Terrorism and Commercial Insurance Coverage By Mark M. Kitrick and Elizabeth A. Mote It may surprise many to learn that it was big business, insurance companies and insurance commissioners that wanted the federal government’s financial support after a terrorist attack. Following Sept. 11, 2001, corporate interests extensively lobbied the federal government to reinsure or “backstop” commercial insurance policies to cover potential losses in the event of terrorist activities.1 In fact, President George W. Bush enacted such a law. How did this occur and what is the law now? Why “terrorism insurance”? Prior to Sept. 11, 2001, many commercial policies included terrorism coverage. Much like standard homeowners, renters or life insurance policies, commercial policies did not contain exclusions for damage caused by terrorist acts. However, soon after the substantial losses experienced that day, estimated by The New York Times and other entities to be anywhere from $30 to $55 billion in toll and physical damage alone,2 many reinsurers announced they would not provide coverage for acts of terrorism in future reinsurance contracts.3 Such coverage became expensive if available and was largely unavailable in 2002.4 This happened because, state-by-state, many insurance companies requested exemptions from state insurance departments, the usual entities governing insurance matters. The plethora of unanswered questions presented as justification for the requested exemptions included (1) whether various insurance companies had an ability to pay claims, (2) whether those corporations could sustain the level of exposure required to cover acts of terror, (3) whether businesses could afford not to have terrorist coverage, (4) how commercial developers in high-risk, large metropolitan areas could finance and develop projects if they did not have coverage and so on. In sum, insurance companies and other corporate interests were concerned about whether the private marketplace could handle the damages of a terrorist attack without government help and the confidence government sometimes provides. What is “terrorism insurance”? When contending with the possibility of large scale attacks, the corporate community intensely lobbied the federal government to share the risk with them, such as providing reinsurance or “backstop” coverage. The United States is not the first or only country to create a terrorism insurance program; Australia, Austria, Belgium, Denmark, France, Germany, Israel, the Netherlands, Spain, Switzerland and the United Kingdom all have their own versions of such government protection.5 Ultimately, President George W. Bush signed into law on Nov. 22, 2002 the Terrorism Risk Insurance Act of 2002 (Pub. L. 107-297, 116 Stat. 2322) (“TRIA”). At that time, TRIA created what was to be a temporary federal program that the Treasury Department administered, with the stated purpose to provide: 18
Winter 2016 Columbus Bar Lawyers Quarterly
“… a transparent system of shared public and private compensation for insured losses resulting from acts of terrorism, in order to (1) protect consumers by addressing market disruptions and ensure the continued widespread availability and affordability of property and casualty insurance for terrorism risk; and (2) allow for a transitional period for the private markets to stabilize, resume pricing of such insurance, and build capacity to absorb any future losses, while preserving State insurance regulation and consumer protections.”6 In plain terms, under TRIA insurance, the federal government reinsures or “backstops” private insurer losses attributable to severe terrorist acts. TRIA first focused on foreign attacks and defined an “act of terrorism” as any act that the Secretary of the Treasury certifies, in concurrence with the Secretary of State and the Attorney General, (1) to be an act of terrorism, (2) to be a violent act or an act dangerous to human life, property or infrastructure, (3) to have resulted in damage within the U.S. or outside the U.S. to an air carrier or U.S. ship and (4) committed by an individual or individuals acting on behalf of any foreign person or interest, “as part of an effort to coerce the civilian population of the United States or to influence the policy or affect the conduct of the United States Government by coercion.” In 2007, Congress added domestic acts of terrorism and these are now covered by the Act. After 2015, the Secretary of the Treasury must certify acts of terrorism in consultation with the Secretary of Homeland Security and the Attorney General.7 In addition to property damage to buildings, coverage may also include claims for business interruption, also known as business income coverage. Business interruption coverage covers losses that occur when business operations are suspended either due to direct damage or because authorities limit access to an area after an attack. Reductions in business income due to fear of traveling to a location and closure of areas by authorities because of a heightened state of alert would not be covered by business interruption policies. Wasn’t the program supposed to be temporary? TRIA was originally scheduled to terminate on Dec. 31, 2005. However, through ongoing corporate and business interest lobbying, the act has been extended three times.8 First, through Dec. 31, 2007, by the Terrorism Risk Insurance Extension Act of 2005 (Pub. L. 109-144, 119 Stat. 2660) (“TRIEA”) signed into law by President Bush. Second, through Dec. 31, 2014, by the Terrorism Risk Insurance Program Reauthorization Act of 2007 (Pub. L. 110-160, 121 Stat. 1839) (“TRIPRA 2007”) again signed into law by President Bush. Third, and most recently with bipartisan support, the act has been extended through Dec. 31, 2020, by the Terrorism Risk Insurance Program Reauthorization Act of 2015 (Pub. L. 114-1, 129 Stat. 3) (“TRIPRA 2015”)