Terrorism insurance comes of age
August 2017 | PROFESSIONAL INSIGHT | RISK MANAGEMENT
Financier Worldwide Magazine
August 2017 Issue
A difficult subject, to be sure, but the market for insurance against property damage and other losses arising from terrorism is rapidly growing.
The recent remarks by London’s mayor suggesting that terrorism is part and parcel of living in a large global city are echoed in the growth of this market. For example, it is estimated the 60 to 70 percent of businesses in the US now have terrorism insurance. In addition, the growing client demand for certainty and comprehensive cover have led to insurers now having the capacity to cope with potential claims totalling more than $3bn.
In order to facilitate the development of this market, both the US and UK governments now backstop, or provide reinsurance for, terrorism related losses. In the US, this reinsurance scheme is outlined in the Terrorism Risk Insurance Act (TRIA), which was passed in 2002, and which has recently been reauthorised and extended until 2020. In the UK, the corresponding reinsurance programme is Pool Re.
Two recent court cases in the US reflect the source of the demand in both the liability and property contexts.
In connection with the first World Trade Center incident, the victims and their families sued the New York Port Authority on the ground that the Port Authority failed to heed warnings that the facility’s underground parking garage was vulnerable to a terrorist attack. In a 2005 trial, the jury in the case agreed – finding that the Port Authority’s negligence in failing to close, or take remedial actions in respect to, the underground parking was a substantial factor in allowing the bombing (which killed six and injured 1000 people) to occur. Damages in the $2bn range were assessed.
In a more recent case, a Texas appeals court found that two commercial property owners had breached their respective loan agreements by declining to purchase terrorism insurance. In its decision, the Texas appeals court held that the language in the loan agreements required the owners to obtain certain insurance coverage, such as terrorism insurance, if such perils are “commonly insured against for similar properties”.
The fact that the court characterised terrorism insurance as providing cover for perils that are commonly insured against for similar properties clearly suggests that this form of insurance is now becoming a standard element in a business’ broader package of insurance coverage.
With losses from terrorism typically excluded from standard business policies, terrorism insurance in both the US and UK is a risk-sharing arrangement between the insurance industry and the respective governments. Because the primary objective is to make sure that there are adequate resources in the event of a terrorism incident to allow the affected businesses to rebuild, the typical coverages are property related (insuring buildings, equipment and inventory) and may also include business interruption cover. But as illustrated by the 2005 World Trade Center case, such coverage may also protect against third-party liability claims that may be asserted against the insured following a terrorist attack.
In addition to scrutinising the forms of coverage that may be afforded (e.g., property damage, business interruption and liability protection), buyers of terrorism insurance also need to pay attention to what perils may be excluded from coverage.
For example, cyber related losses will typically be excluded. This means that losses arising from a terrorist-related incident involving cyber intrusion, denial of service, loss of data or manipulation of a business’ internal systems will not be covered. Companies experiencing such losses will either have to have negotiated this exclusion away or will have to look to their existing cyber policies, providing those policies do not themselves exclude terrorism-related losses. In this regard, it is generally understood that the coverage available under the TRIA programme would likely not respond to losses that would otherwise be covered under cyber insurance policies.
Beyond the cyber exclusion, some terrorism policies exclude losses from attacks involving nuclear, biological, chemical and radiological (NBCR) risks. Obviously, businesses seeking terrorism cover in the first instance will want to be certain that losses arising from such attacks are not excluded, and are in fact covered, under their applicable policies. In this regard, there are several insurers that now offer standalone NBCR coverage.
With respect to the market for terrorism insurance in the US, there are essentially two distinct pathways that companies can pursue in seeking to place this form of risk.
The first is so-called ‘TRIA-embedded’ coverage, which is often made available within an ‘all risk’ property policy. However, in order for such coverage to be triggered, the insured losses must exceed $5m and the attack must be certified by the US government as an act of terrorism. As in the case of the UK’s Pool Re scheme, the TRIA programme is essentially government-backed reinsurance for losses arising from terrorist incidents that meet the two conditions or triggers for this programme. Notably, in the 15 years since the original passage of TRIA, there have been no terrorist attacks in the US that have met these dual triggers.
The other pathway is standalone terrorism insurance. In general, this form of terrorism insurance is more competitively priced than its counterpart coverage under TRIA. In addition, standalone terrorism insurance is normally effective in the absence of the two triggers described in connection with TRIA. This means that coverage will be available, subject to applicable retentions and exclusions, below $5m in losses and without a declaration of a ‘terrorist incident’ by the US government. The final advantage of standalone coverage is that it will apply to losses outside the US.
Peter S. Selvin is an attorney at TroyGould. He can be contacted on +1 (310) 789 1230 or by email: email@example.com.
© Financier Worldwide
Peter S. Selvin