Friday, December 19, 2014

With insured losses reaching a record $23 billion as a result of the 9/11 attacks, businesses were unable to purchase insurance protection against future terrorist events. This left significant sectors of the economy vulnerable, including the real estate, transportation, construction, energy and utility industries. As a result, in 2002, Congress enacted the Terrorism Risk Insurance Act (“TRIA”) as government-backed reinsurance to insurance companies following a declared terrorism event. TRIA provides terrorism insurance accessibility to businesses by requiring business insurers to offer terrorism coverage for the types of claims experienced in the 9/11 attacks.

TRIA is overwhelmingly supported by both the private and public sectors because it provides a certain level of protection to the U.S. economy in the event of a major terrorist attack, with little cost to U.S. taxpayers. Originally set to expire in December 2005, TRIA has been extended multiple times. Now, the Act is slated to expire December 31, 2014. TRIA reforms were debated in the last session of Congress, but time ran out and political dysfunction took its toll. It appears the financial safety net for uninsured terrorism will not be extended this session, with a stalemate in the Senate blocking reenactment of TRIA.

The general consensus is the death of TRIA may lead to wide-spread economic disaster, with the real estate market suffering most. Terrorism insurance is generally required to secure certain bank financing in the commercial development and construction industry. Current projects could be considered in technical default and possibly shuttered for failure to maintain terrorism coverage. Future commercial real estate projects may fail for lack of financing. The potential economic impact caused by the expiration of TRIA is so great the Real Estate Round Table is urging Congress to make TRIA reinstatement its top priority in the 2015 session.

The expiration of TRIA may also affect the private workers’ compensation market. Workers’ compensation is statutory and insurers cannot exclude coverage for cause. The insurer’s only choice is to provide coverage for terrorism risk or decline participating in the market altogether. For this reason, TRIA reinsurance was especially beneficial to workers’ compensation insurers. Without the TRIA backstop, it is likely that insurers will scrutinize the terrorism risk more closely in certain geographic exposures. Some employers may have fewer choices in the private workers’ compensation insurance market or see higher premiums in high-risk states.

Insurance associations have also lobbied Congress to reenact TRIA immediately. Without TRIA, terrorism insurance will be a much tighter market as insurers may cease writing terrorism coverage and include stiff terrorism exclusions in new policies. Those that are able to purchase a policy will undoubtedly pay substantially higher premiums. Some current policies include exclusions that go into effect in the event of TRIA expiration. Some commentators anticipate the cancellation of large public events like the Super Bowl (although the NFL denies this prediction).

While TRIA does not stop or even curb terrorism, it does offer some security to businesses and their insurers against the catastrophic damage terrorism can cause to the U.S. economy.