Understanding Terrorism Insurance

Managing risk is a key component in the operational and financing strategies of most businesses today. Risk managers at large companies often have a direct line to the CEO and COO, playing a lead role in the profitability of the business. Look no further than how important managing insurance rates has become to risk managers, especially when it comes to figuring out how a particular activity will increase their business’s liability. In our industry you can see this playing out in how complying with a federal regulation—such as installing a pool lift—will affect a property’s overall insurance rates. But there are also factors beyond a risk manager’s control such as terrorism and acts of war. How do they get accounted for?

Prior to the terrorist attacks of Sept. 11, 2001, many policyholders were offered terrorism risk coverage as a nominal part of their insurance coverage policies. Terrorist acts were rare in the United States and insurance companies found the risk could be subsidized for a small fee. The 9/11 attacks reshaped this country in countless ways. The tremendous and tragic loss of life forever changed how Americans perceived our nation and the world. Insurance companies also changed their views on terrorism risk coverage. Estimates vary, but insurance claim payouts for the 9/11 terrorist attacks surpassed $40 billion.

As a response to this unprecedented event, insurance companies rethought terrorism risk coverage and either stopped issuing policies or priced policies at extraordinarily high rates. Policyholders quickly found risk coverage too costly or simply unavailable. For most of 2002 and well after, insurers scaled back on issuing terrorism risk policies and the effect on the real estate market was devastating. Banks often required terrorism risk coverage as part of their lending terms or just would not offer new loans without the coverage. Development began to stall as policyholders struggled to find financing for new projects. In addition, some bank loans risked default status because the required risk coverage was unavailable.


To solve this interruption in the terrorism insurance market, the American Hotel and Lodging Association worked with the real estate industry through the Coalition to Insure Against Terrorism (CIAT) to create a federal resolution. After significant work by the industry, Congress passed the Terrorism Risk Insurance Act (TRIA) of 2002, which created a temporary program where the federal government would share some of the risk with the private insurance market in the event of a new foreign terrorist attack. The resolution provided a federal government backstop for medium or large attacks.

This federal backstop program was renewed in 2005 and again in 2007 with an expiration of 2014. The current iteration of the program would not provide federal assistance until an insured loss from terrorism reached $100 million (it also includes other provisions to ensure costs are fairly shared by private businesses, insurance companies, and the federal government). If the Secretary of Treasury affirms that an event is a qualifying attack, the federal government is required to impose surcharges on property and casualty insurance policies to recoup the costs.

Enactment of the TRIA, and its subsequent extensions, provided the insurance industry sufficient peace of mind to offer affordable risk coverage again after 9/11. It was clear that without a federal program, the insurance market would not be able to provide this coverage. Fortunately for all, this program has never responded to a claim because there have been no moderate or significant foreign acts of terrorism in the United States since 2001.

As Congress begins to consider extending the terrorism risk program beyond 2014, the debate has focused not just on how to renew or whether to renew the act but also on how best to implement the program. AH&LA and much of the lodging development and real estate community (as well as many other industries) are in agreement that a federal program is necessary for an affordable insurance market to exist.

AH&LA has endorsed legislation introduced by Congressman Michael Grimm (R-N.Y.) titled “Terrorism Risk Insurance Act of 2002 Reauthorization Act of 2013” (H.R. 508). With its five-year continuation of the federal program, this legislation, introduced in February, will provide an appropriate starting point for discussion. It is anticipated that additional legislation will be introduced, which may provide for a longer continuation or even significant changes to the program.

In a recent letter, the CIAT thanked Rep. Grimm for introducing his legislation and noted that, “the current federal terrorism risk insurance program has been a tremendous success. At almost no cost to the taxpayer, the national terrorism insurance program has made it possible for more than a decade for businesses to purchase terrorism risk coverage. TRIPRA [Terrorism Risk Insurance Program Reauthorization Act] has helped keep the economy going in the face of continued terrorist threats. It has stabilized the terrorism insurance marketplace and restored insurance capacity to an enormous portion of the U.S. economy.”

After several difficult years, the lodging industry is leading the economic recovery. If financing disappears due to risk management issues, the development of new properties across the country and our ability to create jobs and offer a greater travel experience for our guests will be at risk. If a federal program is not available, experience shows that insurance companies will pull back on terrorism insurance coverage and banks will not offer loans. This coverage is essential to our ability to conduct business and deserves the support of our industry.

If the federal government can certify that international acts of terrorism will never occur within our borders, then perhaps terrorism risk coverage would not be necessary. Unfortunately, this is not the case and we need Congress to act.