With the recent uptick in terrorist activity omnipresent in the news, the need for financial protection against the effects of terrorism is plainly evident. Nevertheless, Congress has now adjourned for the year without making any provision for extending the Terrorism Risk Insurance Act (“TRIA”). Absent some sort of extension, TRIA expires December 31, 2014. Since 9/11, TRIA has provided a backstop to the private terrorism insurance market. Absent that safety net, the market could collapse with substantial financial implications. Without the availability of affordable terrorism insurance, policyholders, lenders, landlords, and others will need to act swiftly to assess and address the consequences of potential loss of this coverage.
TRIA provides insurers with a reinsurance facility for losses they suffer as a result of payouts to policyholders for the consequences of domestic terrorist acts once those payouts aggregate in excess of amounts specified in TRIA. TRIA was first enacted in response to the massive economic consequences of the September 11 terrorist attacks, which generated approximately $25 billion in losses. The duration of an extension of TRIA and the amount of the aggregate threshold triggering the government backstop have been the subject of wrangling between the U.S. House of Representatives and Senate for months. Both have advanced separate proposals, but no agreement was reached. Now, Congress has adjourned for the year without taking action, so TRIA is set to expire.
In addition to providing insurers with a backstop, TRIA mandated that insurers must offer terrorism insurance to policyholders. Once TRIA expires, insurers will not be required to offer this coverage. Further, because the backstop will not be available, even those insurers that do offer the coverage will undoubtedly reassess their risk and price the coverage at substantially increased premium rates.
The majority of policyholders reportedly opt for terrorism coverage. Many lenders require borrowers to have terrorism coverage in place as part of their loan policies. Real estate deals, equipment financing, and many other commercial transactions technically depend on the availability and procurement of terrorism coverage as part of the overall insurance requirements for the deal. Even sporting events, including the Super Bowl, may depend on the availability of terrorism insurance.
Many policyholders have January 1 policy renewal dates. Many policyholders thought they had their renewals in place and concluded in advance of the upcoming holidays. Congress has now thrown those carefully orchestrated renewals into potential disarray, since insurers will no longer be required to offer terrorism insurance and may well not offer it at rates anywhere near what would have been charged if TRIA had been extended.
Policyholders need to review the terms of their binders confirming renewals and assess whether they will or will not have terrorism coverage come January 1, 2015. Terms and conditions of financing documentation, leases, and other important transaction documents also need to be studied to confirm whether they require the purchase of terrorism coverage in order to be in compliance. Policyholders may need to make difficult choices or enter into difficult discussions with their insurers, lenders, or other business partners regarding continuation and cost of terrorism coverage for the coming year.