TERRORISM

Terrorism Coverage – An Insurance-based Response to Terrorist Acts

In plain language: Terrorism coverage refers to an insurance policy component that covers losses incurred due to acts by terrorists. This is not standard in many policies, but can be added onto a policy for an extra cost.

Technical definition: Terrorism coverage provides financial protection against losses directly resulting from acts of terrorism. It’s typically excluded in standard commercial insurance policies but can be restored through specific exclusions endorsements. This coverage is associated with the Terrorism Risk Insurance Act (TRIA) — a U.S. Federal program that offers a backstop for insurance companies for defined acts of terrorism.

Terrorism coverage safeguards your business against the devastating material and human losses which can ensue in the unfortunate event of terrorist acts. While often overlooked, the reality of global terrorism means that more businesses should consider this valuable shield.

TL;DR

Terrorism coverage protects businesses against terrorist attacks

It plays a pivotal role in enterprise risk management

The common pitfall is believing it's unnecessary based on geographical location or business size

The best practice suggests adding this coverage to your business insurance package

What Is Terrorism Coverage in Insurance?

Terrorism coverage is unique in the insurance field. It aims to cover potential losses and liabilities that might arise from acts of terrorism. It is linked to unique governmental intervention, in the form of the Terrorism Risk Insurance Act, representing a partnership between the U.S. federal government and the insurance industry.

Within a policy, terrorism coverage endorsements reinstate the terrorism exclusion generally found in commercial policies. The underwriting of such policies hinges upon the definition and certification of acts of terrorism, as determined by the U.S. Secretary of the Treasury in consultation with the Secretary of Homeland Security, and the Attorney General.

This coverage extends beyond traditional property damage and business interruption insurance. For instance, it can cover losses from business interruption when the threat of a terrorist attack disrupts operations, even if no physical damage has resulted. The gravity of domestic terrorism and international terrorism means agencies must provide coverage that works for their clients while managing the significant risks and uncertainties inherent in such coverage.

Key Related Terms to Know

Terrorism Risk Insurance Act (TRIA) – a U.S. Federal program that provides insurance companies with a backstop for defined acts of terrorism.

Stand Alone Terrorism Policy – A separate policy, outside of the standard commercial package, that provides coverage for terrorist acts.

Underwriter – The person or entity that evaluates the risks involved in insuring someone or something and establishes the pricing.

Endorsement – A written statement attached to a policy that changes or updates the terms of the insurance contract.

Certified Act of Terrorism – A term from the Terrorism Risk Insurance Act referring to an act that is certified by the Secretary of the Treasury, in concurrence with the Secretary of State, and the Attorney General of the United States.

Common Questions About Terrorism Coverage

How is a “certified act of terrorism” defined?

A certified act of terrorism is a violent act committed by terrorists that is certified by the Secretary of the Treasury in agreement with the Secretary of Homeland Security, and the Attorney General. It needs to have caused damage within the United States, or to an American mission or air carrier outside the country.

How does Terrorism coverage apply to business interruption?

Terrorism coverage responds to business interruption losses arising from terrorist attacks by covering the income a business would have earned had the incident not occurred.

Does Terrorism Coverage apply to all kinds of terrorist acts?

Typically, most acts of political violence like insurrection, rebellion, revolutions, and coup d'etat are not covered. Coverage for such acts can be purchased separately.

What's the connection between Terrorism Coverage and The Terrorism Risk Insurance Act (TRIA)?

TRIA is a U.S. Federal program set up after 9/11 to provide a backstop for insurance claims related to terrorist acts. Terrorism coverage per se is offered by insurers based on definitions and provisions set out in TRIA.

Terrorism Coverage vs. Political Violence Coverage

The conceptual difference lies primarily in the nature of the peril each covers.

Comparison Area	Terrorism Coverage	Political Violence Coverage
Primary use case	Provides coverage from financial losses directly resulting from acts of terrorism.	Provides coverage from losses caused by political violence such as riots, strikes, civil wars, or revolutions.
Coverage / concept type	Usually an optional stand-alone coverage or an endorsement to a broader policy	Typically an endorsement to a broader policy, or as part of a stand-alone political risk policy
Typical exclusions	Limited to specific acts of terrorism, as characterized by the federal government	Wider range, including war, insurrection, revolution, military coup
Who is most affected by errors	Businesses without clear understanding of coverage limitations and conditions	Business owners with global operations, or those located in volatile regions
Common mistakes	Believing location or business size negates the need for such coverage	Failure to understand what perils are actually covered, especially internationally

Real Claim Examples Involving Terrorism Coverage

Scenario 1: A restaurant close to a site of a terrorist attack had to shut down due to forced evacuation and safety measures by law enforcement, resulting in significant business income losses. As the business had terrorism coverage, it was able to recover lost income during the shutdown.

Scenario 2: A manufacturing unit suffered property damages due to a terrorist attack on a neighboring business. Their property insurance carrier initially denied the claim based on a terrorism exclusion. However, the business had procured a separate terrorism coverage, which responded appropriately to cover the losses.

Scenario 3: During times of political unrest, a business had its storefront damaged due to a riot. Under the assumption that their terrorism coverage would handle the claim, they filed for coverage. Unfortunately, their claim was rejected, as the event was considered a civil disturbance rather than terrorist act. This illustrated the importance of understanding the scope and limit of terrorism coverage, and the potential need for additional coverages like political violence coverage.

Limitations and Common Mistakes

Terrorism coverage does not apply to all acts of political violence, like insurrections, civil war, and coups

A common misunderstanding is that Terrorism coverage is unnecessary, based on location or business size. Any business could potentially be affected by a terrorist attack.

Failing to clarify the terms, conditions and exclusions of terrorism coverage can lead to significant E&O exposure for agencies.

How to Explain Terrorism Coverage to Clients

To a Small Business owner "Think of Terrorism coverage as financial protection for your business against the unthinkable. It's like an umbrella on a rainy day. Even if you feel your business is small or not a likely target, terrorist acts can occur anywhere and cause property or income losses you didn’t anticipate"

To a CFO or Risk Manager "Terrorism coverage provides the robust financial safety net your company needs against the repercussions of acts of terrorism, including property damage and business interruption. This risk transfer approach ensures balance sheet protection and business continuity, even in today’s uncertain world."