Terrorism Risk Insurance Act (TRIA): Popular myths debunked

The fact so many businesses buy cover through the TRIA program suggests they believe it meets their needs, but this may not be true in practice.

In our experience, the most common cause of loss in this market is non-damage business interruption, which arises from incidents near to the insured’s premises, a supplier’s property, or at site operated by their utility provider.

The problem here is that TRIA cover attaches to, and mirrors underlying property or commercial combined policies. These policies may not cover the impact of a terrorist attack on the insured’s revenues if that attack does not take place at their premises.

Clients need to ask some important questions to ensure they can rely on their cover when needed. For example, does terrorism insurance bought through the TRIA program cover denial of access to their premises? What about contingent business interruption? Loss of attraction? Threat?

These can all have a material impact on a client’s business, but may involve no physical damage to their premises.

What about post-loss exposures such as looting or future brand rehabilitation costs?

All these risks are covered as standard by a CFC standalone terrorism policy.

The TRIA program was developed and launched as a direct result of the 9/11 attacks.  However, over the past 20 years the nature of terrorist attacks has changed.

So-called lone wolf attacks using low grade weapons have become more common.  Terrorism events overall have become more frequent, but less damaging in terms of scale and level of destruction. The problem is, such attacks may not trigger cover as defined by the TRIA. The program has a deductible ceiling of USD5m of aggregate insured losses before the US government declares an incident as terrorism, which can leave policyholders uninsured.

It’s also important to point out that no attack has ever triggered the TRIA definition during the lifetime of the program, not the Boston Marathon bombing (2013), the New York City truck attack (2017), or the Orlando nightclub shooting (2016), which killed 49 people.

A standalone terrorism and sabotage policy, as offered by CFC, will respond to any incident considered political, ideological or religious in its motivation with nil deductibles. It is also worth noting these standalone policies have been tested by claims and have paid out appropriately to insureds.

In the aftermath of a terrorism loss, it is important to establish its quantum and get certainty around settlement. However, this may be difficult under a TRIA policy, because there is no timeframe set for when the government must declare an attack as terrorism.

This generates uncertainty, and may create significant cash-flow problems for businesses. SMEs in particular, often work on very tight margins and any delay in settling a business interruption claim could be the difference between survival and failure.

In contrast, private insurers work to prompt and clearly stated claims processes, and have experience in actually paying for terrorism losses.

The TRIA does not mandate how much insurers should charge for their terrorism cover. The cost of cover is often charged as a fixed percentage of the underlying policies to which it attaches.

In practice, this offers a relatively simple mechanism for pricing, but is not without issue. For example, when property premiums rise, due to market ‘hardening’ or claims experience on specific accounts, the cost of TRIA cover will also often increase. This means the amount the policyholder pays for their terrorism cover is not directly related to the risk they present.

In contrast, the pricing of standalone terrorism policies is not influenced by property or casualty market conditions or claims history. This ensures clients pay a premium commensurate with their specific exposure, whilst also being protected from unexpected volatility in the rates applied.