Born out of the September 11, 2001 terrorist attacks, on November 26, 2002, President George W. Bush signed into law the Terrorism Risk Insurance Act (“TRIA”). Originally set to expire on December 31, 2005, Congress twice previously extended TRIA, first in December 2005 and again in December 2007. Despite passage of bipartisan bills in both the House of Representatives and the Senate to reauthorize the program on a long-term basis, last year Congress failed to agree on a process by which to send a single version of the bill to President Obama, resulting in expiration of the program on December 31, 2014.
Failure to extend TRIA could have had very significant consequences to companies in virtually every sector of the American economy. TRIA created a federal backstop for insurance claims arising out of acts of terrorism. TRIA was necessary to fill a void left by private reinsurance companies that withdrew from the market for terrorism coverage after the September 11 attacks, resulting in the exclusion of such coverage by primary insurers.
Under the federal terrorism risk insurance program, private insurance companies make terrorism coverage available in exchange for the government stepping in to absorb losses when those losses exceeded a pre-determined threshold. Insurance companies contend that such government backstop is necessary because private insurance company balance sheets are unable to cover catastrophic terrorism risks.
TRIA’s success is evident. For example, Marsh’s 2014 Terrorism Risk Insurance Report indicates that, in 2003, the first full year TRIA was in effect, the take-up rate for property terrorism insurance (the percentage of companies buying property terrorism insurance) was 27%. That rate has since increased and has remained steady, near 63%, over the past three years. The take-up rate demonstrates that there remains strong demand for property terrorism coverage. Take-up rates in 2013 were highest among educational organizations, health care organizations, financial institutions, and media companies. Additionally, a higher percentage of companies in the Northeast purchased such coverage compared to other regions of the country.
Experts predicted that expiration of the federal terrorism risk insurance program would result in significantly increased pricing and limited capacity for terrorism insurance. This would have been especially true for risks located in business districts of major metropolitan markets. Furthermore, politicians recognized that TRIA’s expiration already caused some businesses to lose terrorism coverage because many policies are conditioned on the existence of the federal terrorism risk insurance program.
As evidenced by this past week’s horrific attacks in downtown Paris, terrorism remains a significant risk to our society. Because of this continuing threat and the economic necessity of the federal terrorism risk insurance program, Congress worked to reauthorize the federal backstop. This past Wednesday, the House of Representatives passed legislation, by a vote of 416-5, to reauthorize the federal terrorism risk insurance program for six years. On Thursday, the Senate passed the bill, by a vote of 93-4. Yesterday President Obama signed the bill.
As a result of the temporary expiration of TRIA, though somewhat limited, there are steps that organizations should take to put themselves in the best position possible to guard against terrorism risks. First, organizations should collect and review current coverages to determine the immediate impact of TRIA’s temporary expiration on their policies. Second, organizations should consider having an insurance professional audit the insurance portfolio to confirm that the entity has appropriate and cost-effective coverage. Third, individuals within the organization, potentially with the assistance of outside experts, should monitor the developments associated with the federal terrorism risk insurance program and the contents of the new legislation.