What Is Terrorism Insurance and How Does It Work?

Terrorism insurance provides specialized protection against financial losses and damages from acts of terrorism. Traditional property and casualty policies often exclude such events, making this coverage important. It helps businesses mitigate the significant financial impact a terrorist event could inflict.

Understanding Terrorism Insurance

Terrorism insurance is a distinct type of property and casualty insurance covering losses and damages directly from certified acts of terrorism. Before the early 2000s, most standard commercial property policies included terrorism coverage without a separate charge. The September 11, 2001, terrorist attacks, which caused an estimated $59 billion in insured losses, fundamentally altered this approach. Insurers responded by largely withdrawing coverage or making it prohibitively expensive.

This market disruption prompted Congress to pass the Terrorism Risk Insurance Act (TRIA) in 2002. TRIA was enacted to stabilize the insurance market by creating a federal backstop for terrorism-related losses. Its purpose was to ensure businesses could access and afford terrorism insurance. This legislation established a public-private partnership to manage the risks associated with terrorism.

Scope of Coverage

Terrorism insurance generally covers direct physical loss or damage to property, including buildings, equipment, and inventory. Policies also provide coverage for business interruption losses, such as lost income and extra expenses from a covered event. Coverage may address liabilities from a terrorist incident, like third-party bodily injury or property damage claims.

These policies often contain specific exclusions. Acts of war are almost universally excluded from terrorism coverage. Nuclear, biological, chemical, and radiological (NBCR) attacks are frequently excluded unless explicitly included. Workers’ compensation policies are an exception, as they cannot exclude coverage for terrorist acts or acts of war in any state.

The Government Backstop Framework

The Terrorism Risk Insurance Act (TRIA) establishes a federal backstop, acting as a reinsurance program for private insurers. This framework requires insurers offering commercial property and casualty insurance to make terrorism coverage available. If an act of terrorism is certified, the federal government shares a portion of insured losses with the private sector.

A “certified act of terrorism” triggers the federal backstop. An event must be certified by the Secretary of the Treasury, in consultation with the Secretary of Homeland Security and the Attorney General. The act must be violent or dangerous to human life, property, or infrastructure, and result in damage within the United States or to U.S. interests abroad. It must also be committed by an individual or individuals to coerce the civilian population or influence U.S. government policy. The requirement that the act be committed on behalf of a foreign person or interest was removed in a 2015 reauthorization, encompassing domestic terrorism.

For an event to be certified, aggregate property and casualty insurance losses must exceed a program trigger, which is $200 million as of 2020. Once certified and the program trigger is met, a loss-sharing mechanism begins. Insurers are responsible for an individual deductible, 20% of their direct earned premiums for TRIA-eligible lines. After an insurer meets its deductible, the federal government reimburses 80% of covered losses above that threshold.

There is an overall program cap of $100 billion in aggregate insured losses for both insurers and the federal government in any calendar year. TRIA was initially temporary and has been reauthorized multiple times, with the current extension set to expire on December 31, 2027.

Acquiring Coverage

Under TRIA, insurers providing commercial property and casualty insurance must offer terrorism coverage to policyholders. This coverage is typically an endorsement or add-on to a standard commercial property policy, though standalone policies are available. Businesses receive a clear disclosure regarding its availability and cost. Policyholders can accept or reject this insurance, which entails an additional premium if accepted.

The decision to purchase terrorism coverage depends on a business’s specific risk profile, including its location, industry, and perceived exposure to threats. Businesses should consult an insurance broker or agent to assess their needs and determine the most appropriate coverage.