The insurance market has become increasingly expensive due in part to the enormous losses caused by the terrorist attacks of September 11, 2001. Soon after the attacks, insurance companies began refusing to insure businesses and building projects against further acts of terrorism. In response, President Bush signed the Terrorism Risk Insurance Act on November 26, 2002.
The Act has three major components:
1. Insurance Availability. The Act voids all existing terrorism exclusions and requires all property and casualty insurers to offer policyholders a specific policy for losses due to terrorism. The terrorism policy must treat losses from acts of terrorism materially the same as losses caused by events other than acts of terrorism.
2. Disclosure. Insurers must disclose the premium the policy holder will be charged for coverage of acts of terrorism, and the federal share of terrorism losses. Initially, insurers will make these disclosures by separate mailing or a similar method. After 90 days, these disclosures will be made as part of the policies.
3. Federal participation in terrorism losses. The Act provides that once an insurer pays losses resulting from acts of terrorism in any calendar year that exceed a deductible amount based on the insurer's direct earned premiums, the federal government will reimburse the insurance company at 90% above that deductible in that year.
What types of losses are covered under the Terrorism Risk Insurance Act?
The Act only applies to losses caused by acts of terrorism as they are defined by the statute. The event in question must
(1) be a foreign act of terrorism resulting in property damage located within the United States; this does not include acts of domestic terrorism, vandalism or rioting
or
(2) have been perpetrated on behalf of a foreign person or interest as part of an effort to coerce United States citizens or the United States’ foreign policies. The Act does not apply if the event is committed as part of the course of a war declared by Congress or if losses are suffered due to nuclear, biological and chemical hazards.
Who should purchase terrorism insurance?
As of February 2003, only 10-15% of property owners were estimated to have purchased terrorism insurance. The most common reason for not purchasing a terrorism policy is the cost. Premiums for terrorism insurance range from 2% of the property insurance premium to 150% of the property insurance premium. Property owners and community associations must consider the cost of insurance and weigh it against the risk that their property will be damaged by an act of terrorism.
In order to decide whether to purchase a terrorism insurance policy for your community, board members should investigate the availability and cost of coverage. The association’s insurance agent should be able to discuss the cost of the insurance, but the risk may prove more difficult to determine. The board may want to consider factors they think could place the community at a higher risk including:
-
is the community near a government facility which may become a terrorism target?
-
is the community near a military base?
-
is the community near a commercial facility that would cause a large amount of damage under attack?
-
is the community next to a national monument that may be an attractive terrorism target?
[PRINTER FRIENDLY VERSION]
