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Terrorism: What You Need to Know

Today

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• This class is being recorded. The recording can be found in the Community at Webinars Archive

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• This class is not approved for CE credit.

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Insurance forms and endorsements vary based on insurance company; changes in edition dates; regulations; court decisions;

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the instructional materials provided. Insight Insurance Consulting

laurie@insurancecommunitycenter.commarjorie@insuranceacommunitycenter.com www.insuranceacommunitycenter.com

Copyright 2013©

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Marjorie L. Segale, AFIS, CISC, RPLU, CIC, CRIS, ACSR, CISR

Insurance Community Center, LLCDirector of Education 6

Terrorism definedFederal and State StatutesTRIA protectionLimitations of coverageTerrorism Insurance Coverage

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Terrorism

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U.S. Code Of Federal Regulations Definition Of Terrorism: The unlawful use of force and violence

against persons or property to intimidate or coerce a government, the civilian population, or any segment thereof, in furtherance of political or social objectives.

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Domestic individual or groupForeign individual or groupDomestic party acting for a foreign

party

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Terrorists may be either domestic or foreign depending on the following: Origin of group Base of operations Objectives

Investigation and determination post-loss

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Fire Vandalism Explosion

Bomb Radiological Dispersal Device (RDD) Biological, Chemical, Nuclear device

Cybersabotage – (Cyberterrorism) Hijackings, kidnappings or hostage

taking Assassination

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Injury or death Employees Customers Visitors Trade or delivery persons

Ensuing litigation

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Damage to buildings and personal property Widespread damage caused by falling

debris, dust, dispersal of agents Debris removal expense Demolition of surrounding property Environmental monitoring of site Diminution of property value

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Business shutdown Direct and indirect damage

Economic impairment Societal fear is one of the main goals of

terrorists The damage and fear results in overall

economic damage, which terrorists hope will result in a country’s downfall

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A number of services provide a threat assessment Geographic proximity Type of business Business clientele Concentration of people – particularly

children

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Insurance company reinsurance contracts renewed 1/1/2002 (70%) and 7/1/2002 with absolute terrorism exclusions for most coverage lines

US insurers could not take the chance on another event occurring without reinsurance Terrorism exclusions created and added

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Terrorism Risk Insurance Act – TRIA 11/26/2002 – 12/31/2005

Terrorism Risk Insurance Extension Act – TRIEA 1/1/2006 – 12/31/2007

Terrorism Risk Insurance Program Reauthorization Act of 2007 12-26-2007, effective 1-1-2008 to 12-31-2014

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Called a federal backstop for insurers If an insurance company adds a

terrorism exclusion to a policy, this federal law requires the offer of coverage for specific lines of insurance

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TRIPRA is not insurance – it is a Federal statute that requires insurers to provide limited types of coverage for policyholders that purchase the protection

Gaps in coverage can be significant Cost of this coverage is rated as a

percentage rate of either the property or liability rates Does not take actual risk into account

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Responds when the act is a ‘certified act of terrorism’ – declared by: The Secretary of the Treasury Secretary of State, and The Attorney General ALL THREE must agree

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To be an act of terrorismTo be a violent act or an act that is

dangerous to Human life Property Infrastructure

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To have resulted in damage within the United States or outside the United States in the case of An air carrier or vessel The premises of a United States mission

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And to have been 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▪ NOTE: The requirement that the act be

committed by an individual acting on behalf of any foreign person or foreign interest was removed when the Act was reauthorized in 2007

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No act shall be certified by the Secretary of Treasury as an act of terrorism if: The act is committed as part of the

course of a war declared by the Congress, except this clause shall not apply with respect to any coverage for workers’ compensation or property and casualty insurance losses resulting from the act, in the aggregate, do not exceed $5,000,000.

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Determinations are final and not subject to judicial review

The Secretary of the Treasury cannot delegate the determination to anyone else, up to and including the President of the United States

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The Act specifically states that terrorism exclusions included in a policy on specified lines of insurance will be suspended to the extent the law deems the loss to be caused by a certified act when TRIA protection has been purchased by the policyholder

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Policies contain MANY other exclusions that are not overcome by the Act Mold, fungus, microbial matter Nuclear reaction, radiation, etc Pollution War

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Thus, even though the Act includes ALL loss caused by a certified act, the Act only contemplates terrorism exclusions and does NOT address the impact of the other exclusions that effectively remove coverage for nuclear, biological, chemical or radiological events

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A single terrorist act must cause property and casualty losses in excess of $5 million to be eligible for certification under TRIPRA If certified, this becomes the trigger of

coverage for the policyholder The reinsurance program trigger is fixed

at $100,000,000 ($100 million) If certified, this becomes the trigger for the

reinsurance protection for the insurers31

Requires the Secretary of the Treasury to notify Congress not later than 15 days after the date of an act of terrorism as to whether aggregate insured losses are estimated to exceed $100,000,000,000 ($100 billion)

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Retention of 20% of each insurer’s prior year direct earned premium

Co-payment of 15% of all covered loss Federal funds pay back 85% to insurers

in excess of the retention

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Lesser of: $27.5 Billion Aggregate amount, for all insurers, of

insured losses during each Program YearThe Act requires the Treasury to

publish an estimate of aggregate insured losses within 90 days after an act of terrorism

