate claims that will be paid. TRIA is essentially a cost-sharing program, in which insurers are responsible for a co-payment amount and the federal government covers the balance of the claim, up to the aggregate cap.
For TRIA-eligible lines of coverage (which include commercial property, general liability, umbrella liability, and commercial auto, to name a few), terrorism coverage is typically offered as a policy endorsement. That means if an insurer offers you a policy on a TRIA-eligible line of insurance, the carrier is required to offer you terrorism coverage as an endorsement for an additional premium. As the insured, you must elect to accept or decline the coverage.
When you decide whether to accept the endorsement, it is helpful to understand what the coverage includes vs. excludes. While it varies by the specific policy type, terrorism coverage offered through the TRIA program may cover losses such as damaged or destroyed property (like buildings and equipment) and potentially the associated business interruption and liability claims. Under the TRIA, terrorism coverage excludes acts of war, along with nuclear, chemical, biological, and radiological terrorism.
The cost to add terrorism coverage to your commercial insurance policy is calculated as a percentage of your total premium, typically averaging three to five percent of the policy premium. That said, a number of factors influence that percentage, including, but not limited to, your geographic location and industry. Generally, businesses based in dense urban areas and those with a significant impact on the economy (for example, energy and infrastructure-related businesses) will have greater exposure to a terrorist attack and likely pay higher rates for the coverage.
How B. F. Saul Insurance Can Help
When our clients receive a commercial insurance policy that offers terrorism coverage, they often ask if it is worth purchasing for an additional premium. As with all risk management decisions, it comes down to your risk tolerance.
The commercial insurance specialists at B. F. Saul Insurance can talk through your risk factors and help you weigh the decision before you finalize a new or renewal policy. While we do not actively recommend that you decline the coverage, especially in today’s volatile world, we understand that it is ultimately a business decision that each company must make.
Do you need advice on how to protect your business assets from risk? Schedule a call with a B. F. Saul commercial insurance specialist!
Kallie Drewyer is an Account Manager on the Commercial Lines team at B. F. Saul Insurance, specializing in assessing the risk management needs of prospects and clients and helping market new and renewal accounts. She is responsible for servicing a designated book of business/clients as it relates to marketing, claims, and administration. Kallie interned with Saul Centers for three summers before joining the B. F. Saul Insurance team in July of 2019.