Do You Need Terrorism Insurance?
Between 1995 and 2014, 510 terrorist attacks occurred in the United States. Given these statistics, you may wonder whether your company should buy terrorism insurance. Before making a decision, you need to assess your risks. You should also understand what terrorism insurance does, and does not, cover.
What Are the Risks?
A terrorist attack can impact your business in several ways.
- Property Damage An attack can cause physical damage to buildings, building contents, vehicles and other property owned by your business.
- Loss of Income and Extra Expenses An attack can damage your company's premises, forcing it to close down until repairs are completed. The shutdown may cause your business to lose a significant amount of income. While your company may be able to continue operating at a temporary location, it will likely incur additional costs for moving and rent. Even if your firm's property isn't damaged, it could lose income if government authorities block access to your business.
- Employee Injuries Terrorist attacks often involve the use of bombs or other incendiary devices. These can cause serious injuries to your employees.
- Lawsuits Victims of terrorist acts may file third-party lawsuits against businesses. For instance, a victim may allege that your company's failure to adequately secure its premises left customers vulnerable to an attack.
Insurers Must Offer Terrorism Coverage
Commercial property and liability insurers are subject to a federal law called the Terrorism Risk Insurance Act (TRIA). The law was passed in 2002. It requires commercial liability and property insurers to offer terrorism coverage to their policyholders. If a policyholder declines the coverage, an insurer may attach a terrorism exclusion to the policy.
TRIA does not apply to commercial auto, professional liability (other than directors and officers liability), workers compensation, burglary and theft, life and health, or personal insurance policies. Insurers are barred from excluding terrorism under these types of policies. Thus, employees injured on the job due to a terrorist attack will be eligible for benefits under your workers compensation policy. Likewise, damage to a company-owned auto by a terrorist attack should be covered by your commercial auto policy, assuming the vehicle is insured for auto physical damage.
Coverage for Certified Acts Only
TRIA created a loss-sharing mechanism between the federal government and commercial insurers. The government agreed to share losses that exceed a specified threshold. In exchange, insurers agreed to make terrorism coverage available. The agreement applies only certified acts of terrorism. This term is defined in the law. To qualify as a certified act, a terrorist act must meet all of the following characteristics:
- be a violent act or an act that is dangerous to human life, property or infrastructure
- be committed by one or more people in an effort to coerce U.S. civilians, or influence the policy or conduct of the U.S. government by coercion
- cause damage within the United States (or outside the country on U.S. ships or at U.S. missions)
- cause property and casualty losses over $5 million
- be certified by certain U.S. government officials
TRIA does not require insurers to cover acts of terrorism that don't meet the requirements cited above. In the insurance industry, acts that don't qualify as certified acts may be referred to as "other acts" or "non-certified acts" of terrorism.
Terrorism Coverage Endorsements
Small business owners typically obtain terrorism coverage via an endorsement added to a property or liability policy. Some insurers use terrorism endorsements developed by ISO. Others use their own proprietary endorsements.
Terrorism endorsements generally limit coverage to certified acts. If a terrorist act damages your company's property and the act is certified, the damage should be covered by your terrorism endorsement.
An alternative to a terrorism endorsement is a stand-alone terrorism policy. This coverage is usually available only to large and mid-sized companies. It covers losses caused by terrorist acts whether or not they are certified. A stand-alone policy may also cover acts committed outside the U.S.
Exclusions and Limitations
Many terrorism coverage endorsements used by commercial property and liability insurers contain exclusions. One common exclusion applies to acts involving the use of nuclear, biological, chemical, or radiological materials. This exclusion would eliminate coverage for injury or damage caused by radiation released by a "dirty bomb".
Another exclusion found in terrorism endorsements applies to non-certified acts. In many states, non-certified acts may be excluded only if they cause catastrophic losses. For instance, a non-certified act may be excluded under a liability policy only if it causes death or serious physical injury to fifty or more people. Under a property policy, a non-certified act may be excluded only if it causes more than $25 million in insured property damage.
TRIA does not cover losses caused by war. Most liability and property policies already exclude this peril. If terrorism is covered under a property or liability policy, war is still excluded.
Ensuing Fire Damage
When terrorists crashed two planes into the World Trade Center in 2001, jet fuel in the planes ignited massive fires. The fires caused steel in the Twin Towers to fail, and the buildings collapsed.
In some states (called standard fire policy states), property insurers are required to cover fire damage that ensues from a terrorist act. The resulting fire damage must be covered even if terrorism is excluded under the policy. Thus, if insured property is located in a standard fire policy state, and the policy excludes terrorism, the exclusion must contain an exception for ensuing loss caused by fire.
In standard fire policy states, the ensuing loss requirement applies only to direct loss by fire. Insurers are not required to cover business income or extra expense losses that result from fire caused by an act of terrorism. If you aren't sure whether your business operates in a standard fire policy state, ask your agent or broker for clarification.
TRIA requires insurers to include certain disclosures about the law in property and liability policies.
- Right to Buy Coverage: Policyholders have the right to buy coverage for certified acts of terrorism under property and liability policies.
- Cap on Losses: Under TRIA, insured losses are capped at $100 billion. If a certified act has generated $100 billion in insured losses and your insurer has met its deductible, neither your insurer nor the federal government will pay any further losses.
- Terrorism Premium: If your insurer has charged you a premium to cover certified acts of terrorism, the premium amount must be stated in the policy.
- Government Participation: The federal government will share terrorism losses with your insurer once your insurer has paid its retention (deductible).
Should You Buy Terrorism Coverage?
Should you consider purchasing terrorism coverage? The answer depends on the nature and location of your business. Here are some things to think about:
- Type of Business: Businesses in certain industries may have a greater than average risk of a terrorist attack. Such industries include government, military, energy (oil, gas, electricity), chemicals, media (newspapers, magazines etc.), transportation (including airports and transit systems), entertainment, and hospitality.
- Location of Business: Terrorists tend to target areas that are highly populated or that attract large numbers of visitors.
- Lease Requirements: Some landlords require their tenants to purchase terrorism coverage. Check the provisions of your lease.
- Attacks May Not Be Certified: The fact that a terrorist attack has serious consequences does not guarantee it will be certified. The 2013 attacks at the Boston Marathon killed three people and injured over 160. The attacks also generated at least 160 commercial property damage and business income claims. Yet, the attack was never certified.
- Certification Process: The government will need time to collect loss data to determine whether the $5 million threshold has been breached. This may take months or years.
- Cost of Coverage: Terrorism coverage generally costs between $19 and $49 for every million dollars of insured value, according to the Insurance Information Institute. This typically amounts to 3 to 5 percent of the total property insurance premium.