What The Heck is Terrorism Coverage?

What is Terrorism Coverage?

I usually get this coverage right as a customer is signing the paperwork to buy their policies.? Customers have to sign disclosures with big, bold letters.? And every time they do, they want to know what they are signing.?

Terrorism coverage is a federal backstop to insurance that is only triggered if an event is declared a terrorist event by the US Department of the Treasury.

However, many people tend to get confused about this concept. Let's take a step back and delve into the origins of terrorism coverage to gain a better understanding.

The History of Terrorism Coverage

Terrorism coverage emerged as a response to the aftermath of 9/11. Following the attacks, the insurance industry incurred over $47 billion in damages, leading to several insurance companies going bankrupt due to the overwhelming financial burden.

It wasn’t only damage to properties.? The damage from the fallout caused significant business interruption claims as well.

Reinsurance companies, which provide insurance to primary insurance companies, refused to cover such catastrophic events in the future as they deemed them uninsurable. This reluctance put a strain on insurance companies, who were at risk of shouldering massive costs without a clear way to budget for such contingencies.

Here’s the thing – when insurance companies stop offering insurance, the economy grinds to a halt.

Every bank that needs proof of property insurance for a building, every event center that needs to see proof of liability insurance, every General Contractor needing to submit a certification of insurance for a bid, they all depend on the insurance industry offering coverage.

For a moment, that wasn’t happening.

No one understood the probability of terrorism events.? Insurance companies weren’t willing to extend their own capital.? When insurance companies aren’t willing to act as a backstop, commerce grinds to a halt.

Why the Need for Federal Backstops?

Insurance policies are based on the law of large numbers, which allows insurers to predict and price risks for common occurrences.? This works when an insurance company is able to take a large number of things that look identical, historically analyze what happened to them, then use that data to extrapolate into the future.

For example, insurance companies will study how Toyota Camry’s behave in car accidents.? What is the average repair bill?? Are the people in the vehicle more or less likely to need medical treatment??

They extrapolate that data over thousands and thousands of Camry’s to make predictions about what will happen to other Camry’s in the future.

$47 Billion Terrorist events that happen once in a century cannot be modelled.? Some would call it a Black Swan event, although Nassim Taleb would say that we could have foreseen 9/11 because there was an increase in intercontinental traffic.? Nassim can be a bit of a know-it-all.

When insurance companies don’t feel like they can bear the financial burden, they go to the only organization bigger than them for support – the government.

As a by the way, this is also why the Flood Insurance program is administered by the Federal Government.

Has Terrorism Coverage Ever Been Triggered?

No, terrorism coverage has never been triggered since its inception. Despite various civil disturbances and attacks post-9/11, none of them met the criteria for a terrorist event declared by the US Department of the Treasury.

Several high-profile events in the last 20 years might appear to come close to terrorism but would not qualify as terrorism coverage.

1.???? Boston Marathon Bombings.? CNN spent a lot of time questioning whether it was a terrorist event.

2.???? Civil Right disturbances, including the Freddie Gray.? There were a number of businesses looted and rioted.

3.???? January 6th disturbances on the capital.

Depending on where you live and operate, it’s really important to understand how your insurance policy would respond.?

These events would be considered vandalism or civil commotion. They are causes of loss commonly covered by a property insurance policy that has Special Perils.? Every policy is different and you should have qualified representation review your policy.? However, the principle I want to convey is that even though a bomb went off in Boston, and it was detonated by people with religious purposes, it would not have been considered a terrorist event for insurance purposes.

It's not terrorism because the US Department of Treasury didn’t declare it to be one.

Do You Need Terrorism Coverage?

After learning the history of the coverage, where it came from, and, how common it’s used, people want to know whether they have to buy it.? Business owners are allowed to decline Terrorism insurance for their properties.? They are not allowed to decline terrorism coverage for workers' compensation.

The decision to buy the coverage depends on a few things:

1.???? What is your level of concern?

2.???? Where are you located?

3.???? Do you have a loan that requires the coverage?

Everyone needs to make their own decision.? Some people have very low risk tolerance.? They want to buy insurance for everything.? Others may feel the opposite.

The key is to make an educated and informed decision for yourself.

Conclusion

Understanding terrorism coverage in insurance is crucial for both individuals and businesses to safeguard their assets in the face of unforeseen events. By grasping the history and implications of terrorism coverage, you can make informed decisions when it comes to protecting your financial interests.