The Terror Risk Insurance Act ("TRIA") is scheduled to expire on December 30, 2005. Congress is considering extending TRIA, but a decision is unlikely until summer. Policyholders should beware that insurers are responding to the uncertainty surrounding the reauthorization of TRIA by attaching to policies nuclear, biological, chemical, radiological or other terrorism exclusions that will become effective if TRIA is not extended or extended in its current form.
Under TRIA, insurers are required to offer terrorism coverage. TRIA endorsements, as they are known, provide coverage for liability, property damage, or business interruption losses resulting from a terrorist act as defined by TRIA. TRIA defines an act of terrorism as one that is perpetrated by a foreign group and that results in more than $5 million of damage. Many companies have purchased TRIA coverage on one or more types of policies.
The House Financial Services Committee last year approved an extension of TRIA through 2007. But Senate Banking Committee Chairman Richard Shelby decided not to move a similar bill in the Senate, opting instead to hold hearings. Senator Shelby stated that he will approach the debate with a "critical but open mind," concluding that the "purpose of this law was to establish… [a] temporary federal program." While Banking member Christopher J. Dodd, D-Conn., argued that "[i]f we let TRIA expire, many business consumers will be unable to get the coverage they needed. That can only hurt the economy."
Meanwhile, the Congressional Budget Office issued a paper on TRIA in January 2005 in which the CBO stated that letting TRIA expire could actually improve economic efficiency by forcing companies to increase efforts to mitigate risk. The paper states that TRIA hinders efforts by companies to address terrorism and develop technology to protect its properties and investments from damage caused by terrorist acts. Douglas J. Holtz-Eakin, Director of the Congressional Budget Office, stated that "alternatives to insurance would be more likely to develop more quickly if premiums were higher…the addition of cost-based premiums could stimulate the development of alternatives, including mutual reinsurance pools and capital instruments such as catastrophe bonds." However, the Administration has yet to take a formal position pending a Treasury report on TRIA due within a few months.
The new terrorism exclusion some insurers are adding to policies is quite broad. It would preclude coverage not only for foreign acts of terror, but domestic acts as well. The exclusion is also very subjective, as it could apply even if it only "appears" that the intent of an act is to coerce the government or further a political or social objective.
Policyholders may want to negotiate for a narrower terrorism exclusion or for no exclusion at all. At the very least, policyholders should be aware that a new terrorism exclusion could be added to any new or renewal policy in 2005.
This article is presented for informational purposes only and is not intended to constitute legal advice.
