The Terrorism Risk Insurance Act should be amended

Since the Boston Marathon bombings, the hot topic in insurance coverage circles has been terrorism insurance.  I was interviewed by Massachusetts Lawyers Weekly here on the subject. 

After the events of September 11, 2001, insurers started excluding terrorism risks from their policies.  In response, the federal government passed the Terrorism Risk Insurance Act ("TRIA"), under which the federal government acts as a "reinsurer" (basically an insurer's insurer that steps in if losses become too high).  As I noted to Lawyer's Weekly, for the coverage to kick in, the Secretary of the Treasury must certify that an incident was an act of terrorism.  If that happens, then businesses who purchased terrorism coverage will be covered, and those who did not purchase it will not be covered.  If the event is not declared terrorism then -- presumably but not definitely -- neither the terrorism endorsement nor the terrorism exclusion would apply, and coverage would be determined under other policy terms.

So far, the Secretary of the Treasury has not made a determination one way or another, and there is no deadline by which he must do so.  The Boston Globe has an article on the issue here. 

To be clear, terrorism insurance is unlikely to affect third-party claimants -- the people who were injured or relatives of those who were killed in the bombings.  Third-party insurance only applies if the insured was negligent.  While some lawyers would no doubt be willing to explore a theory that the Boston Athletic Association -- the organization in charge of the marathon -- provided insufficient security, most of the injured will probably seek compensation from OneFundBoston, a nonprofit organization that has been set up to compensate the injured in a similar manner to the September 11 Victim Compensation Fund.  (You can donate to OneFundBoston here.)

Terrorism insurance will cover first-party claims by businesses who purchased the endorsement  whose property was damaged in the bombings and who lost income because of closures after the bombings. 

The events in Boston are the first time that terrorism insurance has become an issue since TRIA was passed, and they have brought to light flaws in the legislation.  Businesses who did not purchase the insurance -- most of those affected by the marathon bombings -- are advocating that the government not declare the bombings to be an act or terrorism, because such a declaration will mean that they don't have coverage for their losses. 

TRIA is set to expire in 2014, and the debate over whether it should be renewed is underway.    According to this article in Property Casualty 360, the Insurance Information Institute favors renewal of the act because insurers will simply exclude terrorism coverage if the act is not renewed.  The Consumer Federation of America opposes renewal because it allows insurers to charge premiums without taking on risk (since losses are paid by the federal government).

The events in Boston have shown us that TRIA needs to be amended.  Its unintended consequence is that the federal government has been put in the untenable policy position where if it declares an act to be terrorism, many businesses will lose out on insurance coverage. 

The way to avoid that is to amend the Act.  The terrorism endorsement should be made an expected, even mandatory, part of general liability policies and no additional premium should be charged for it.  If claims are made, the government would pay insurers a fee to administer them. 

The solution makes sense because it would acknowledge that terrorism is an attack on our country as a whole.  It is not right that only certain, random businesses -- those that happen to be on a particular block of a particular street -- should bear the financial loss of such attacks.  The businesses would have their losses paid by the government, which is funded by the entire country. 

Moreover, the solution would address the concerns of both the Insurance Information Institute and the Consumer Federation of America.  Insurers would continue to provide terrorism insurance as part of their policies.  They would be paid for their actual work of administering claims.  The government would be freed to make a determination of whether an act was terrorism based on whether or not it actually was terrorism, not on whether such a determination will cause businesses to close.