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Terrorism Insurance: Understanding its Limits and Provisions

Businesses and individuals can purchase terrorism insurance to cover possible losses resulting from terrorist attacks. It is important for consumers and business owners to understand the options and coverage inclusions.

A Dilemma for Some
Boston Businesses

Standard business insurance policies typically exclude acts of terrorism. For that, businesses have to purchase terrorism insurance.

The Congressional Research Service estimates that 60 percent of commercial policyholders have purchased terrorism insurance -- leaving many businesses uninsured.

In order for the coverage to kick in, the Secretary of the Treasury must declare an event a terrorist act -- and that has not happened yet. If a certification is made, and a business has not purchased a terrorist act policy, its losses will not be covered.

However, if an event is notcertified as a terrorist act, a business with losses could apply for reimbursement under its other business policies.

So in the case of Boston, small businesses that did not purchase the coverage are in the position of hoping the federal government does not certify the April 15 bombings as terrorist acts.

History of the Law

11/26/02 President Bush signed the Terrorism Risk Insurance Act(TRIA), which was originally scheduled to expire at the end of 2005. To be covered, it required a violent act committed by, or on behalf of a foreign person or interest.

12/22/05 President Bush signed the Terrorism Risk Insurance Extension Act, which extended the law for two years.

12/26/07 President Bush signed the Terrorism Risk Insurance Program Reauthorization Act, which extends the TRIA through 12/31/14. It removed the requirement that an act of terrorism must be committed by or on behalf of a foreign person or interest in order to be covered.

Business Coverage

Before September 11, 2001, commercial insurers provided terrorism coverage without extra costs in general insurance policies.

After 9/11, the situation changed "as insurers realized the extent of possible terrorism losses," according to a recent report from the Congressional Research Service. It is estimated that losses from the 9/11 terrorist attacks were approximately $32.5 billion ($40 billion in current dollars) -- the largest amount ever recorded for a non-natural disaster.

In 2002, terrorism insurance was either very expensive or not available because it was excluded from policies. There was concern that a lack of coverage could hurt the economy.

Congress responded by passing the Terrorism Risk Insurance Act (TRIA). Insured losses are covered by private insurers that are reinsured by the federal government under the law, which was originally passed in late 2002. In other words, if a terrorist attack occurs, the federal government shares some of the loss with private insurers. The amount depends on the size of the loss.

The law brought "much needed capacity back to the market at a critical time," according to the Insurance Information Institute.

So now, terrorism insurance is offered separately with its own price that is reflective of current risk levels. According to the Congressional Research Service report, the initial price of terrorism coverage was high when the insurance was first introduced but it has declined in the last decade.

The TRIA includes commercial property owners. Examples of such properties are shopping malls, factories and offices that are required to carry this coverage.

When Does Terrorism Coverage Kick In?

Under the law for commercial insurance, a terrorist attack must be declared a "certified act" by the U.S. Secretary of the Treasury, which requires at least $5 million in damage.

In the case of the two Boston Marathon bombings on April 15, this declaration has not been made yet. If a business does not buy terrorism insurance and an attack occurs causing damage to its property, the business will generally not be covered for losses.

While an attack must be certified by the Secretary of the Treasury to be triggered by the government for business policies, no declaration is needed for auto or home coverage. This is because there are no terrorism exclusions.

What Is Not Covered?

Restrictions apply to biological, nuclear, radiological and chemical events for both commercial and personal policies. Risk exclusions that are war related reflect the reality that damages stemming from war acts are not insurable. For the war risk exclusion to apply, no formal declaration is needed from Congress. If some exclusions are allowed by a state, the Terrorism Risk Insurance Act states that insurers do not have to make the excluded coverage available.

Business Interruption Coverage

Commercial buildings sustaining damages from terrorist attacks may include claims for business interruption. Insurance for this type of incident covers financial losses stemming from firms suspending business due to direct damages or access restrictions placed by civil authorities. Although coverage depends on individual policies, it usually starts after a waiting period of at least two days. It lasts anywhere from two weeks to several months.

Losses due to business interruption that are associated with civil authority closures may be triggered by physical damages or losses nearby. The losses do not have to happen on the insured's premises to apply. Civil closures and loss of income due to closures would not be covered by business interruption policies.

Workers' Compensation

This is a compulsory coverage for business owners. It covers workers who are killed or injured on the job, so it automatically includes acts of terrorism. This is the only type of coverage that does not exclude war act provisions. In every state, exclusion of Workers' Comp coverage for terrorist attacks is not allowed.

Health, disability and life insurance policies may offer coverage for death, sickness or injuries related to an attack. To learn more about this type of coverage and its inclusions or exclusions for businesses, discuss concerns with an insurance agent.

Individual Coverage

A standard homeowner's policy includes coverage for property damage and damage to personal possessions as a result of terrorist attacks. However, terrorism is not specifically referenced. This type of policy offers protection for homeowners due to fires and explosions, which are common methods of terrorist attacks.

Owners of co-ops or condominiums can also have protection for personal possessions in the event of a terrorist attack. Damage to common areas is only covered if the board has purchased terrorism coverage, so people who live in large complexes should be aware of this. The same is true for people who rent apartments. While personal possessions are covered, damages to any common areas are the responsibility of the landlord.

If a car is destroyed or damaged due to a terrorist attack, an auto insurer will only cover the destruction if the owner purchased comprehensive coverage. People who have vehicles that are still on loan or lease terms must carry this coverage. Those who have only liability insurance will not be covered.

Life insurance policies do not include exclusions for terrorism. If a policyholder dies in a terrorist attack, the beneficiaries will still receive their money.