The Senate dashed out of town Tuesday night to get an early start on the holidays, but insurance policyholders were given a lump of coal instead of the extension of the Terrorism Risk Insurance Act (TRIA or the Act) that everyone – including Majority Leader Harry Reid – had promised would get done prior to their adjournment.  The recriminations are flying and the leading parlor discussion at deflated holiday receptions is – what exactly happened?  At the end of the day, only now former-Majority Leader Reid (who will become the minority leader when the next Congress convenes in January) knows for sure.  The rest of us, however, must live with the consequences, at least for now.

In terms of next steps, incoming Majority Leader Mitch McConnell and House Speaker John Boehner both have been promising quick action in January to extend the Act.  No one can or should rely on any such enactment, however, unless or until it actually comes to pass (pun intended).  A post-New Year’s extension also may raise questions regarding how self-effectuating exclusions many insurers put into place in case Congress did fail to extend the Act will operate if there is a TRIA coverage gap.  Those types of questions will be at the forefront in January.

The immediate impact is that the Act will expire on December 31st; insurers will no longer be required to offer or “make available” terrorism coverage to their commercial insureds and they will not be able to rely on the TRIA reinsurance backstop to help them satisfy any terrorism-related claims.  Insurers will still have terrorism risk exposure to the extent that they have in place:

  1. Workers compensation coverage (for which no state permits terrorism risk exclusions);
  2. “Fire-following” coverage in place in the 30 plus states that bar any exclusions from losses resulting from fires caused by another exposure; and/or
  3. Other general or terrorism-specific coverages from which losses caused by acts of terrorism were not excluded, either under the core terms of the policy or by a self-effectuating endorsement that dictates that the terrorism component of the coverage is conditioned upon the availability of the TRIA backstop.

AM Best – the lead property/casualty insurer rating agency – issued a press release stating that it does not expect the absence of the backstop to result in any insurer downgrades despite the expanded scope of insurers’ potential terrorism-related liability.

Policyholders will be impacted to the extent that they had terrorism-coverage in place that will effectively expire if that coverage is tied to one of the self-effectuating endorsements.  Policyholders that have contractual obligations to maintain terrorism coverage through, for example, a loan or lease covenant may want to ensure that they understand the impact of the expiration of the Act on their rights and obligations. 

The markets are still digesting the unexpected expiration of the Act but some already are making moves.  Berkshire, for example, is offering a new product to fill the TRIA coverage gap between now and whenever TRIA is re-enacted with an aggregate retention of $10 billion and up to $1 billion in coverage available per client.  The Berkshire product has a one-year term but can be canceled if/when TRIA is re-enacted.  We expect other insurers to make some terrorism capacity available as well.