By Richard A. McGrath, CIC, LIA
While the loss of life and injuries resulting from the Boston Marathon bombings are a great tragedy, the bombings caused another tragedy that understandably receives less attention – many businesses suffered significant losses as a result of the bombings and some may not be properly insured to cover the damages.
Many insurance policies, such as commercial policies, business interruption insurance, civil authority and general liability coverage, typically exclude coverage for acts of terror. In Massachusetts, it has been standard to exclude terrorism coverage from fire insurance since 2011.
Before 9/11, insurance companies did not exclude coverage for acts of terror and did not charge extra for it. While the $40 billion in damages resulting from 9/11 was largely covered by reinsurers – companies that insure insurance companies – the industry reacted to the enormous cost by excluding coverage for acts of terror.
In the case of a business policy, terrorism exclusions most often apply to all claims relating to the act of terror. Businesses owners may choose to buy out any or all of the exemptions, which may apply to liability, business interruption, event cancellation or other areas.
Most insurers also offer separate policies to cover claims resulting from terrorism, so businesses that do not have terrorism insurance may not be covered. However, even though President Obama referred to the bombings as an “act of terrorism,” it is up to the Secretary of the Treasury to determine whether the bombings were an “act of terror.” If it is not an act of terror, traditional insurance should cover most of the damage.
Under the Terrorism Risk Insurance Act (TRIA), the Secretary of the Treasury is required to determine whether the bombings are an act of terrorism, with concurrence from the Secretary of State and U.S. Attorney General, based on the following criteria:
- Is it considered an act of terrorism?
- Is it violent or dangerous to human life, property or infrastructure?
- Does it result in damage within the United States, specified U.S. foreign missions or common carriers?
- Is it committed by an individual or individuals as part of an effort to coerce the U.S. civilian population, or to influence policy or the conduct of the U.S. government by coercion?
- Does it result in property and casualty losses exceeding $5 million?
In other words, the bombing can be considered an “act of terror” and not be declared such if it does not meet the other criteria as well. With the Boston bombings, the only criteria that seems in question is the fourth one; it remains unclear whether the bombers were seeking to coerce the U.S. civilian population, influence policy or influence the conduct of the U.S. government.
Many insurance policies rely on the TRIA definition to determine whether an act of terrorism took place, but some do not, further complicating coverage. Even if the Secretary of the Treasury determines that the bombings do not fit all of the TRIA criteria for an act of terrorism, some insurance policies may determine that it is an act of terror and is, therefore, exempt from coverage.
Under TRIA, when large losses result from an act of terrorism, the federal government would cover all of most of the cost, with reimbursement from insurers based on a surcharge applied to insurance policies nationwide.
TRIA is scheduled to expire in 2014, but it may be extended, as it has been in the past.
Complications may also arise in settling claims for business interruption. In addition to being affected on the day of the bombings, some businesses were forced to close during the lockdown while police and the FBI searched for the fugitive bombers.
Businesses that chose to close on Patriots’ Day because it is a local holiday or that remained closed at their own discretion rather than out of necessity will likely have those factors considered when insurers settle their claims.
Covering Acts of Terror
While it is still uncertain how insurers will react to the Boston Marathon bombings and whether they will be ruled an act of terror, businesses should be certain that they are adequately protected from potential acts of terror in the future.
The Congressional Research Service estimates that 60% of businesses now have terrorism insurance. One reason is that prices have trended downward since the product was first introduced. While the likelihood of a terrorist attack is very low, if one were to occur, the damage to an uninsured business could be catastrophic.
Of course, the risk of a terrorist act taking place in Sturbridge is much less than the risk in Boston, but consequently, premiums will be much less, too.
Businesses that think they need terrorism insurance should discuss it with their insurance agent, who can price coverage and make a recommendation as to whether it is needed and, if it is, what precisely needs to be covered.
Before purchasing coverage, it is important to understand what is and is not covered. Some policies, for example, may exclude coverage for nuclear, chemical, biological and radiological acts of terrorism. Be certain that you have the coverage you need.
Richard A. McGrath, CIC, LIA is President and CEO of McGrath Insurance Group, Inc. of Sturbridge, Mass. He can be reached at firstname.lastname@example.org.
This article is written for informational purposes only and should not be construed as providing legal advice.