Unprecedented levels of violence are occurring in areas of the world which were once presumed safe.
Attacks in major cities including Orlando, Nice, Paris, Dallas and London have taken dozens of lives and established a new level of awareness and apprehension. Terrorism, in various forms, is now a major threat.
When these attacks occur, the impact is often far greater than reported. News teams cover the loss of life, property damage and motivation behind the attacks. Often overlooked is the impact these strikes have on the businesses sustaining them, who are tasked with rebuilding their operation and reopening their doors as quickly as possible. There are challenges to crafting the appropriate solution to address this risk but the options are expanding.
Property insurance terrorism coverage
Those seeking to commit terrorist acts can be difficult to detect and stop. To that end, it is critical for clients to prepare for potential future attacks impacting insured facilities. Many property insurance policies achieve this (to a limited degree) through coverage for malicious mischief.
However, since 9/11, most policies exclude or severely limit terrorism coverage as common practice. To help illustrate how Malicious Mischief and Terrorism differ, sample property policy definitions of malicious mischief and terrorism are as follows:
- Malicious Mischief – willful and malicious damage to, or destruction of, insured property
- Terrorism – any act, involving the use or threat of: force, violence, dangerous conduct, interference with the operations of any business, government or other organization or institution, or any similar act, when the effect or apparent purpose is:
- To influence or instill fear in any government (de jure or de facto) or the public, or any segment of either; or
- To further or to express support for, or opposition to, any political, religious, social, ideological or similar type of objective or position.
To amplify how P&C insurers clarified their position on terrorism coverage in recent years, look no further than the great pains taken in modern-day property policies to outline occurrence language. One of the debates undertaken by the 9/11 loss adjusters was whether the coordinated attacks were to be considered a single event or multiple occurrences. At that time, language in insurance policies was vague and it was a negotiation to agree on how many deductibles and policy limits applied to the attacks. Today, a property policy extending terrorism coverage will include language clarifying these details.
Policies can respond to these types of losses in a variety of ways and it is critical to analyze the applicable coverage wording with your insurance advisor. All policies should be reviewed in detail to confirm how the occurrence clause reads to limit ambiguity after a potential loss.
Another related peril to consider is damage from civil authority as a consequence of actual or threatened terrorism. Policies can respond to these types of losses in a variety of ways and it is critical to analyze the applicable coverage wording with your insurance advisor to understand how a policy will respond before a potential loss occurs.
Understanding the limitations of TRIPRA
The Terrorism Risk Insurance Act/Terrorism Risk Insurance Program Reauthorization Act (TRIA/TRIPRA) has been in effect since 2002 and much of the insurance buying community secures terrorism coverage through this government-backed mechanism. However, coverage provided by TRIPRA remains limited, as it requires specific thresholds to be met. Here are some of the requirements for TRIPRA to consider:
- The U.S. Treasury Secretary must certify an event as an “Act of Terrorism.”
- Only certified Act(s) of Terrorism are eligible for coverage through TRIPRA.
- There is no legal recourse against the Treasury Secretary decision.
- The period which the U.S. government could take to certify an event can adversely impact a company’s ability to recover, especially if a claim payment is delayed in anticipation of certification.
- An event must exceed $5 million to be declared an Act of Terrorism under TRIPRA.
- TRIPRA has an annual program cap which can be eroded by other policyholder losses.
- No event has been certified as an Act of Terrorism since TRIPRA’s inception.
- TRIPRA expires Dec. 31, 2020 and though previously extended, the federal government has shown an interest in putting the onus of the coverage back on the marketplace.
- TRIPRA does NOT cover international locations (excluding the use of Foreign Asset extensions some markets now offer).
- TRIPRA is required to cover all locations on the property policy.
- TRIPRA does not cover an act of sabotage.
- The pricing for TRIPRA coverage on an all risk program is often calculated as a percentage of the all risk premium unlike the bespoke premium calculated under a stand-alone policy.
The benefits of TRIPRA
Despite the many drawbacks of TRIPRA, there are compelling reasons many insurance buyers continue to secure terrorism coverage through the government-backed program:
- TRIPRA is often more cost effective than stand-alone terrorism, especially for policyholders carrying small and moderate property premiums.
