Does your company have terrorism risk insurance?

Posted May 20, 2009

Does your company have terrorism risk insurance?

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By Justin M. Lewis, Ward and Smith, P.A.

Editor's Note: Justin M. Lewis is a member of the Real Estate Practice Group at Ward and Smith, P.A.

The offices and data centers of technology companies house valuable equipment, resources, and research and development. These assets are unique and usually very valuable, with total insurable values reaching, in some cases, well into the tens of millions of dollars. Since such companies are high profile and much of their property has a high value, the possibility of a terrorist attack, and the devastation that typically ensues thereafter, warrants their consideration of terrorism risk insurance coverage.

Terrorism Insurance in Light of 9/11

Prior to September 11, 2001, many standard commercial property insurance policies, commonly called "hazard insurance," insured most commercial properties against acts of terrorism, and the coverage for such an event usually was inexpensive or included without an increase in premium. The 9/11 terrorist attacks in New York and Washington, D.C. caused over $30 billion in insured losses and permanently changed the landscape of insuring against loss resulting from terrorist events.

In light of the events of 9/11, insurance companies no longer wanted to insure losses resulting from a terrorist attack because such an event could result in losses much greater than what the insurance companies could afford to pay. Insurance companies that continued to offer insurance against acts of terrorism did so at such high premiums that most businesses could not afford to purchase it. This left many businesses without insurance coverage for an event which, while unlikely, could destroy a business completely if it occurred. Lenders also were unwilling to finance some new construction projects because the property could not be insured adequately against terrorist attacks. It was for these reasons that the federal government stepped in and agreed to serve as a backstop to ensure that terrorism insurance was available to all businesses that wanted it.

Terrorism Insurance After 9/11

The Terrorism Risk Insurance Act of 2002 was signed into law by President George W. Bush on November 26, 2002, and has been extended by subsequent legislation, the most recent of which is known as the Terrorism Risk Insurance Program Reauthorization Act of 2007 (the "Act"). The purpose of the Act is to allow businesses and individuals to obtain insurance against losses resulting from a terrorist attack at affordable prices, while not threatening the solvency of the insurance companies in the process. After surveying what was happening in the insurance world after 9/11, the federal government agreed to allocate federal funds to share in the obligation to pay for insured losses caused by acts of terrorism in order to aid businesses in obtaining insurance coverage and to allow private markets to stabilize.

Under the Act, all insurers must make coverage for losses caused by acts of terrorism available in all of their insurance policies. The portion of the policy covering losses resulting from acts of terrorism must contain terms, amounts, and other coverage limitations similar to the terms applicable to losses caused by events other than terrorism. There is no cap on the premiums charged for terrorism risk insurance under the Act, but such premiums are regulated by the individual states. Additionally, the insurers must disclose the premiums charged for terrorism loss coverage, the federal government's share of the liability for claims, and any caps applicable to the coverage.

How Terrorism Insurance Works

Terrorism insurance works just like standard hazard insurance. If a loss occurs due to a covered event (here, an act of terrorism instead of, say, a lightening-caused fire), the insurance company is responsible for paying the victim for the loss. What is less well known is that insurance companies insure themselves against a portion of the loss by buying "reinsurance" from other insurance companies, some of which specialize in providing only reinsurance. The difference the Act makes with respect to an act of terrorism is that the federal government becomes the "reinsurer" if certain conditions are met, some of the most important of which are:

The Secretary of the Treasury, in concurrence with the Secretary of State and the Attorney General, must certify that the act or event which caused the loss was an "act of terrorism" by either foreign or domestic persons or groups.

The act of terrorism must not involve nuclear, biological, chemical, or radiological materials.

The act of terrorism must not be committed as part of a course of war.

The losses resulting from the act of terrorism must exceed $5 million for a particular insured and the aggregate industry insured losses must exceed $100 million.

The insurance company first must pay a deductible equal to 20% of that insurer's direct earned premiums over the previous calendar year. For all losses which exceed this deductible, the federal government will cover 85% of the losses and the insurance company will pay the rest.

Neither the federal government nor any insurer is liable for payment of any portion of insured losses that exceeds $100 billion.

The federal government may recoup some of the money it pays to cover insured losses through an increase in the premiums charged for the terrorism risk insurance.

These provisions, along with the other terms of the Act, provide stability to the insurance industry and a sense of confidence to businesses wishing to insure their commercial property against acts of terrorism. Confidence in the Act has resulted in an increase in the purchase of terrorism risk insurance since 2002 and a reduction in premiums for such insurance. While no form of reinsurance is infallible, the fact that terrorism risk insurance is backed in part by the federal government should comfort worried businesses.

Conclusion

It is difficult to predict when, if, or where another terrorist attack will occur, and the likelihood of a terrorist attack affecting one particular business is very low. However, the loss from such an attack could be catastrophic, and many businesses might not be able to recover if such a loss is not insured. The Act makes such insurance coverage available at reasonable prices, and any business, especially technology companies which may be prime targets of terrorist attacks, should consider whether terrorism insurance and the sense of security it provides is a good investment.

© 2009, Ward and Smith, P.A.

Ward and Smith, P.A. provides a multi-specialty approach to the representation of technology companies and their officers, directors, employees, and investors. Justin M. Lewis practices in the Real Estate Practice Group where he concentrates his practice in commercial real estate, leasing, and community association law. Comments or questions may be sent to jml@wardandsmith.com.

This article is not intended to give, and should not be relied upon for, legal advice in any particular circumstance or fact situation. No action should be taken in reliance upon the information contained in this article without obtaining the advice of an attorney.

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