This subject was addressed at the LicataRisk “Risk Advisory Breakfast” in Boston on September 24, 2015. The event featured presentations by:
- Daniel F. Conley, Suffolk County (MA), District Attorney ;
- David Holley, Berkeley Research Group Managing Director ;
- Frank Licata, Licata Risk Advisors President .
One of the key topics was:
Terrorism Risk is Evolving – Is Your Insurance Coverage Keeping Up?
(As always with the insurance industry, the devil is in the details and the details are in the fine print).
A summary of that discussion is here:
Terrorism risk is evolving with the advent of the “lone wolf” phenomenon, causing the exposure to be more dispersed and localized. So, business owners are taking second and third looks at risk and insurance.
Your broker gives you an offer of terrorism coverage and quotes a price. It should be as simple as checking “accept” or “reject.” It is not that simple, unfortunately.
The insurance industry has concocted a confusing mix of different terrorism exclusions, some of which can remain on the policy even after your pay your premium to purchase “terrorism coverage!”
First, a minute of background:
Prior to 9-11 there was no discussion of terrorism insurance. Terrorism was just one of many things that could happen, and there was no such thing as a terrorism exclusion. Therefore, it was covered.
Post 9-11 the insurance industry rushed to produce terrorism exclusions just as fast as their computers could spit them out. They applied them to property policies and to liability policies. A coverage that was immune, though, was workers compensation, and that holds true today: no terrorism exclusions apply to that line of coverage. But for the insurance market in general, there was now a huge, gaping hole. The federal government jumped into that breach with the Terrorism Risk & Insurance Act (TRIA) which mandated that insurers offer terrorism coverage to its insureds. (TRIA also provided a financial backstop to the insurance industry to fund the largest claims).
The insurers then began to propose offers of terrorism coverage and produced sign-up forms that asked the insured to check a box – either “accept” or “reject”– and to sign the form. It seemed at first like a clean solution. We in risk management know it is never exactly what it seems in dealing with the insurance industry, so we watched and acted cautiously. The insured community in general, though, was feeling comfortable that either they were going to knowingly assume the risk, or if they did not want to assume the risk that they would be “protected” from terrorism loss if they only paid the premium being asked by the insurer.
Broker promises and insurer advertisements are nice, but are little more than distractions, as the only thing that really controls is policy language. Any proposal we receive at this firm must have the full and complete policy language attached, and terms and conditions are reviewed and negotiated prior to binding. At first, in the market things went fine: the proposals contained a terrorism exclusion, but that exclusion was removed upon payment of the specific terrorism premium.
Over time, though, the situation went sour.
Another minute of background is necessary here. The TRIA law defined terrorism and stated that the federal government would be the ones to certify whether an event is terrorism under their definition, and thus was born the concept of a “certified” terrorism event. To be certified, an event had to meet certain guidelines such as a minimum of $5 million in losses, certain characteristics involving the intent of the terrorists, and most importantly the actual declaration by the Secretary of the Treasury.
As time went by after the advent of TRIA we began to notice a disconnect between payment of the premium under the insurers’ terrorism insurance offer, and the resultant coverage. We were paying the special premium and the result was not the expected full coverage of terrorism. What the insurers started doing was making a distinction between terrorism in general and “certified” terrorism. Some, but not all, of the insurers were excluding terrorism as very broadly defined, and then in return for payment of terrorism premium giving back only a small portion of the exclusion: only the certified events. Without announcement of any sort, the fine print of the policy was reneging on what everyone thought was the deal. To be fair to the industry, at every turn they warn “read your policy.” One flaw in that caveat though is that, absent LicataRisk or others on your side, are they even providing the policy language with the proposal (or do you only get it three months later when the policy shows up)?! But we digress.
The breadth of the exclusions is illustrated in the following example proposed to one of our large real estate clients:
Terrorism (an excluded event) is defined as (emphasis added):
“an act…committed for political, religious, ideological or similar purposes including the intention to influence any government and/or to put the public, or any section of the public, in fear…”. If the underwriters allege the exclusion is applicable, “the burden of proving the contrary shall be on the insured.”
Then in the proposal, in return for payment of the terrorism premium the insured got coverage for the certified event — ONLY. As an example of how limited the scope of certified terrorism can be, note the Boston Marathon bombing was never certified. So the form of “terrorism insurance” described above would be of little consolation to the businesses along Boylston Street in Boston after that fateful day.
Our position on behalf of our clients is: in return for payment of the terrorism premium we demand and expect removal of ALL terrorism exclusions so that the result is terrorism under anyone’s definition will be covered in full.
© Licata Risk & Insurance Advisors, Inc., 2015