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.
Before 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 fully understand 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 of a certain total size. It requires insurers to offer terrorism coverage to all property/casualty policyholders in the U.S and creates a fiscal liability for the government. This ensures adequate resources are available for businesses to recover and rebuild if they are the victims of a certified terrorist attack.
Since 2002, the TRIA has been extended multiple times under various names and is currently extended through 2027. If you’d like to learn more about the TRIA, visit the US Treasury’s Terrorism Risk Insurance Program webpage.
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 claim payment to a certain amount, and the federal government shares in the balance of the claim, up to the aggregate TRIA 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 add-on. 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 choose to elect or decline the coverage.
When you decide whether to accept TRIA coverage, 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 perils like 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 two 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.
In recent years, the private insurance market has introduced private terrorism insurance coverage. This coverage often offers broader coverage, lower or no damage thresholds, lower or no deductibles, and broadened domestic coverage, often at a similar cost to the federal TRIA program.
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. Want expert guidance on how to protect your business assets from risk? Schedule a call with a B. F. Saul commercial insurance specialist today.