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As most of our readers know, all major commercial insurance policies these days contain exclusions for claims arising out of acts of terrorism (workers compensation being the sole exception to this general rule). At each renewal for most property and liability policies, and certainly for your property insurance policies, you are offered the option to purchase terrorism coverage by deleting the terrorism exclusion, for an additional premium, of course. Industry reports indicate that approximately three in five policyholders nationally elect to buy terrorism coverage; 40% do not.
Some background: at the time of the 9/11 attacks policies did not contain terrorism exclusions. Some $30 billion in claims later the insurance industry concluded the potential magnitude of such losses was too great and unpredictable to insure and attached terrorism exclusions to all policies, WC excepted. In response, Congress passed a law, originally known as the Terrorism Risk Insurance Act (TRIA), to help insurers pay claims stemming from possibly catastrophic damage from future terrorist attacks. Current law now provides what is in essence federally backed reinsurance to insurance companies writing terrorism coverage. To trigger terrorism coverage the government must certify that an event is an act of terrorism. By law, damages must exceed $5 million before the government can do so. If damages exceed $5 million and if the government certifies the event as a terrorist act, then insurance policy provisions relating to terrorism come into play.
The recent bombing in the Chelsea neighborhood in Manhattan offers an object lesson in how this coverage may work, or how it might come back to bite you. The suspected perpetrator is apparently an ISIS inspired self-radicalized home grown terrorist, who built his bombs out of locally sourced materials. The damage from the one that went off was reportedly limited to businesses and residences in the immediate vicinity. While press reports have pretty routinely referred to this event as a terrorist act, as of this writing damages do not appear to have reached the $5 million threshold; whether they do or not is still an open question. If they do, the government still has to decide if the will certify the event as an act of terrorism.
Why is this important? Many of the local property owners affected by the bombing reportedly did not buy terrorism insurance. As long as damage remains below $5 million, or the government does not certify the event as terrorism, this is no problem; their property insurance will pay for their losses. If the event is ultimately certified as terrorism related, the terrorism exclusions in their policies come into play…no coverage.
If you are one of the 40% who do not buy terrorism coverage, perhaps you might want to rethink that. The threat these days may not be so much from massive, 9/11 style attacks but more from the type of widely scattered, random lone wolf attacks so much in the news lately. And a $5 million threshold from one or a series of coordinated bombings isn’t a high bar.
This is worth another look. Give us a call to discuss.