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$100 billion The insurance industry will have no

obligation under TRIA or TRIEA required coverages to pay losses

Congress will have to make the determination of payment for losses that exceed this amount

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The government will recover a portion of payments paid out by the government program to insurers or reinsurers

The original 3% premium surcharge on property and casualty insurance coverage is currently eliminated

The Act requires the Treasury to issue recoupment regulations within 180 days of enactment

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Requires the insurers to use clear and conspicuous notice to policyholders of the existence of the $100 billion cap At time of offer At time of purchase At time of renewal

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The offer of TRIA protection must be offered on specified lines of insurance

Suspends terrorism exclusions to the extent of the defined ‘certified act of terrorism’

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Per-occurrence limits that match property policy

Coverage applies at all covered locations within the U. S.

Cancellation terms are set by the policy or state statute

Deductible same as for other losses

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Act deemed a certified act $5,000,000 property or casualty losses

from single event $100,000,000 damage to trigger federal

reinsurance for insurers Co-payments apply to each individual

insurer plus 15% of loss above their premium retention

Aggregate industry capped at $100 billion on federal reinsurance program

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Client has a building insured and has purchased the offer $2,000,000 limit of insurance $5,000 deductible Explosion from bomb damages the

building Loss is valued at $1,000,000 What is the policy response?

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Client has a building insured and has purchased the offer $20,000,000 limit of insurance $50,000 Deductible Explosion from bomb damages the

building Loss is valued at $4,000,000? What is the policy response?

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Client has a building insured and has purchased the offer $10,000,000 limit of insurance $50,000 Deductible Explosion from bomb damages the

building Loss is valued at $15,000,000 What is the policy response?

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No Terrorism Exclusions Allowed If an act of terrorism (certified or

not) injured workers will be covered by Workers’ Compensation Policy Must arise AOE/COE

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Commercial insurers and reinsurersWorkers compensation poolsState-licensed captive insurersRisk retention groups

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Property policiesBoiler and MachineryGeneral liabilityDirectors and Officers LiabilityOcean and Inland Marine

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Personal lines insurance companies and reinsurers

Federal crop and livestock Farmowners Multi-PerilPrivate mortgage / Financial

guaranty Professional liability / Medical

Malpractice

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Health and LifeFlood – NFIPCommercial automobileBurglary and theftSuretyReinsurance / Retrocessional

reinsurance

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Standard Fire Policy State Regulations

Impact on Coverage

Many states have adopted a standard fire policy Establishes exclusions from coverage

In these states, fire from all causes, including earthquake but excluding war, is covered In some cases a nuclear explosion with

ensuing fire is specifically addressed in the statutes

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Some states with a standard fire policy have allowed fire following a terrorist attack to be excluded, if the policyholder turned down TRIA

In the remainder, fire following a terrorist attack is covered, whether or not the business purchased terrorism coverage

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ArizonaCalifornia**ConnecticutGeorgiaHawaii Idaho Illinois Iowa

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LouisianaMaine**MassachusettsMichiganMinnesotaMissouri**NebraskaNew Hampshire

** Not allowed to reject fire following

New JerseyNew YorkNorth CarolinaNorth DakotaOklahomaOregon**New HampshirePennsylvania

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Rhode IslandTexasVirginiaWashingtonWest VirginiaWisconsin**U.S. Virgin

Islands** Not allowed to reject fire following

AlaskaArkansasColoradoDelawareDC

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Florida IndianaKansasKentuckyMaryland

MississippiMontanaNevadaNew MexicoOhioPuerto RicoSouth Carolina

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South DakotaTennesseeUtahVermontWyomingGuam

Most Companies Do Not Include NBCR Coverage

To provide broader coverage To provide more specific and tailored

coverage for the buyer To provide coverage at an appropriate

rate commensurate with the individual risk TRIA typically use a percentage of the

original policy rates▪ This does not provide premium specific to the

risk of terrorism

Does not distinguish between foreign or domestic acts

Can be written world-wide with a few countries excluded

Specific Country Deductibles may be used at the underwriter and client’s discretion

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Limits are typically aggregated or with one reinstatement

Typically written on a location specific basis

Policies may be written as non-cancelable

Long-term policies up to three years available

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Ace USA – Illinois Union

AIG - Property Arch Insurance

Group AXIS Capital Berkshire

Hathaway Glacier Re Hiscox Lancashire Re

Lloyds (a number of different syndicates)

Montpelier Re OPIC Transatlantic Re Various Political

Risk Carriers Western Re Bermuda

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You have an obligation to your insured to not only EXPLAIN TRIEA but to offer actual insurance coverage that does not require a government proclamation

Coverage in the stand-alone marketplace is available and can be less expensive than the TRIEA protection provided under Federal law

NEVER assume your client will not want this coverage

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Community Lecture May 16th - Revise your Contracts or Risk

Losing Additional Insured Coverage!University CE

May 9th - Insight on Foreign Insurance May 14th - Condominium - 5 Key Issues May 16th - Workers Compensation - 5 Key

Issues May 23rd - Construction Liability

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