- TRIPRA is signed through 2020, ensuring coverage will continue to be made available for the next several years.
Simply stated, TRIPRA is unable to provide the coverage and flexibility most companies operating in a global economy need.
The domestic nature of TRIPRA concerns buyers in a world where globalization continues to grow. Even for insurance buyers with first party exposure limited to the U.S., supplier and customer chains are likely to expand across multiple countries and continents. Most policies providing coverage on a schedule of domestic locations restrict the coverage territory accordingly. Moreover, policy wording addressing contingent time element coverage as it relates to terrorism can be limiting or even exclusionary.
It is important to note some insurers do extend domestic terrorism coverage to both certified and non-certified events when TRIPRA is purchased:
- All policies need to be reviewed individually, as not every property policy written will necessarily extend domestic terrorism coverage to certified and non-certified events.
- Terrorism remains a global exposure, as evidenced by recent event history. While there are limited exceptions in the market, property insurers have demonstrated almost no ability since 9/11 to add terrorism coverage to a global property program where a government sponsored pool is not in place, irrespective of the scope of locations, values, and premium.
Stand-alone terrorism coverage
The stand-alone terrorism market has spent the last 15 years recapitalizing, enhancing its capabilities and increasing the limits it can offer. New insurers continue to enter the space, providing competitive capacity to drive down pricing while introducing creative products to generate growth.
- Compelling reasons to consider stand-alone terrorism coverage are as follows:
- Contract certainty, as this is a claim-tested product with prompt loss payouts.
- Coverage can extend internationally, where TRIPRA is limited to the U.S.
- Coverage can be tailored so the terms desired by the policyholder, such as contingent time element, or dictated by a contractual agreement can be appropriately underwritten into the policy form.
- Allows for coverage to apply only to specific locations carved out of the property schedule, as needed.
- Clear policy coverage for both sabotage and terrorism, including civil authority damage.
- Pricing reflects the actual exposure rather than a percentage of the policy premium to which TRIPRA is attaching.
- Lower deductibles are often available, especially for larger organizations accustomed to taking six- or seven-digit retentions.
Additionally, the commercial marketplace has introduced products focused on emerging issues which do not fit the traditional terrorism definition. Many of the high-profile attacks during 2015 and 2016 have not necessarily been in pursuit of a political aim, and others done with a political aim have not caused substantial physical damage. As a result, the commercial marketplace has sought to enhance their offerings by creating policies covering perils excluded by both traditional property policies and most stand-alone terrorism programs. Examples of these products include the following:
- Threat of a malicious act.
- Active assailant.
- Active shooter.
- Threat and hoax.
- Crisis management.
- Loss of attraction.
The commercial marketplace has sought to enhance their offerings by creating policies covering perils excluded by both traditional property policies and most stand-alone terrorism programs.
Lockton recently launched Terrorism Crisis Solutions (TCS), offering a suite of terrorism solutions. This proprietary product allows policyholders to select from the stand-alone coverages listed on the previous page in addition to third-party coverages such as Employer’s Liability, General Liability, Workplace Violence, and Stalking. Offering these as a menu of options allows policyholders to design their terrorism coverage in alignment with their exposure and risk appetite.
Many of the stand-alone market’s offerings are designed to protect an organization’s balance sheet from insured events irrespective of physical damage. As an example, a bomb threat in a major retail location such as a mall will adversely affect the revenue of many of its stores. The Threat of a Malicious Act program would help indemnify those enterprises for business interruption resulting from the threat. For many insurance buyers, this should encourage a discussion on how to sustain an organization’s revenue and market
The risk of terrorism continues to rise and it is critical for companies to address this through appropriate risk management. Your company growth does not need to be limited by a lack of adequate terrorism coverage, especially as the breadth of terrorism coverage solutions expands at an unprecedented pace.
Neil Silverblatt is an account executive for Lockton Cos. He markets coverages and compares and analyzes quote options while working with underwriters to obtain the best pricing and coverages. He joined Lockton in 2016 with 14 years of experience in the insurance industry, all of which have been focused on property. He has sat on the broker advisory committee of AFM and authored white papers on industry-centric topics such as supply chain, terrorism and flood coverage.