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Insuring Against Terror

We are all affected by the fear associated with terrorism. But did you know that we also all share in the insurance for losses resulting from terrorist acts? That’s precisely what the federal government has done through a shared public and private compensation system for insured losses resulting from acts of terrorism.

Under the Terrorism Risk Insurance Act of 2002 (TRIA) (Pub L 107-297, 116 Stat 2322) (set out as a note under 15 USC §6701), all insurers writing “property and casualty insurance” in the United States must participate in the federal program and offer insurance for “certified” acts of terrorism.

Under this Act, each insurer will be responsible for paying a certain amount, or deductible, in claims before federal reimbursement will be available. Insurers will receive reimbursement from the federal government for 85 percent of losses in excess of that deductible. Losses covered by the program are capped at $100 billion; neither the United States nor insurers are responsible for losses in excess of that amount unless Congress acts otherwise. TRIA §103.

Under TRIA, an “act of terrorism” is defined as an act that:

  • Is a violent act or an act that is dangerous to human life, property, or infrastructure;
  • Is committed by someone acting to coerce the civilian population of the United States or to influence the policy or affect the conduct of the U.S. government by coercion;
  • Produces property and casualty insurance losses in excess of $5 million; and
  • Results in damage within the United States, or to an air carrier or a U.S. flag vessel (or a vessel based principally in the United States and insured under U.S. regulations), or on the premises of any U.S. mission (e.g., an embassy or consulate).

To trigger TRIA, an act of terrorism must be certified by the Secretary of the Treasury in concurrence with the Secretary of State and the Attorney General of the United States. Any decision to certify an act of terrorism is final and not subject to judicial review. Interestingly, an act that occurs in the course of a war declared by Congress cannot be certified as an act of terrorism except in regard to workers’ compensation claims. TRIA §102.

If an act is certified, TRIA creates a federal cause of action for property damage, personal injury, or death arising out of or resulting from such an act of terrorism, which is the exclusive cause of action; TRIA preempts all state causes of action. TRIA §107.

TRIA does not invalidate those elements of existing policy exclusions that deal with terrorist activity outside the scope of the Act, including terrorism losses that do not cause $5 million in damage. However, TRIA §105 does void terrorism exclusions on commercial property and casualty policies in effect on the date TRIA was enacted, to the extent that such exclusions eliminate coverage for certified acts of terrorism covered by the federal program.

Of course, the federal budget can easily affect terrorism risk insurance. And there already have been proposals to remove coverage for domestically inspired acts of terrorism, increase private insurer deductibles and co-payments, increase the “trigger” amount of aggregate insured losses that must occur before federal compensation becomes available, and allow the program to expire at the end of 2014 as planned under current law.  Stay tuned for more political wrangling.

For more on insurance for acts of terrorism and other emerging issues in the world of property insurance, check out CEB’s California Property Insurance: Law and Litigation, chap 17. Learn more about this book from my interview with its contributing editor, Tim Sullivan.

© The Regents of the University of California, 2012. Unauthorized use and/or duplication of this material without express and written permission from this blog’s author and/or owner is strictly prohibited.

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