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By Christopher B. Barker, P.C. and Truday A. Ernst. Debbie Fruci contributed to the preparation of this article.
Introduction
Before September 11, 2001, terrorism coverage was routinely included in commercial insurance policies. Insurance claims from the September 11th attacks were estimated at $40 billion to $50 billion with property insurers covering most of the losses. As a result, primary insurers drastically raised their premiums or eliminated terrorism coverage entirely, often both in pre-existing and new policies, and reinsurance companies stopped providing terrorism insurance to primary insurers. More than $15 billion in real estate transactions were put on hold or canceled because owners and investors could not obtain terrorism insurance protection.
In response to this state of affairs, Congress passed the Terrorism Risk Insurance Act of 2002, effective November 26, 2002. The Act establishes a temporary federal program through which the federal government shares with the insurance industry losses resulting from acts of terrorism. The Act effectively ensures that at least during the next two years terrorism insurance will be available, permitting construction projects, property acquisitions, and other real estate transactions to move forward.
Important!: If you have a policy of commercial property or casualty insurance that was in effect on November 26, 2002, you need to review carefully any communication you have received regarding the insurance since that date. You may lose terrorism insurance coverage reinstated under the Act if you do not pay the additionalpremium for the reinstated coverage in a timely manner. Insurers were required to notify holders of policies in effect on November 26, 2002 of the additional premium that was required on or before February 24, 2003.
Important Provisions of the Act
The Act establishes a program that will expire on December 31, 2005. In essence, the program compels insurers to offer terrorism coverage and, in the event of a terrorist attack, will provide federal funds to assist insurers in paying claims.
Insurers covered by the Act include all licensed primary or excess insurers, surplus line carriers, state workers’ compensation funds, and state residual market insurance entities. The program does not apply to federal or privately issued crop insurance, private mortgage insurance or title insurance, monoline financial guaranty insurance, medical malpractice, health or life insurance, the national flood insurance program, or reinsurance or retrocessional insurance.
The current program requirements apply to commercial property and casualty insurance. Program coverage is to be extended to workers’ compensation insurance and state residual market insurance entities and may be extended to self-insurers and group life insurers by regulation.
During calendar 2003 and 2004, insurers are required to make terrorism insurance coverage available as part of all commercial property and casualty insurance policies that were in force on November 26, 2002 and all subsequently issued commercial property and casualty insurance policies. This mandatory availability requirement may or may not be extended through calendar 2005 by the Secretary of the Treasury.
Terrorism coverage terms may not differ materially from the coverage terms applicable to other insured risks. Thus, if an insurer does not cover a particular type of loss (because of state regulation or otherwise), that type of loss arising from an act of terrorism need not be covered. For example, if a policy excludes losses from non-terrorist nuclear events, the insurer would not be required to provide coverage for an act of nuclear terrorism.
Under the Act, the U.S. Treasury Department must monitor the price and availability of terrorism risk insurance. The program does not limit the premium an insurer may charge for terrorism insurance, but does require clear disclosure of the premium.
Program coverage is limited to acts of foreign terrorism that result in more than $5 million of property and casualty insurance losses. Acts of domestic terrorism and acts of war, after war has been declared, are not part of the program (but the program will still apply to workers compensation losses due to acts of war). Before any federal funds are made available, the Secretary of the Treasury must certify that an "act of terrorism" has occurred, and the Secretary of State and the Attorney General must concur. The Secretary of the Treasury’s determination is not subject to judicial review. Only losses to property within the United States are covered by the program, except for losses outside the United States involving certain aircraft and ships and U.S. embassy property.
The Act voids any terrorism exclusion in a commercial property and casualty insurance policy as well as any state approval of terrorism coverage exclusion in force on November 26, 2002. A terrorism exclusion provision may be reinstated, however, if the insured authorizes it or if after 30 days notice the insured fails or refuses to pay an increased premium for terrorism coverage. Insureds, lenders and investors should be alert to the risk of inadvertent reinstatement of a terrorism insurance exclusion. Loan documents, operating agreements and partnership agreements may need to be revised in order to protect lenders and investors.
In the event of an act of terrorism, the federal government, insurers and policyholders share the risk of loss. The federal government is responsible for paying 90% of each insurer’s primary property and casualty losses after an insurer’s exposure exceeds 7% of its commercial premiums in 2003, 10% of its commercial premiums in 2004, or 15% of its commercial premiums in 2005. Federal funds paid out under the program are capped at $100 billion for each program year. If total industry terrorism claims exceed thresholds of $10 billion in 2003, $12.5 billion in 2004, or $15 billion in 2005, the federal government bears all losses up to the program cap of $100 billion. Insurers are not liable for losses in excess of the program cap. In some cases, the federal government may be reimbursed for its share of losses from policyholders through surcharges imposed on property and casualty policies not to exceed 3% of the policy’s annual premium.
The Act also allows injured parties to sue for property damage, personal injury or death resulting from a certified act of terrorism. The lawsuits arising from the act of terrorism would all be consolidated into the federal district court where the act of terrorism occurred. Lawsuits in state courts or other federal courts are not permitted. None of these limitations, however serve to limit the liability of perpetrators of an act of terrorism.
Effect on State Law
States may still require an insurance policy form to meet the state legal requirements. Commencing January 1, 2004, states may still invalidate a terrorism insurance rate as excessive, inadequate or unfairly discriminatory.
Responses to the Act
Critics fear that the Act may leave taxpayers exposed to billions of dollars in claims and removes incentives for insurers to require their insureds to take preventive measures against future attacks. Supporters of the Act, such as the National Association of Real Estate Investment Trusts ("NAREIT"), believe that the Act creates a necessary temporary federal insurance backstop that will once again make affordable and comprehensive terrorism coverage available to real estate companies and other businesses. In any event, the Act offers only a temporary solution to the problem of terrorism insurance in our post-September 11, 2001 world.
This publication, which may be considered advertising under the ethical rules of certain jurisdictions, is provided with the understanding that it does not constitute the rendering of legal advice or other professional advice by Goodwin Procter LLP or its attorneys. © 2003 Goodwin Procter LLP. All rights reserved.