What Is Terrorism Insurance Coverage?

Terrorism insurance protects against financial losses from acts of terrorism. Before September 11, 2001, standard property insurance policies typically included terrorism coverage without additional charge. However, the immense financial impact of those attacks, estimated at $59 billion for the insurance industry, led insurers to reassess this risk. Following these unprecedented losses, many insurers began to exclude terrorism coverage from their commercial policies, creating a significant gap in protection for businesses. Consequently, terrorism insurance emerged as a distinct product, often offered separately, to address the catastrophic nature of these events.

Understanding Terrorism Insurance Coverage

An “act of terrorism” is specifically defined for insurance purposes, linked to a federal framework. An event must be certified by the Secretary of the Treasury, in concurrence with the Secretary of Homeland Security and the Attorney General, to qualify as a certified act of terrorism. This certification requires the act to be violent or dangerous to human life, property, or infrastructure, and to have resulted in damage within the United States, or abroad. Furthermore, the act must be committed as part of an effort to coerce the U.S. civilian population or to influence U.S. Government policy or conduct.

The Terrorism Risk Insurance Act (TRIA), enacted in 2002, plays a key role in the availability of terrorism insurance. TRIA created a federal backstop program, sharing the financial burden of large-scale certified terrorism losses between the federal government and private insurers. This mechanism helps ensure terrorism coverage remains available and affordable in the commercial property and casualty market.

TRIA initially served as a temporary measure, reauthorized multiple times, with the current extension set to expire on December 31, 2027. Under TRIA, insurers are required to offer terrorism coverage to commercial policyholders, though policyholders are not obligated to purchase it. Terrorism insurance is typically offered either as an add-on endorsement to an existing property and casualty policy or as a standalone policy.

Terrorism insurance covers losses such as physical damage to property, including buildings, equipment, and inventory. It also extends to business interruption losses, which compensate for lost income and extra expenses incurred when operations are suspended due to a covered terrorist act. The federal government’s involvement through TRIA helps stabilize the market by providing a safety net for insurers against significant costs associated with major terrorist events.

Key Policy Provisions

Terrorism insurance policies cover several types of losses. Property damage coverage protects physical assets like buildings, equipment, and inventory from damage caused by a terrorist act. This provision helps businesses and property owners fund repairs or replacement after an incident.

Business interruption coverage is another key component, compensating for lost income and ongoing expenses when operations are halted due to direct physical damage from a certified act of terrorism. This can include lost profits, rent, and employee salaries during the recovery period. Some policies may also extend to losses from civil authority orders that prevent access to premises, even if the property itself is not directly damaged.

Workers’ compensation insurance covers employees injured or killed on the job, including those affected by terrorist acts, and it cannot exclude coverage for such events in any state. It is also the only line of insurance that typically covers injuries or deaths from acts of war. Additionally, terrorism policies may include liability coverage, protecting businesses from third-party claims arising from a covered terrorist incident.

Despite these coverages, terrorism insurance policies also contain common exclusions. Nuclear, biological, chemical, and radiological (NBCR) attacks are frequently excluded, as these events are often deemed uninsurable due to their potential for widespread damage. Acts of war or warlike actions are generally excluded from terrorism insurance policies, as such conflicts are beyond traditional insurance scope.

Deductibles and policy limits apply to terrorism insurance claims, often differing from those in standard property policies. Under the TRIA framework, an insurer’s deductible for a certified act of terrorism is calculated as a percentage of its direct earned premium for TRIA-eligible lines of business. The federal government then reimburses a significant portion (currently 80%) of insured losses that exceed this deductible. There is also an industry-wide program trigger, meaning federal involvement in a certified act of terrorism is activated when aggregate industry-wide insured losses from the event exceed a specific threshold (currently $200 million). Furthermore, the TRIA program includes an aggregate cap of $100 billion on annual insured losses for all insurers, which limits total federal reimbursement and insurer liability in the event of exceptionally large-scale events.

Availability and Considerations for Policyholders

Terrorism insurance is offered in the market in two ways: as an endorsement, or add-on, to an existing property and casualty policy, or as a standalone policy. A majority of insurers (80-85%) provide terrorism coverage as an endorsement, integrating it with a business’s current insurance program. The remaining insurers may offer it as a separate policy. When offered as an endorsement, about 70% of insurers charge an additional premium for this specialized coverage.

This coverage is relevant for certain types of entities and properties. Commercial property owners, especially those with high-value assets or located in densely populated urban centers, often purchase terrorism insurance. Businesses with public-facing exposure, such as large retail establishments, entertainment venues, or those near potential target locations like government buildings or major landmarks, also purchase this protection. While TRIA requires insurers to offer the coverage to commercial policyholders, acceptance rates vary by industry and region, with an overall take-up rate of around 75% across all insurer categories in 2021.

Several factors influence the cost of terrorism insurance premiums. Location plays a key role, with properties situated in major metropolitan areas or near high-profile targets facing higher premiums due to increased perceived risk. The value of the property being insured is another key factor, as higher-valued assets carry greater potential losses.

Insurers also conduct a risk assessment for each policyholder, considering factors such as existing security measures, the type of industry, and the overall terrorism threat level in the area. Businesses in certain sectors, such as energy or critical infrastructure, may face higher premiums due to their elevated risk profile. Generally, terrorism insurance premiums represent a small percentage of a company’s overall property insurance costs, often ranging from 3% to 5% of the total premium, or approximately $19 to $49 per million of insured value.