Terrorism Insurance Defined

By:  Ashley Western, ACSR, MSM RMI, Commercial Business Development Manager

The events of the past 24 hours are shocking to most of us.  The capture and subsequent killing of Bin Laden revives tragic memories of the events he was responsible for in New York City on September 11, 2001.  While the US Military has brought about justice to that tragic day, there are thousands of lives that will never be brought back.  With that, there have been tremendous impacts to our economy, and on a broader scale, to the world as we know it.

The insurance industry also felt the impact of 9/11.  One of the ways our industry was impacted, was the implementation of The Terrorism Risk Insurance Act (TRIA), signed into law by President George W. Bush, on November 26, 2002.  This Act created a federal stop loss program for insurance claims that are deemed certified acts of terrorism.  This was put into place because before 9/11, the insurance industry had no coverage that addressed the peril of terrorism.  The government stepped in to give the industry time to react to the newly highlighted risk, and to allow them time to develop their own terrorism coverage.  The act is currently in place until December 31, 2004.

In order for an incident to fall into the category of "terrorist act", the Secretary of State and Attorney General of the United States must deem the act an act of terrorism. 

The basic premise behind the act is the government will fund any losses after a $27.5 billion payout from the private insurance companies.  There is a $100 billion cap on this coverage.  Because the insurance companies are responsible for a collective $27.5 billion of coverage for perils of terrorism, they have begun to attribute additional premium on each policy offered, that compensates them for taking on the extra exposure. 

So what does this mean for you, the typical insurance buyer?  It means that a portion of premium (shown as a line item on policies) is attributed to protect you from terrorism.  This is typically a nominal cost, but insurance companies do use various models in order to determine how severe your exposure is.  If your office is on the 22nd floor of a building in downtown Houston, your premium is likely to be higher than a small office in a strip center in Katy.  Also, locations near airports that are of considerable size can bring more terrorism premium. 

You do have a choice in the matter.  Each year, you are presented with premiums attributed to terrorism.  If you do not feel your operation is at risk for terrorism events, you may decline the coverage by signing a "TRIA Rejection Form".  However, we caution you from doing this before considering all the factors that may add to your own exposure.  If you are comfortable, however, with retaining this risk, a simple rejection form signed by an authorized representative of your company will elminate the premium.  Next time you are asked to sign the forms, think twice & consider all your risks before you waive coverage. 

While it is unfortunate that our global economy & state of affairs has made terrorism insurance an actual product, we can all be glad that we have the option.  Perils of War & Nuclear actions are almost always excluded on policies, so the government's action in this has at least afforded us the ability to choose if we want the coverage. 

If you have any further questions on terrorism coverage, or would like your Cravens Warren representative to assist you in considering your total exposure to this peril, please give us a call.