The nature of terrorism, and insurers’ actions, mean you need to be aware
Following September 11, the federal government created the Terrorism Risk Insurance Act (TRIA) and defined a “certified act of terrorism.” This worked well for the buyers of insurance initially. However, the terrorism insurance scheme has become outdated and the insurance industry has also perverted the process. With awareness, you can protect yourself as a business owner.
There are two issues:
First, the insurance industry has gone to the point of excluding more than “certified” acts of terrorism, so that the buyback of terrorism coverage (opting to “accept” the offer of terrorism insurance) will or can still leave a gap in the coverage with respect to non-certified events. Thus you would be exposed without coverage to events like the Boston Marathon Bombing (never certified), or the recent events in San Bernadino (probably will not be certified). We wrote extensively on this particular part of the problem and you can read that analysis here: http://licatarisk.com/cms/the-precarious-state-of-terrorism-risk-and-insurance/ (Not all insurers have taken this approach of excluding non-certified even if you purchase certified; this is more prevalent in the “surplus lines market” with insurers such as Lloyd’s of London).
The second issue concerns the purchase of the terrorism extension on liability policies.
There are two separate decisions to be made:
If we own and insure property, do we want terrorism coverage in the event of terrorism-caused damage to the property itself?
- Do we want the terrorism extension on our liability policy in the event we are alleged to be legally liable to others for bodily injury or property damage from a terrorist event?
Here’s how the changing nature of terrorism impacts that decision:
Until recently, we’ve thought of the following as being the major targets of terrorism:
- government centers
- high profile properties
- high rise buildings
- large malls
- huge sporting venues
The concept was that the terrorists would go for the greatest carnage possible, generating the largest worldwide headlines. Under this model, owners of the target properties and their security firms have had a clear liability exposure. Other property owners were not likely to be targeted and would not reasonably be held liable if the unexpected were to happen.
Now, under conditions of smaller, more frequent attacks, the liability equation might be altered. Experts in terrorism now point to a different model involving:
- lone wolves
- home grown terrorists
- sleeper cells already in the country
- smaller, more frequent events
- a general randomness of the targets and a sense that it can happen anywhere
The news is full of talk of “the new normal,” and speculation we will become an Israeli-like permanent security state.
If terrorism attacks become more diverse, more frequent and more target- neutral, terrorism becomes like any event that causes injury and leads to lawsuits. We have liability insurance for this in general, but now it may be excluded by a terrorism exclusion (excluding either certified or non-certified, or both) if it happens to be terrorism-related. So it has come full circle. Terrorism was once thought of as having so massive a loss potential that the insurance industry could not handle it and they would need the backing of the gargantuan federal government in order to pay the claims. Now, though, if the exposure becomes more like the multitude of other loss-causing perils, but the exclusions remain, it will be the unsuspecting little guy who pays the bill, not his or her insurer, a truly unique (and unfortunate) situation.
Plaintiff attorneys are likely right now crafting their theories of liability related to San Bernadino. Whether this has any ethical validity or not, business owners and property owners who are victims of these terrorist attacks will experience follow-on attacks by the plaintiffs and their lawyers.
Our recommendations to clients are now evolving. In the past we purchased terrorism on property policies in the vast majority of cases, but on liability to a much lesser degree. We now see the liability exposure increasing, and will recommend terrorism coverage in many more cases. Again, for a primer on this difference between certified and non-certified, and how you can protect yourself walking through that minefield, please read here: http://licatarisk.com/cms/the-precarious-state-of-terrorism-risk-and-insurance/ .
© Licata Risk & Insurance Advisors, Inc., 2015