Insuring Terrorism in America

Recent high-profile attacks in Paris and San Bernardino, CA have refocused the attention of the insurance industry upon terrorism coverage issues.  The question of whether terrorism coverage applies to a particular act is often dependent upon a determination of its motive.  This has become more problematic in recent years given the advent of “lone wolf” attacks by individuals unaffiliated with terrorist organizations.  A determination of the motive for such attacks often requires a detailed investigation, and may sometimes never become apparent.

The Terrorism Risk Insurance Program Reauthorization Act (“TRIPRA”) provides valuable guidance in determining whether a particular incident may be classified as a terrorist attack.  Since 2002, terrorism-insurance-imageTRIPRA and its predecessor TRIA were intended to   place the  federal government into the role of a reinsurer for purposes of covering terrorist events. These regulation required primary insurers offering commercial property and casualty insurance to offer terrorism coverage as well. These regulations further preempted all terrorism exclusions in commercial and casualty insurance policies to the extent they precluded recovery of an otherwise covered loss.

Unlike traditional reinsurance, the threshold set by the federal government is exceptionally high:  $120 million in 2016.  In order for TRIPRA to apply to a particular event, it must be certified as an “act of terrorism” by the Secretary of the Treasury, in consultation with the Secretary of Homeland Security and the United States Attorney General.  Under TRIPRA, incidents must satisfy several factors to be certified as an “act of terrorism.”  Most notably, the incident must be “committed by an individual or individuals, 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.”  An incident will not be declared an “act of terrorism” if it occurred during a war declared by Congress, or if it resulted in less than $5 million of insurable property and casualty losses.

Terrorism policies often limit coverage to those acts that have been certified under TRIPRA. Other policies are broader in scope, offering terrorism coverage generally encompassing incidents that are motivated by religious, political, or ideological beliefs.  In such cases, certification of an incident as an act of terrorism under TRIPRA may effectively resolve disputes that may arise over whether the incident qualifies for coverage.  However, no incident has been certified as a terrorist act under TRIPRA or TRIA in the fourteen years since TRIA was first enacted.  This is primarily because no terrorist attacks in the United States during this period have resulted in $5 million of insurable property and casualty losses.  By way of example, the Boston Marathon bombings, which the U.S. Treasury did not officially label an act of terrorism, did not exceed $5 million in losses. Fast forward to San Bernardino and the recent terrorist attacks. In addition to the tragic human losses, the shrapnel, bullet riddled buildings and other damage, preliminary estimates are that those losses will also not exceed the $5 million threshold. In both instances, the costs for these tragic events fell on the property & casualty insurers.

The inability to certify the bombing as an act of terrorism led to several disputes between insurers and policyholders as to whether terrorism coverage should be provided.  At least one of these disputes resulted in litigation.

As part of the most recent reenactment of TRIPRA, the Secretary of the Treasury was required to conduct a study on the certification process.  While this study focused upon development of a reasonable timeline for making certification decisions, a number of insurance trade organizations recommended elimination of the $5 million threshold for certification.  Other organizations have recommended maintaining the threshold, but allowing parties to request certification for incidents that do not satisfy the threshold in order to provide guidance for insurers and policyholders.  As detailed above, increasing the opportunities for certification will offer a measure of certainty to the insurance industry, and help minimize the potential for coverage disputes as to whether an incident was truly a terrorist attack.

Timoney Knox will continue to monitor this important issue and report significant developments regarding terrorism insurance and TRIPRA.

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