A Russian commercial airline jet is blown out of the sky by a bomb planted onboard, killing all passengers. In Paris, a team of terrorists carry out a coordinated attack and open fire on crowded restaurants and venues, killing over 100 people and injuring hundreds more. Three terrorists in a vehicle with fake diplomatic plates enter a Radisson Hotel in Mali, where they begin shooting and killing guests and workers.
These are a few of the tragic headlines of late that confirm the fact that terrorism is everywhere and can strike at any time, inflicting death and pain on human life and causing significant loss and damage to property. As insurance professionals, we need to step back and review our insured risks and the policies in place to confirm that proper coverage and protection is in place. Without a clear-cut idea as to the scope of terrorism, those concerned with disaster mitigation may not realize potential threats and assume that a low-profile business does not present a target.
Many insurance policies, regardless of the complexity of the coverage and the risk, contain the standard “War and Military Action” exclusion, which typically reads as follows:
WE WILL NOT PAY FOR LOSS OR DAMAGE CAUSED DIRECTLY OR INDIRECTLY BY ANY OF THE FOLLOWING. SUCH LOSS OR DAMAGE IS EXCLUDED REGARDLESS OF ANY OTHER CAUSE OR EVENT THAT CONTRIBUTES CONCURRENTLY OR IN ANY SEQUENCE TO THE LOSS.
F. WAR AND MILITARY ACTION
(1) WAR, INCLUDING UNDECLARED OR CIVIL WAR;
(2) WARLIKE ACTION BY A MILITARY FORCE, INCLUDING ACTION IN HINDERING OR DEFENDING AGAINST AN ACTUAL OR EXPECTED ATTACK, BY ANY GOVERNMENT, SOVEREIGN, OR OTHER AUTHORITY USING MILITARY PERSONNEL OR OTHER AGENTS; OR
(3) INSURRECTION, REBELLION, REVOLUTION, USURPED POWER, OR ACTION TAKEN BY GOVERNMENTAL AUTHORITY IN HINDERING OR DEFENDING AGAINST ANY OF THESE.
In most instances, as experienced after the World Trade Center attack on Sept. 11, 2001, insurers will take the position of not applying the war exclusion, instead looking at the circumstances surrounding the attack as an act of terrorism. Each event will dictate how the market reviews its policies and applies any applicable exclusions or limitations. It is best to review policies with a professional, even coverage counsel, to ensure that proper action is taken.
The World Trade Center attack, along with the other locations affected that day, caused such vast loss and damage on top of the loss of thousands of lives that the U.S. government took the initiative in 2002 to enact into law the Terrorism Risk Insurance Act (TRIA), which was extended in 2005 and 2007 under the Terrorism Risk Insurance Program Reauthorization Act (TRIPRA). Recently, it was extended again by President Obama in January 2015.
TRIA created a U.S. government reinsurance facility to provide reinsurance coverage to insurance companies following a declared terrorism event. The final version as extended by President Obama reauthorizes the program for six years and states the following:
ELIGIBILITY OF INSURERS
RECIPIENT OF DIRECT EARNED PREMIUMS FOR ANY TYPE OF COMMERCIAL PROPERTY AND CASUALTY INSURANCE COVERAGE;
LICENSED OR ADMITTED TO PROVIDE INSURANCE IN ANY STATE, APPROVED FOR THE PURPOSE OF OFFERING PROPERTY AND CASUALTY INSURANCE BY A FEDERAL AGENCY IN CONNECTION WITH MARITIME, ENERGY, OR AVIATION ACTIVITY, OR IS A STATE RESIDUAL MARKET INSURANCE ENTITY OR STATE WORKERS’ COMPENSATION FUND;
MEETS ANY OTHER CRITERIA THAT THE U.S. SECRETARY OF THE TREASURY MAY REASONABLY PRESCRIBE.
