Why standard terrorism risk insurance may not be enough

If you own or are considering buying an apartment building or multi-family structure of any size, chances are that you’ll need to buy terrorism risk insurance. Standard individual homeowners and auto insurance policies don’t contain terrorism exclusions, but commercial property insurance routinely does. These policies protect property developers and landlords against potential losses due to acts of terrorism—but only under certain limited circumstances. The reality is that for some property developers and management firms, a standard terrorism risk insurance policy may not be enough, and a more nuanced approach to risk management may be in order.

Terrorism Risk Insurance: The Backstory

Prior to the 9/11 attacks, standard commercial insurance policies usually included terrorism protection as part of the standard package. Terrorist attacks were just considered another possible hazard. However, the 9/11 attacks were a game-changer. Terrorists had suddenly demonstrated not just a desire, but also an ability to cause billions of dollars of damage and end thousands of lives in a single stroke. All told, estimated losses from the 9/11 attacks topped $31 billion in 2001 (more than $42.9 billion after adjusting for inflation), according to the Insurance Information Institute.

In the days following the September 11^th attacks, many insurance carriers abandoned the market. They stopped offering insurance policies covering terrorism. Lenders, in turn, began to refuse to finance properties since they wouldn’t be able to cover their losses in the event of a terrorist attack. Construction and development threatened to come to a grinding halt until Congress agreed to provide a backstop, limiting insurer’s losses with the Terrorism Risk Insurance Act of 2002. The intent was to have the law sunset in a few years—whenever the markets recovered and insurers didn’t need a government guarantee anymore.

15 years later, we’re still waiting. The series of post-9/11 terrorist attacks around the world, coupled with low interest rates (reducing carriers’ ability to earn income on their float between terrorist events), have combined to make insurers still reluctant to cover terrorism risk insurance. Meanwhile, the TRIA has been extended multiple times, most recently in 2015.

The Insurance Information Institute reports terrorism risk insurance costing between $19 and $49 per million of insured value per year—representing approximately 3 to 5 percent of most companies’ property insurance costs. Insurance markets tend to tighten as carriers adjust premiums to account for elevated risk; for example, as malls scrambled to find terrorism coverage following 2013’s Westgate Shopping Mall attack, premiums in Kenya jumped by up to 20% in just 5 months.

Terrorism Risk Insurance: Exclusions

Generally, terrorism insurance policies only provide coverage if the U.S. Department of the Treasury certifies the event as an act of terrorism. In order to qualify for certification, the terrorist attack must be violent; driven by the desire of an individual or group to coerce U.S. civilians or government; and result in at least $5 million in property and casualty damages.

The terror strike can be caused by either a foreign or domestic terror group—but if the Department of the Treasury doesn’t certify it, or the attack fails to do at least $5 million in property damage, you’re most likely out of luck. The terrorism insurance policy won’t pay the claim even though it could be excluded by your other commercial insurance policies.

Furthermore, at this point, nuclear, biological, and chemical attacks are still excluded from most terrorism risk insurance policies, as are attacks that occur in the course of a congressionally-declared war.

Those located in close proximity to properties considered prime targets for terrorist attacks should definitely consider coverage—especially policies that cover business interruption/disruption of rental activities. When you buy this coverage, you’ll have an exclusion period, or waiting period, of a number of days. You pick up the risk for a few days; the longer the waiting period, the lower the premium, all other things being equal. You will also select a length of benefits, which can be anywhere from a week or two to several months in duration.

Such coverage normally applies only to direct costs of area closure. You would likely not be able to purchase coverage against the possibility that interest in living in your neighborhood or property will decline—at least, not through normal terror risk insurance policies.

Workers’ compensation generally covers any worker who is injured or killed on the job, whatever the cause. You don’t need separate terrorism risk coverage to cover your employees—just your property, your residents, and your income/cash flow.

Coverage Options Outside of Terrorism Risk Insurance

As you can see, formal terrorism risk insurance policies are designed to pay out only in a rather narrow set of circumstances. A number of horrific attacks have resulted in tremendous costs but failed to meet the triggers established in TRIA, and in the individual policies in question.

For this reason, a number of private carriers have rolled out several products that help to plug the gap and provide broader coverage, more likely to actually pay a claim. Examples include:

• Malicious acts insurance (MAI)
• Property terrorism & sabotage insurance
• Vandalism & malicious mischief (VMM) insurance
• Riot, terrorism & civil disorder insurance
• Nuclear, biological, chemical, and radiological (NBCR) coverage
• Threat-induced business interruption insurance, with waiting periods as short as 2 hours
• Denial of access business interruption insurance, possibly based on distance to terrorist attack sites, without a dollar amount trigger
• Loss of attraction insurance—for example, if your property relies on a nearby attraction that is destroyed by a terrorist attack
• Cyberterrorism coverage not covered under TRIA or standard terrorism risk policies

If your broker has only mentioned TRIA-style terrorism-risk insurance policies, dig a little deeper. You may find more appropriate, flexible and customizable coverage is available for those who know where to look. For example, you may consider violent malicious acts coverage, which will pay out even if damages are less than $5 million and there is no direct damage to the property. This coverage, available from Arthur J. Gallagher & Co. and underwritten by Lloyds of London, may be appropriate for many properties. Aon also offers some custom terror and violence risk policies as well—and has a deep bench of underwriting expertise, as well as ample liquidity to pay benefits.

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