Finding insurance coverage for acts of terrorism

September 11Paris, San Bernardino, Brussels and countless others across the globe. The recent upsurge in worldwide terrorism is both frightening on a personal level as well as a mandatory reason for you to consider major security and insurance upgrades to your hotel. In light of the recent attacks, I wanted to share some of my wisdom insofar as how to give your clients a way to find insurance coverage for Terrorist Acts.

First, the term ‘act of terrorism’ is defined in my home nation of the United States as (according to Wikipedia): any act certified by the Secretary of the Treasury, in concurrence with the Secretary of State and Attorney General, to be an act that is dangerous to human life, property or infrastructure and to have resulted in damage within the US (or outside the US in the case of a US-flagged vessel, aircraft or premises of a US mission).

It must be committed as part of an effort to coerce US civilians or to influence either policy or conduct of the US Government through coercion. The definition includes both foreign and domestic terrorists. The Secretary may not delegate this certification authority and his or her decision to either certify or not certify an act of terrorism is not subject to judicial review.

Terrorism coverage is available for all commercial accounts in the USA. This coverage is provided by the Terrorism Risk Insurance Act (TRIA) of 2002 and has been renewed repeatedly since (currently 2020). Various incidents that we would think are terrorist acts may not be deemed so by the governing body. In that case, ‘normal’ insurance would apply. It references ‘international acts’, but, at least at this time, TRIA coverage applications for overseas is not guaranteed.

When a policy for commercial insurance is offered, every insurance company must offer ‘Terrorism’ coverage. This was not a ‘named peril’ until the 9/11 attack. After that event, insurance companies created ‘exclusions’ for terrorist attacks. The wording differed from company to company, but at this point, they all use the same exclusion on any policy sold. It covers all lines of insurance – property, liability, auto, work comp and umbrella coverage.

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Through TRIA, specific terrorism attacks will be covered, much like how the Federal Government covers ‘Flood insurance’ (that is a loose analogy but you understand the concept). Private insurers typically will not offer this outside of TRIA. It depends on the size of the account, the premiums paid and the underwriting criteria.

The specific limits allowed by TRIA will be offered on an account-by-account basis. Your client should evaluate the cost versus the exposure. As an example, a quote was offered for liquor liability only to a bar and it included ‘TRIA’ – so how might that policy be triggered? If a terrorist came onto the premises and invoked the trigger for the liquor liability to respond for ‘general liquor liability’, and then decided to commit an act of terrorism, this would be reasonable cause to invoke TRIA on that policy.

For most operators, it makes total sense to include TRIA. Offering perhaps the most vivid example of this, 9/11 paid out billions for the property damage to the Towers. No question about that.

But the debris that flew around NYC was a ‘liability’ coverage for the owners of the Towers. And everyone killed was likely under work comp (certain owners, directors and officers may have exempted themselves). The payments for work comp alone triggered the insurance industry to re-underwrite all policies to understand how many people are in the building on the policy and how many stories the building is and what the safeguards are to get them out in the event of another such catastrophic event.

Rest assured, this system is evolving. In many states, TRIA is mandatory on work comp policies. Your client will see the line item on the policy as a surcharge, placed after the premium calculation based upon payroll and rates when the adjustors determine the discounts, experience modification and so on.

So, how can you help as a hotel operator? The first item to address is the loan documents.

Many lenders require full terrorism coverage for the value of the asset (property insurance). My company has been successful in negotiating with lenders to accept a ‘cap’ on the cost for terrorism versus all other perils. As an example, we would stipulate that the borrower pay premiums for TRIA up to a certain percentage of the cost for all other perils. If the borrower pays $100 for property coverage for the asset, but TRIA premium costs $100 just for terrorism coverage, we would negotiate to cap the TRIA cost under the loan documents to 20% of the premium for all perils, which in this case would cost $20 for whatever limits of coverage we could purchase using TRIA (but not the full limits per se).

In more recent years, pricing has calmed down to a fair level, but immediately after 9/11, TRIA was as much as ‘all other perils’. While it is reasonable now, you would be wise to address this when new loans are secured using a formula comparable to this methodology. We have had success with negotiating CMBS loans, so nothing is beyond discussion.

And this works for publicly traded companies as well. Either way, insurance for acts of terrorism is a matter that we all must soon address, from major chains to each and every independent property under the sun.

To help you brush up on the subject, read the Wikipedia page on terrorism insurance here.

About the author

Tom ClearyTom Cleary is an Equity Partner with the Sihle Insurance Group in Clearwater Florida and a member of Cayuga Hospitality Consultants. Based in Florida for his entire career, Tom has expertise in commercial insurance with a focus on hospitality and real estate as well as flood and wind exposures. Products offered include property, liability, automobile, crime, umbrella and workers’ compensation throughout the United States and the Caribbean. Tom also serves as a regional director for The Cornell Society, has been a board member and longtime member of the Florida Restaurant and Lodging Association, and serves in an advisory capacity to the Resort Hotel Association.

 

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