Exclusively from Foa & Son
When you renew most commercial insurance policies you are presented with a TRIA election form, giving you the right to reject or accept (at some additional cost) coverage for terrorism related claims. It’s worth taking a moment to think about what that is all about.
Your insurance policies have always contained exclusions for claims arising from truly catastrophic events, like war or nuclear explosion. In and of themselves these types of claims could be insurable, but the concern has always been that the volume of claims arising from these types of occurrences could easily be so huge that the financial health or even the survival of the entire insurance industry could be compromised. Rather than trying to insure a risk that could be completely unpredictable and yet could bankrupt any insurance company, policies simply exclude them.
Until 2001 acts of terrorism were not considered acts of war, and no separate exclusion applied to them; claims that were presented after 9/11 were paid. But, the insurance industry took notice; here was an entirely new risk with the potential to drop billions of dollars of claims in their laps at any time, repeatedly. Terrorism risk is unpredictable, unquantifiable, impervious to actuarial analysis and potentially huge; that is the definition of an uninsurable risk. Exclusions for claims arising from acts or terrorism appeared almost instantly.
Insurance is a mechanism to protect and make whole those few who suffer unfortunate incidents by spreading the cost of those events over many others, and over time. Considered as a cost spreading device it’s the perfect means to spread the risk even of events like terrorist attacks. For that reason Congress enacted the Terrorism Risk Insurance Act (TRIA) in 2002 in response to new policy exclusions for claims arising from acts of terrorism. The law provides a government reinsurance backstop for insurance companies offering coverage for terrorist acts, subject to certain definitions and retentions held by insurers. With TRIA as a backstop, the insurance industry can offer coverage for terrorism claims that it could not afford to offer otherwise. Extended first in 2005 and again in 2007, TRIA is set to expire at the end of 2014. Congress is again reconsidering the appropriate government role in terrorism insurance markets. There is no certainty that TRIA will be extended, or on what terms if it is.
For most insurance buyers this will have little impact, since buyers commonly reject TRIA unless they are an operation or location that might be considered a possible terrorist target. One policy you buy will be affected, though. Terrorism exclusions can be and have been added to almost all commercial insurance policies, but not workers compensation. The main insuring clause in your workers compensation policy says that it will pay for claims as required by the applicable state workers compensation law. No state WC law excludes terrorism claims. Consider 9/11; every one of those workers in the World trade Center buildings, every police, fire and other first responder, every other worker in surrounding areas forced to evacuate…all were, are, and will be in the future covered by workers compensation.
Like it or not you already pay a terrorism surcharge on your WC policy. Absent TRIA this would likely increase. Workers compensation is state specific, so states with a higher potential for terrorist attack like New York or California would likely see higher surcharges. Insurance companies could also try to soften that impact by increasing such charges across the country.
Another very real likely impact would be that employers with a work force concentrated in potential targets areas might not be able to buy WC in the standard market at all. There are already signs that large insurance companies are looking at aggregation, the concentration of policies they write in certain terrorism exposed areas. Absent TRIA, insurers may not wish to write any, or any more, WC policies in such areas. Buyers only resort would be to obtain coverage in residual markets or assigned risk pools, which of course charge higher premiums.
Expiration of TRIA and growth in the residual or assigned risk market would also mean that WC losses from a catastrophic terror attack would primarily be financed by taxpayers and employers in the state in which the attack occurs, adding to the challenge of rebuilding in that state. TRIA, in contrast, spreads such risk across the entire country.
We are keeping an eye on this issue for you.