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Terrorism Risk and Insurance

The recent attacks in Paris served as a dreadful reminder of the constant risk of terrorism. Sadly, they are far from the first incident of their kind — since 9/11, there have been major attacks motivated by Islamic extremism in Indonesia, Russia, Spain, Britain, India, and Belgium, as well as throughout Africa and the Middle East. This isn’t a new issue, though; terrorist attacks have been an ugly reality for decades. In addition, terrorism isn’t just restricted to Islamic extremism, as many attacks are motivated by separatist or political ideologies.

Cost is a major element in terrorist attacks. This can be very significant; in fact, the estimated cost to the World Trade Center site in Manhattan has been estimated at $60 billion. This estimate does not include General Liability and Workers’ Compensation costs, with the economic costs of injury and the loss of human life often greater than material concerns.

Before 9/11, in the United States, Terrorism coverage was implicit in standard commercial packages. However, the economic effect of those attacks, coupled with the realization of the potential damages and the lack of any model to effectively dictate premiums, led many insurers to cease offering insurance coverage in terrorism risk areas entirely. The United States government responded by passing the Terrorism Risk Insurance Act (TRIA), which required insurance companies to offer insurance while compensating them by providing them with support in the event that a terrorist attack overwhelmed their ability to pay. Since this time, the insurance industry has begun to develop newer models and instruments to bring terrorism coverage entirely back into private industry. As such, both stand-alone Terrorism policies and Terrorism endorsements to other policies are typically available.

What does commercial insurance cover, then, with respect to terrorism? Obviously, the simple answer is “terrorism”, but it’s a bit more complicated than that. How is terrorism defined? In the context of TRIA coverage being extended to insurance companies, it is up to the Secretary of the Treasury to determine on a case-by-case basis, given certain established guidelines. In addition, nuclear, biological, chemical, and radiological attacks are excluded. The situation is further complicated by the fact that the definition of terrorism in stand-alone policies usually differs from the TRIA definition.

Also note that these exclusions do not apply to Workers’ Compensation claims, given that policies covering these costs simply require that the insurer cover the insured with respect to its legal obligations. The most notable example of this is the Workers’ Compensation claim that Chubb paid Cantor Fitzgerald after the 9/11 attacks. Two-thirds of Cantor Fitzgerald’s workforce was killed in the attack. The beneficiaries of these workers were provided with Workers’ Compensation survivorship benefits, with total lifetime payouts estimated at about $400,000 each. More generally, Workers’ Compensation claims that arose from the 9/11 attacks totaled an estimated $1.8 billion. As a result of this, many insurance companies have begun to restrict coverage for clients with large, concentrated workforces in major cities.

An important strategic question is whether you should purchase terrorism insurance for your company, either through a TRIA endorsement or through a standalone policy. There is no obvious answer to this question. First, you should check whether any banks or financing agreements with which you are involved might require terrorism insurance. Otherwise, cost must always be balanced with risk, and there are several things to keep in mind when determining just how much risk your business faces. General concerns relating to location and exposure are important — getting caught in a large attack is, of course, much more likely if your office is located in Manhattan than in a rural area. However, keep in mind that terrorist attacks have occurred all over the country, and again, that a great deal of these incidents are motivated by politics that might be more common outside of the prime target areas for international terrorism. Consider, for example, the recent white supremacy attack at a church in Charleston, South Carolina, or the even more recent attack at a Planned Parenthood facility in Colorado Springs, Colorado.

You should also consider the risk within your industry. If you deal with national security or infrastructure, you are likely in a more exposed position. This is also the case if you work with chemicals or manage utilities. Alternatively, consider if any political stances (or perceived political stances, such as in donations made by your organization) could make you a target. For example, Starbucks’ recent statements on race and marriage equality could be seen as grounds for attack by certain right-wing organizations.

The 9/11 attacks had wide-reaching effects. The resulting changes in the insurance industry alone have made getting proper coverage more difficult, but that doesn’t mean that doing so is impossible. Every business is different. As with any other type of insurance coverage, be sure to thoroughly review your risks and needs and act accordingly.