Terrorism Insurance Returns

With policy exclusions now voided by law, finance executives face decisions about buying coverage for terrorist acts.

The terms of terrorism insurance changed overnight on September 11, 2001, when carriers suddenly faced an estimated $40 billion to $50 billion in losses. Prior to that date, the risk of losses due to terrorism was so low for U.S. companies that it was automatically covered by most policies. After September 11, the vast majority of insurers immediately excluded coverage; a few offered limited stand-alone policies at exorbitant premiums.

"On September 11, we all had terrorism coverage, and on September 12, we didn't," recalls Scott R. Adams, director of corporate insurance and risk management litigation for Insignia/ESG Inc., a commercial real estate provider headquartered in New York City. "CFOs had to purchase stand-alone policies with premiums that jumped 100 to 300 percent."

But many exclusions for terrorism losses are void under the Terrorism Risk Insurance Act of 2002 (TRIA), signed into law on November 26, 2002. CFOs now face a new series of coverage decisions.

The TRIA requires that property and casualty insurers provide coverage for specified terrorism losses until the law expires at the end of 2004. Although the act is silent on the prices insurers may charge, it specifies that carriers must provide terrorism coverage on terms and rates that are not materially different from those applicable to other property and casualty lines.