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Renewal Of The Federal Terrorism Insurance Program Leaves Key Questions Unanswered . . . For Now
January 20, 2015
On January 12, 2015, President Obama signed into law the Terrorism Risk Insurance Program Reauthorization Act of 2015, the first piece of legislation to pass the new Republican-controlled Congress. The law extends, for an additional six years, the federal program that ensures the widespread availability of insurance for terrorism. This is good news for business and property owners, and for the property and casualty insurance markets which will continue to offer the coverage at affordable rates. But the legislation falls short in providing needed certainty about how the insurance program will work - if and when the country faces its next terrorist attack.
First enacted in 2002 in the wake of 9/11, the Terrorism Risk Insurance Act (TRIA) established a shared public-private mechanism to address the unlimited exposure arising from large impact terrorist events. It was intended to ensure the availability of insurance for these risks. Under TRIA, a federal backstop was created for property and casualty losses above a threshold dollar amount ($100 million under the original act, rising to $200 million under the new law). Once that threshold is reached federal funds are made available, relieving private insurers of continuing exposure. The program is widely considered to be a success and it has been extended twice before. When it expired on December 31, 2014 - due to Congressional inaction - the New York Times reported that 750,000 private insurance policies were cancelled due to the lapse of the federal backstop.
While the renewal of TRIA is a positive step, Congress failed to fix a significant glitch in the program that came to light after the 2013 Boston Marathon bombings, the first domestic terrorist event since 9/11. At that time, many policyholders faced legitimate questions about whether their insurance policies would cover Marathon bombing-related losses. While most persons (including President Obama) agreed that the event was an act of terrorism, it remained unclear whether the events of April 15, 2013 qualified as such under TRIA for purposes of insurance coverage. And it remains unclear to this day.
Under the original law, and its several extensions, the definition of an “act of terrorism” requires, in short, a certification from the Secretary of the Treasury (in consultation with other cabinet secretaries) that the event constitutes a violent act, dangerous to life or property, resulting in damage exceeding $5 million, and committed by a foreign person to “coerce the civilian population” or to “influence the policy… or conduct” of the U.S. government.
Nearly two years after the event, no official determination has been made whether the Boston Marathon bombings constituted an “act of terrorism” under TRIA. In September 2014, the Treasury Department caused confusion about this issue when a spokesperson issued a statement that the Secretary “ha[d] not determined” that the Marathon bombings constituted an “act of terrorism” under TRIA. This was not an official certification but rather an acknowledgment that the question still had not been decided.
In the new law, Congress has recognized the uncertainty caused by the lack of clarity and the lack of any timetable for deciding whether and when an event constitutes an "act of terrorism." Because almost all insurance policies incorporate TRIA’s legal definitions as the trigger for terrorism coverage, policyholders are also affected. Congress’ solution? Call for more study.
Under the 2015 Act, by September 2015, the Secretary of the Treasury is to complete a study of the certification process that will include setting a reasonable timeline for declaring whether an event constitutes an act of terrorism; the impact of that timeline on policyholders, consumers and the insurance industry; the factors to be evaluated in the certification process; and more generally, an assessment of the effectiveness of the certification process. Then, nine months later, by June 2016, the Treasury Secretary is required to issue final rules implementing the new, and hopefully improved, process.
Until then, policyholders will need to hedge their bets when it comes to terrorism insurance. This should include taking a hard look at their insurance policies and working with qualified professionals to ensure that they have a comprehensive insurance package in place.
If you have any questions or need additional information regarding this, please contact Jon C. Cowen.
This Alert is provided for information purposes only, and does not constitute legal advice. According to Mass. SJC Rule 3:07, this material may be considered advertising. ©2015 Posternak Blankstein & Lund LLP. All rights reserved.