Understanding the benefits of the Terrorism Risk Insurance Act

Real Estate Weekly, Jan 1, 2003 by Jeffrey A. Moerdler

A troubling side effect of the Sept. 11 terrorist attacks against the United States that has impacted real estate across the country has been the sharply reduced availability of commercial property and casualty insurance for losses borne out of terrorism. However, government support for private terrorism coverage became available recently when President Bush signed the Terrorism Risk Insurance Act of 2002.

The main thrust of the act is to establish a temporary three-year backstop for property and casualty insurers in the event of another terror attack. Accordingly, the federal government is now required to:

* Share the risk of losses from future terrorist attacks committed on behalf of a "foreign person or foreign interest" on United States soil with private insurance companies during the next three years.

* Pay 90% of a terrorist attack's damages after losses that exceed $10 billion in 2003, $12.5 billion in 2004, and $15 billion in 2005. To this end, starting in 2003, private insurers must pay 7% of their premiums toward the damages, 10% in 2004, and 15% in 2005.

* Pay 90% of insured losses in excess of an issuer's deductible. Insurers can reinsure their deductibles and their 10% share of losses.

The legislation also caps the federal back-up coverage for terrorism losses at $100 billion annually, applies coverage only to primary and excess commercial property and casualty insurance -- including cyber-terrorism and business interruption insurance, and requires carriers to offer terrorism insurance to policyholders whose current coverage excludes acts of terrorism. The policyholder can choose whether to purchase such coverage at the additional price offered.

For an event to be covered as an act of terrorism, it must be certified as such by the Secretary of Treasury, in conjunction with the Secretary of State and the Attorney General. To be certified, damage from the terrorist act must occur within the United States and its territories -- except for cases of air carriers, vessels, or on the premises of a United States mission -- and must have been perpetrated on behalf of a foreign person or interest. Acts committed in the course of war, as declared by Congress, are not covered under the act. Additionally, the aggregate losses resulting from the terrorist act must exceed $5 million in order to be subject to the act, and the act does not cover the terrorist attacks of Sept. 11.

The scope of the additional premium, which can be imposed by the insurer for terrorism coverage, is not well defined. The act specifies that coverage must be made available on terms that do not "differ materially from the terms, amounts, and other coverage limitations applicable to losses arising from events other than acts of terrorism." In addition, it is unclear if premiums can vary based on the insured property being a high-risk landmark or being located near such a landmark.

The act does not address acts of domestic terrorism or acts of unknown origin. In addition, the act does not indicate what would happen if losses exceed $100 billion in one year.

The act also creates an exclusive federal cause of action and remedy, governed by state law, for all lawsuits involving claims for property damage, personal injury, or death resulting from a terrorist act. Moreover, the act allows punitive damages against governments, organizations, or individuals who commit or aid terrorism, although it would exclude punitive damages from counting as covered losses by the federal government or private insurance companies. The legislation still preserves state insurance laws.

Obviously, there are many details that need to be clarified but it appears that terrorism coverage will be more available and more reasonably priced in the near future.