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An Update on Terrorism

Immediately following September 11^th, 2001, insurance companies excluded terrorism on policy renewals as their reinsurance began to evaporate. The NY State Insurance Department was one of half a dozen States that would not allow licensed insurance companies to exclude coverage for terrorism. Some Insurance companies responded to the mandate by non-renewing policies in the State. Several insurers renewed policies on their sister company “non-admitted” paper, thereby circumventing the directive, and still excluded terrorism. Other companies offered a sub-limit of $1 Million or $2.5 Million for terrorism, taking the position that since coverage was not excluded, they were in compliance.

What emerged was a limited, prohibitively expensive market for Terrorism coverage. Berkshire Hathaway, Lexington (an AIG company), ACE and London became the predominant writers of those risks the industry was unwilling to underwrite. High rise buildings in Manhattan became the greatest victim to the market. Where “all risk” coverage premiums ran in the hundreds of thousands of dollars on a 35 + story building, stand-alone terrorism coverage cost millions of dollars in premium for full limits. Further complicating matters, lenders required borrowers to cover terrorism thereby leaving the building owner with no alternative but to pay these exorbitant costs.

The Terrorism Risk Insurance Act of 2002

On November 26th, 2002, George W. Bush signed the Terrorism Risk Insurance Act of 2002 into law. Essentially, the U.S. Government became the backstop (or reinsurer) to the insurance companies for terrorism. The law committed $100 Billion of taxpayer money in the event of a “certified act of terrorism” and remains in effect until December 31, 2005.. The act still requires the insurance company to assume a sizable retention (a deductible of 7% of the insurers prior years’ direct earned premiums in 2003 – increasing to 10% in 2004 and 15% in 2005) before reimbursement. As a result of the signing, terrorism exclusions immediately became null and void. Insurance companies were granted 90 days to declare the premium charge for terrorism coverage and the policyholder had 30 days to accept or decline coverage.

“Certified” versus “Non-Certified” Terrorism

Should an act occur, the Secretary of State, along with the Attorney General will certify the act as covered or not. In order for it to be covered, it must be committed “by an individual or individuals acting on behalf of any foreign person or foreign interest…”, exceed $5 Million in aggregate loss and not be connected with a war declared by Congress. Certain insurance policies will only cover the occurrence as defined by the act. In other words, if the "certified" thresholds are not met, e.g. the aggregate loss is less than $5 Million dollars, the policy will not respond.

Clearly, what’s not covered by the act is a situation similar to the Oklahoma City bombing, which was not foreign directed. This would be considered “non-certified”. Some insurance companies will offer “non-certified” terrorism coverage for an additional premium. Other companies do not distinguish between the two and cover terrorism, without qualification. You must read the proposed language to understand what it is you’re buying.

The cost for terrorism coverage currently ranges from 0% to 30% of the “all risk” premium, depending on the type of property and its location. The higher profile buildings in Manhattan are still paying considerably more than 30%, but not approaching the numbers quoted before the act was adopted.

Is War covered?

The simple answer is no. The insurance industry is unwilling to accept an aggregate exposure of this magnitude. Most policies contain war exclusions and, as noted above, the act specifically excludes war, except with respect to Workers’ Compensation.

What about a Dirty Bomb?

Virtually all property insurance policies contain an exclusion for losses resulting from nuclear radiation, radiation, or radioactive contamination, however caused. There is no question as to an insurers response to damage (and resulting cleanup) from a dirty bomb. One would only think that our Government will step in and do the right thing. Assuming it does, ultimately, we are the ones who will bear the cost.