The United States is no stranger to acts of terrorism. In recentyears, domestic and international events have increased withalarming frequency. More importantly, such events have shown thatno area of life is completely risk-free.

Domestically, notable acts of terrorism have occurred on schoolcampuses like Virginia Tech or Sandy Hook Elementary School. Justthis month, Las Vegas experienced the deadliest massshooting in modern U.S. history.

Concern over terrorism risk is clear and definite, butinformation and understanding of terrorism risk insurance is not aswell known. Not-for-profit organization RIMStackles this subject in its latest report, TerrorismInsurance: Understanding the Boundaries of Coverage for a RiskWithout Borders.

Guidance for risk managers

The report provides corporate risk managers, insurancebrokers and coverage counsel with guidance on determining whetherterrorism risk insurance coverage is necessary, identifyingterrorism risk solutions that exist in the market and insights onnegotiating for terrorism coverage.

“With terrorism risk being an unfortunate reality, corporaterisk managers and counsel can take proactive measures to contain arisk that otherwise knows no bounds,” said the author of thereport, Micah Skidmore of Haynes and Boone LLP.

Related: Terrorism and political violence call for review ofinsurance strategy

Terrorism risk is seasonal, with most attacks occurringduring the spring and summer months. (Photo:Shutterstock)

Is terrorism risk insurance coverage necessary?

Terrorism risk can be quantified and, to some extent, understoodby its relationship to a variety of constantly evolving factors.Historically, domestic terrorism represented a disproportionaterisk to property, relative to bodily harm, spread over numeroussmaller incidents.

Most attacks occur on a seasonal basis, especially during thespring and summer months. The report also notes there is a greaterlikelihood of terrorist attacks in the Northeastern region of theU.S. and the coastal states like California and Texas.

Although property damage and bodily injury are the primary risksassociated with terrorism, there are other dimensions companiesshould consider if they're looking to minimize their exposure, suchas:

• Fiduciary liability for corporate directors and officers,
• Pollution loss and liability,
• Professional (E&O) liability,
• Employment practices liability,
• Business interruption loss, and
• Privacy and network security liability.

Even when a company does not independently recognize terrorismrisk sufficient to justify an insurance solution, some form ofterrorism coverage may nonetheless be required by contract —including lending agreements.

Related: Chubb increases terrorism, political violence andwar insurance capacity

Traditional policies, including commercial general liabilityand property policies, may provide some coverage for terrorism riskif not expressly excluded. (Photo: Shutterstock)

What insurance solutions are available to address terrorismrisk?

What terrorism insurance solutions are available to corporaterisk managers? A significant market capacity exists for domesticterrorism coverage in two different forms: traditional first- andthird-party policies, and so-called stand-alone terrorism riskinsurance. Traditional policies, including commercial generalliability and property policies, may provide some coverage forterrorism risk if not expressly excluded.

Workers' compensation insurance — a state-regulated line ofcoverage compulsory in nearly every state — is anothertraditional policy that may provide some form of terrorismcoverage. Unlike other property & casualty policies, workers'compensation policies do not have terrorism (or war)exclusions.

Related: 6 tips for helping employees get through aterrorist attack

To the extent that terrorism risk is excluded or unavailableunder traditional policies, a corporate policyholder may considerpurchasing stand-alone terrorism insurance. Stand-alone terrorismpolicies, however, provide a wide a variety of terms — someoffering broad coverage, others very little.

They also typically exclude political risks, including lossresulting from strikes, riots, civil commotion, rebellion,revolution, war and insurrection. Cyber-related loss and liability,as well as nuclear, biological, chemical and radiological hazardssuch as anthrax, are also commonly excluded.

Related: Protests, riots, and loss of businessincome

In a large-scale terrorism event, disputes havedeveloped and may continue to arise over what qualifies as aseparate “occurrence.” (Photo: Shutterstock)

What should corporate policyholders look for in placingstand-alone terrorism coverage?

If a stand-alone terrorism policy is the preferred method ofaddressing terrorism risk, selecting the policy with the best termsinvolves more than just ensuring that coverage extends beyond“certified acts of terrorism.” Brokers and policyholders shouldcarefully review the valuation terms in stand-alone terrorismpolicies to ensure that such terms appropriately compensatethe insureds for loss and damage, even when actual repair orreplacement may not be possible or optimal.

In a large-scale terrorism event, disputes have developed andmay continue to arise over what qualifies as a separate“occurrence,” justifying either the application of separate limitsor the accrual of a separate deductible or retention. To avoid suchcontroversy and afford a measure of certainty to policyholders andinsurers alike, some considerations should be given to includingspecific terms defining what constitutes an “occurrence” and howthe number of occurrences associated with a given claim will bedetermined.

Related: Insurance implications of war,domestic terrorism and nuclear threats

The “act of terrorism” may, directly or indirectly, prompt arelease of hazardous substances. (Photo: Shutterstock)

What other policy terms justify special consideration in aterrorism risk insurance policy?

• Expediting expense: The costs incurred tosustain operations or expedite repairs in the wake of a terrorismincident may vary substantially from any other casualty loss.Expansion of insuring terms beyond “reasonable and necessary” coststo include items such as security or healthcare-related expense maybe appropriate.
• Increased cost of construction: Aterrorism incident may itself prompt legislative or other practicalrequirements that have the effect of increasing the cost ofdemolition and compliant repair.
• Pollution exclusion: The “act ofterrorism” may, directly or indirectly, prompt a release ofhazardous substances, which increases the cost of the claim.Policies should not exclude the cost associated with a release of“pollutants” that is an indirect result of an otherwise covered“act of terrorism.”
• Sue and labor: What is reasonable toprotect, recover or save insured property after a general casualtyloss may be very different from what is appropriate following as anact of terrorism. To avoid disputes, language in “sue and labor”provisions should be tailored accordingly.

Terrorism risk insurance, whether through traditional orstand-alone policies, is an increasingly important element ofdomestic corporate insurance programs. To that end, risk managers,agents, brokers and corporate counsel should review corporateexposure to risk, existing policies and contracts to determinewhether terrorism risk insurance is necessary to protect thebusiness or fulfill contractual obligations.

Related: Interest in travel insurance terrorism coverage onthe rise