Terrorism insurance act defines coverage, limitations

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Richard Ollis is president and CEO of Ollis and Company, an employee-owned insurance agency.|ret||ret||tab|

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The terrorist attacks of Sept. 11, 2001, produced the most expensive losses in the history of the insurance industry. As of July 2002, insurers worldwide have publicly announced more than $40 billion in losses.|ret||ret||tab|

Many losses were uninsured and New York City alone estimates total damage of $83 billion. Prior to Sept. 11, insurers did not price for losses from terrorism. Terrorism was simply not considered a significant factor in underwriting insurance within the United States. |ret||ret||tab|

Consequently, little if any premium was charged for terrorism risk. On Nov. 26, President Bush signed into law the Terrorism Risk and Insurance Act of 2002. This act applies to and will impact every commercial insurance account in the United States. If a business is domiciled in the United States and is insured under a commercial insurance policy, the insurance carrier has to comply with this new legislative initiative and the business will have more clearly defined options. |ret||ret||tab|

The new Terrorism Risk Insurance Act of 2002 does the following:|ret||ret||tab|

It nullifies any existing terrorism exclusions applied to insurance contracts. However, it does allow insurance companies to exclude terrorism provided they meet certain conditions. Insurance companies can exclude terrorism if policyholders formally reject the coverage in writing or fail to pay the increased premium for terrorism coverage.|ret||ret||tab|

It defines terrorism and provides that it be the exclusive definition. Terrorism has to occur within the United States, on an air carrier, to a United States flag vessel, or at the premises of any United States mission.|ret||ret||tab|

The terrorism act must be committed by an individual or individuals acting on behalf of a foreign person or foreign interest. Damage caused by disgruntled U.S. citizens acting on their own behalf and others who have no foreign connection do not seem to fall within the act. Actions such as the Oklahoma City bombing would not be considered acts of terrorism. |ret||ret||tab|

Also, vandalism, which could have previously been considered terrorism according to the old definitions, appears to be outside the language used to define terrorism. It establishes an exclusive federal cause of action for claims resulting from terrorism. Terrorism must be certified by the Secretary of the Treasury in concurrence with the Secretary of State and the Attorney General. |ret||ret||tab|

This provision establishes who will decide whether an incident is terrorism. To be certified, the act of terrorism must meet certain criteria. First, it must be a violent act or an act that is dangerous to human life, property or infrastructure. Secondly, the terrorism must have resulted in damage within the United States. Damage outside the United States qualifies in the case of any U.S. citizen subject to U.S. regulation. Damage is also included if it occurs on any U.S. mission.|ret||ret||tab|

The act also contains two limitations. No action shall be certified as an act of terrorism if it is committed in the course of a declared war or if it does not cause more than $5 million in aggregate property and liability losses. This does not apply to workers' compensation coverage, where terrorism is not excluded.|ret||ret||tab|

The program terminates Dec. 31, 2005, and losses are capped at $100 billion. If terrorism coverage is not excluded from an insurance contract, this act has no impact, as terrorism will be covered under that particular policy.|ret||ret||tab|

Insurance companies have 90 days to notify policy holders of the increased premium for coverage and the insured has 30 days to accept the increased premium or decline coverage. |ret||ret||tab|

Although the new act is not perfect, it certainly clarifies the definition of terrorism, establishes who will decide if an act qualifies as terrorism and what criteria they will use in order to do so. |ret||ret||tab|

In the coming months, every business will have clearly defined options for terrorism coverage. Either the coverage will be included in the insurance contract or the new federal terrorism insurance law will apply. An insurance broker should be able to provide clearly defined options and costs.|ret||ret||tab|

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