The act goes on to define “terrorism” as follows:
THE TERRORISM RISK INSURANCE ACT DEFINES “ACT OF TERRORISM” AS ANY ACT THAT IS CERTIFIED BY THE SECRETARY OF THE TREASURY, IN CONCURRENCE WITH THE SECRETARY OF STATE AND THE ATTORNEY GENERAL OF THE U.S.:
TO BE AN ACT OF TERRORISM;
TO BE A VIOLENT ACT OR AN ACT THAT IS DANGEROUS TO HUMAN LIFE, PROPERTY, OR INFRASTRUCTURE;
TO HAVE RESULTED IN DAMAGE WITHIN THE U.S., OR OUTSIDE THE U.S. IN THE CASE OF AN AIR CARRIER OR A U.S. FLAG VESSEL, OR THE PREMISES OF A U.S. MISSION;
TO HAVE BEEN COMMITTED BY AN INDIVIDUAL OR INDIVIDUALS ACTING ON BEHALF OF ANY FOREIGN PERSON OR FOREIGN INTEREST AS PART OF AN EFFORT TO COERCE THE CIVILIAN POPULATION OF THE U.S. OR TO INFLUENCE THE POLICY OR AFFECT THE CONDUCT OF THE U.S. GOVERNMENT BY COERCION.
The intent of TRIA and the subsequent extensions was to provide a reinsurance backstop in case of large-scale terrorist attacks and to require insurers to offer terrorism coverage for the types of insurance included in the act. Many insurers that provide the coverage have added endorsements to their policies and offer various degrees of coverage ranging from worldwide exposures to those limited to the U.S. and its territories. Only those events as outlined in the act can be presented to the government as a claim for reinsurance; others may be presented to the reinsurance market for consideration. All policy conditions, limitations, and exclusions would apply in all cases, so a review of coverage would be in order.
Just as in any insurance program, there are certain certifications and triggers in place for a response by the act:
- A minimum of $5 million in insured losses per insurer to trigger certification.
- An aggregate of $200 million in insured losses by the industry (as of 2015).
- Federal share of losses limited to 80 percent to insurer.
- Insurer deductible is 20 percent of earned premium.
- Federal cap on assistance would be $100 billion per year.
Can one predict where terrorism will occur next? Of course not, but what we can do is determine how we conduct our business, where we conduct business, and with whom. Are our properties and personnel in a high-risk area? What security measures are in place? What about our customers and suppliers? Are you close to a highly targeted area? One of the largest exposures after property and personnel is loss of business, which is the hardest to predict due to the many potential scenarios involving loss and prevention of access. Even with the heightened security measures in place, there is no guarantee a terrorist attack will not occur. We can only be aware of the risks, act as diligently as we can, and—most of all—be safe.
Patrick Milone is vice president of the large loss unit/international division of the property services group for Custard Insurance Adjusters Inc. He has been a CLM Fellow since 2011 and serves as committee co-chair for CLM’s Property Committee. He may be reached at (973) 752-9473, pmilone@custard.com, custard.com.
SIDEBAR: Understanding France’s Governmental Backstop
Shortly after the attacks on 9/11, France implemented a similar program to the U.S.’ TRIA. Called Gestion de l’Assurance et de la Réassurance des risques Attentats et actes de Terrorisme—or GAREAT—the program is a market structure that has been in place since January 2002. It seeks to manage the reinsurance of the risks of attacks and acts of terrorism in France in the name and on behalf of its members so as to allow them to meet the property damage losses arising out of attacks and acts of terrorism suffered on national territory, regardless of the country in which the act of terrorism is perpetrated.
GAREAT is composed of two sections: the “large risks” section, which includes risks whose sums insured amount to €20 million ($21.2 million) or more, and the “small and medium-sized risks” section, which manages risks with sums insured below €20 million.
GAREAT’s members are French or foreign insurance companies that issue property damage policies covering risks situated on French territory. Its fundamentals rest on the principle of “mutuality” between its members, all of whom are jointly liable with the other members within a same section, and on the support given to GAREAT by international reinsurers as well as by the French State, which provides unlimited coverage to the GAREAT program via unlimited treaties reinsured 100 percent by Caisse Centrale de Réassurance.
As a non-profit-making Economic Interest Grouping mandated by its members, GAREAT returns to the latter that part of the premiums that are not used to finance the reinsurance coverage at the close of each year. Since GAREAT is neither an insurer nor a reinsurer, any necessary equalization reserves are set up by the members.
Source: GAREAT, gareat.com/en