Perspectives | Terrorism Insurance

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Terrorism Insurance

—by Douglas H. Hartman, ARM

New York City, January 16, 2003 - New York Chapter Meeting of the Risk and Insurance Management Society - "Navigating the Maze of Terrorism Options"

We were treated to one of the more informative and lively presentations in recent memory – even though the topic was dead serious: Terrorism Insurance.

William A. Savino, a partner of RivkinRadler www.rivkinradler.com set the table with a rhetorical proposition: “Is terrorism such a volatile, unpredictable risk as to make its discussion useless?”

Briefly noting the obvious exposure to building and property damage, the loss of rent/sales and extra expenses incurred in the aftermath of a terrorist attack, Mr. Savino opened for us his “Litigation Menu.” The starters on this menu are Three Failures: Failure to warn, failure to prepare and failure to perform a risk assessment. The test of failure is foreseeability.

If your employees, customers, tenants or invitees are killed or injured in a terrorist event and you didn’t conduct a risk assessment and the act was foreseeable, then you may have liability.

The second presenter, Robert P. Hartwig, PhD and Senior Vice President and Chief Economist for the Insurance Information Institute www.III.org turned up the volume when he declared that that the insurance industry is “the world’s largest charity.” In other words, TRIA is not pork. It’s going to take a long time for insurance companies to recoup their losses on 9/11. He put up a lot of charts. One of them showed how the Cost of Risk for all buyers was 6.94% of revenues last year — which is about the same percentage buyers paid seven or eight years ago. Dr. Hartwig put on a vigorous homeland defense of the insurance business.

The third presenter, Jill Dalton, Managing Director and North American Practice Leader of Marsh www.marsh.com navigated us back to the maze. Once inside the maze, buyers have to make a few decisions. The TRIA Maze below is a mix of scenarios and possible solutions offered by Ms. Dalton — or in response to questions from the well-attended audience. We threw in a couple Q&A of our own.

This posting is the product of notes taken on the back of an envelope plus information gleaned from pages of the insurance press. This should not be interpreted as advice. As part of every Diagnostic Review we assess the insurance buyer’s exposures to loss and carefully read the endorsements and policy forms. Please Contact Us for advice.

Tria Basics

On November 26, 2002, Congress enacted the Terrorism Risk Insurance Act of 2002. Unless renewed by the Secretary of the Treasury, it expires at the end of 2004.

“TRIA” is not free insurance. A terrorist act must first be certified by the Secretary of the Treasury, after he confers with the Secretary of State and the Attorney General. Only acts of domestic terror can be certified.

The $100 billion of catastrophe coverage is funded by insurance company retentions in excess of deductibles. During 2003, the deductible is 7% of the insurance company’s aggregate premium volume for 2002.

Above the deductibles, the insurance industry must fund the first $10 billion. Above this, the U.S. Treasury will reimburse insurance companies for up to $90 billion of their retained losses. Excess TRIA certified losses in aggregate – across the whole insurance industry -- are capped at $100 billion. In other words, insurance companies retain all of the deductible and 10% of up to $100 billion of the excess. When the $100 billion is gone – game over.

TRIA Maze

Does your policy exclude terrorism?
Not all insurance policies that renewed in 2002 exclude terrorism. Check your policy for an endorsement. If it does, the exclusion is null and void. So, until you hear from the insurance company, stay out of the maze!

Did the insurance company offer you certified TRIA coverage?
You can either buy it for the quoted price – or purchase a non-certified or stand-alone product. If you buy back the exclusion, it will cost you money.

What to do if you have an overseas terrorist exposure?
Either purchase a non-certified product covering both certified acts in the U.S. and non-certified acts abroad – or purchase certified coverage offered by your domestic carrier and buy a separate non-certified product for overseas.

If I have a cargo loss outside the U.S., will my certified coverage apply?
Yes, provided the act outside the U.S. was perpetrated by evil doers whose intent was coercion of U.S. citizens and U.S. policy.

If I buy certified coverage, will I be subject to any surcharges?
Yes. If the insurance company has had to pay “recoupment” to the U.S. Treasury for their share of the $10 billion retention, they can assess you a surcharge of up to 3% of the TRIA premium you already paid.

Is my company’s Vermont captive exempt?
No. According to a posting in www.vcia.com domestic captives that directly insure U.S. risks must provide TRIA coverage and contribute to the $10 billion shared retention.

I already bought a non-certified TRIA policy. What should I do if my primary carrier is now offering certified TRIA coverage?
If the non-certified policy can be canceled, do a cost-benefit comparison and decide whether to cancel or pay a lower premium for the certified TRIA insurance but make it excess of the non-certified policy.