TRIA effects: Act put limits, requirements on terrorism insurance

Lewis Melahn is an attorney with Sonnenschein Nath & Rosenthal in Kansas City.

On Nov. 26, President George W. Bush approved the Terrorism Risk Insurance Act of 2002 passed by Congress in response to the more than $40 billion in insurance claims that followed the 2001 terror attacks on New York and Washington, D.C.

Commercial insurers had warned that without a federal program, they would be unable to provide coverage against terrorism for high-profile properties. TRIA establishes a new terrorism insurance program under the direction of the Department of the Treasury. TRIA is applicable to every insurer that writes commercial property and casualty insurance in the United States. TRIA initially continues through Dec. 31, 2004, with the Treasury secretary having authority to extend it through Dec. 31, 2005.

All existing exclusions in commercial insurance policies that were in force on Nov. 26, 2002, were voided to the extent that they excluded losses that would have otherwise have been covered by the policy.

Under TRIA, insurance companies are responsible for terrorism losses up to 7 percent of their total premiums for 2003, increasing to 10 percent in 2004 and 15 percent if extended to 2005. After that amount, the insurers are responsible for 10 percent of any additional losses. The federal government provides the other 90 percent, up to a total of $100 billion annually.

TRIA requires insurers to make available to their policyholders coverage for losses from certified acts of terrorism, that is, violent acts resulting in damage within the United States, or to U.S. air carriers or vessels, committed by individuals acting for a foreign interest to coerce the U.S. population or government, and causing $5 million or more in damages.

To be deemed an act of terrorism under TRIA, the act must be certified as terrorism by the secretary of the Treasury, with concurrence of the secretary of state and attorney general. Insurers must provide coverage for such acts that is not materially different in terms, amounts and coverage limits from other insured casualties.

TRIA sets no limits on the premiums for terrorism coverage; however, rates are still subject to review by state regulators under state rating laws. The act also provides insurers with a mechanism for reinstating exclusions if the policyholder either consents or fails to pay the separate premium for the terrorism coverage.

Insurers are required to give specific notices to their policyholders of the availability of the terrorism coverage, the premium amount, and any exclusion that might be placed on coverage if the terrorism coverage is declined.

The initial period for advising policyholders regarding policies existing on Nov. 26, 2002, ended on Feb. 24. For all new policies the notices must be given at the time of the offer or renewal of the policies by separate, clear and conspicuous notice, most likely on the cover or declaration page of the policy.

Reaction to TRIA has been varied as initially presented. While TRIA offers some stability in the insurance marketplace for terrorism coverage, implementation of its provisions leaves several concerns. For insurers, determining how to price terrorism coverage is difficult since, thankfully, there are not that many prior losses to provide pricing data. Initial pricing suggestions from insurance rating organizations suggested three levels of premiums, with the highest in high-profile geographic areas such as New York, Chicago, Washington, D.C., and San Francisco. Certain objections by New York and Washington, D.C., regulators have resulted in some moderation of these rating schemes.

In addition, individual insurers could face substantial losses for acts that may not be certified under TRIA. For example, the anthrax attacks on Congress and other locations has no known source, domestic or foreign, so it would be unlikely to be certified under TRIA. And even if the source were known, no property was destroyed, so losses might not reach the threshold amount under TRIA.

However, there might be substantial losses from the loss of use or loss of income from property subjected to lengthy cleanup, such as the Florida building housing the publication offices first attacked with anthrax.

For policyholders, because of the same lack of experience, determining whether the cost is appropriate is also difficult. Complicating that determination is the fact that TRIA does not cover domestic terrorism. Therefore, insurers could still create exclusions for domestic terrorism.

To address this problem, the Missouri Department of Insurance issued a bulletin on March 18, which sets limits for domestic and other noncertified terrorism exclusions. Such exclusions will not be effective unless there are industry-wide losses exceeding $25 million in a 72-hour period. However, the exclusions are not limited if the act of terrorism involves the use of nuclear, chemical or biological agents.

Clearly this leaves businesses potentially exposed to long periods when their properties may be unavailable for use, without the ability to insure for that loss of use if resulting from domestic terrorism. Policyholders must also be concerned with whether their lenders will require the purchase of the terrorism coverage, no matter what the cost, in order to comply with the insurance requirements of their lending agreements.

Hopefully, TRIA will make coverage for terrorism more widely available than in the months prior to its enactment. But even so, businesses will need to carefully review their proposed coverage to assess the cost of the terrorism coverage relative to the risk. That task is more difficult since the entire purpose of terrorism is unpredictability.

Businesses will also need to carefully consider any exclusion in their coverage for domestic or noncertified acts of terrorism. The experience of insurers and businesses over the next two years may help determine whether Congress extends TRIA, or whether other sources for coverage will become available.