After September 11, 2001, many businesses felt the compelling need to obtain “Terrorism Commercial Insurance,” something which was commonly excluded from commercial insurance policies. Congress responded to this need by passing the Terrorism Risk Insurance Act of 2002 (the “Act”) which provides a Federal government guarantee on payouts, something which enabled commercial insurers to offer affordable terrorism coverage to policyholders. Its purpose was explicitly to help businesses that were unable to obtain terrorism coverage after September 11, 2001. The Act had a two year term to it originally, but has since been renewed several times and remains in force.
The Act accomplished what it set out to do by vacating all insurance policy terrorism exclusions, and mandating that all property and casualty insurers offer policyholders terrorism insurance. According to the terms of the Act, terrorism coverage cannot “materially differ from the terms, amounts, and other coverage limitations applicable to losses arising from events other than acts of terrorism.” When offered by a commercial insurance company, the terrorism coverage premium and the existence of the Federal guarantee have to be plainly and clearly explained to policyholders.
Although the Act does not establish coverage pricing, States can nullify rates they feel are exorbitant or discriminatory. Under the Act, the government does not insist policyholders purchase terrorism commericial insurance, but if they decline to buy it, they must do so in writing.
According to the stipulations of the Act, the Federal government covers losses, after the deductible is met by the insured party, of 90 percent, and the insurer picks up the remaining 10 percent of the losses. Interestingly, in light of recent domestic terrorism attacks, the Act is limited to only losses incurred from “foreign” acts of terrorism. It also does not apply to foreign acts of terrorism outside of the United States on US owned property or to chemical or biological foreign acts of terrorism The government also put an upper limit on payout of claims attributable to foreign acts of terrorism at $100 billion.
In the event an insurance company and the government jointly pick up the tab of a claim due to an act or acts of foreign terrorism, the Act provides for the government to impose a surcharge on the company’s policyholders to recoup the amount paid out.
Since the implementation of the Act, industry and academic estimates suggest that less than 10 to 20 percent of commercially insured businesses have opted for this terrorism commercial insurance, either due to its high cost or their feeling they are not likely targets for foreign acts of terrorism—or both. However, lenders to large businesses in major metropolitan areas often require terrorism insurance and so the incidence of terrorism insurance in force in these areas exceeds the average.
