The Terrorism Risk Insurance Act: A Federal Backstop of Prevention

Jan. 2, 2008

The prospect of a violent global event impacting a U.S. or other national community and causing damage or fatalities to those in cities on the other side of the world cannot be overlooked when considering security planning. Terrorism remains a real threat to global society.

The renewal of the Terrorism Risk Insurance Act will provide building owners and the buildings industry with a safety net for reconstruction and recovery after a terrorist attack

By Barbara A. Nadel, FAIA

The prospect of a violent global event impacting a U.S. or other national community and causing damage or fatalities to those in cities on the other side of the world cannot be overlooked when considering security planning. Terrorism remains a real threat to global society.

The assassination of Pakistani opposition leader Benazir Bhutto on Dec. 27, 2007, sent a chilling message around the world regarding efforts to spread democracy, stem terrorism, and reconsider the impact of American foreign policy on other governments. Some experts suggest Al Qaeda may have been behind this violent act because Bhutto openly threatened al Qaeda and had American support. Al Qaeda remains intent on attacking America and American interests.

In New York and major international cities, security was increased at embassies, facilities, and communities with Pakistani ties to thwart potential subsequent attacks by disgruntled groups or individuals, either foreign born or American, thus further underscoring how major events around the world can have a local impact on personal safety, building security, and the global economy. Several pundits were tracking the price of gold and the Wall Street markets for any changes after the Bhutto assassination to prepare for the ripples of what may have been a wider effect.

For building owners and tenants with properties in or adjacent to affected areas in situations like this, such as international businesses, tenants, and ethnic or religious communities, international terrorist events can give rise to a new round of local threats that lead to increased overtime costs, additional coordination with local law enforcement agencies, and lost business if people cannot access offices, retailers, schools, and civic and commercial venues. Foreigners or American residents can perpetrate vandalism, violence, and acts of terrorism on American soil. The net effects will be the same.

The U.S. House of Representatives had this in mind when it passed the Senate version of the Terrorism Risk Insurance Act (TRIA) renewal on Dec. 18, 2007, a measure deemed critical to rebuilding Lower Manhattan’s Ground Zero and other sites attacked by terrorism. The measure is expected to be signed by President Bush in 2008.

TRIA Background
After the 9/11 attacks, many insurance companies eliminated terrorism insurance from their policies, judging the potential losses from a major attack to be too great to insure against. In response, Congress passed TRIA, which created an insurance backstop from the federal government to protect against catastrophic, terrorism-related losses. It was intended as a temporary measure to allow the insurance industry to recover from 9/11 and develop their own solutions and products against acts of terrorism.

TRIA is a government insurance program that commits the U.S. federal government to paying for most of the damages in the event of terrorist attack in the next 7 years. It is a continuation of the original law created by Congress in 2002 after the 9/11 attacks on the World Trade Center and was renewed at the end of 2005 for another 2 years, until Dec. 31, 2007.

Among the various provisions of the original act was the definition of terrorism as an act that must have been committed by individual(s) acting on behalf of a foreign person or foreign interest as part of an effort to coerce the U.S. population or government. The program is triggered after an occurrence of an event as determined by the U.S. Secretary of the Treasury to be an act of terrorism. Losses from the act must exceed $50 million in 2006 and $100 million in 2007, up from the original $5 million trigger in 2002.PageBreak

According to media reports, TRIA will now require insurers to pay for the first $27.5 billion in damage and 15 percent of the remaining costs up to $100 billion. The White House had initially threatened to veto the TRIA extension, claiming the insurance industry had recovered after paying out over $31 billion in the World Trade Center attacks. The Senate significantly scaled back some of the House bill provisions, which apparently caused the White House to approve the bill.

The original House version of TRIA, put forth by House Financial Services Committee Chairman Barney Frank (D-MA) and U.S. Representative Gary Ackerman (D-NY), sought a 15-year extension to allow long-term planning for construction and other businesses; coverage for group life; the requirement of nuclear, chemical, biological, and radiological coverage, for so-called NCBR attacks; and a lower damage level of $50 million, at which TRIA kicks in.

The approved Senate version cut back many of the House provisions, but went along with providing coverage regardless of whether the attack was carried out by foreigners or American citizens. Previously, attacks carried out by Americans were not covered. The approved version also does not cover NCBR attacks, which could result in astronomical costs.

TRIA effectively provides an economic safety net to the building industry for reconstruction efforts. Insurance companies said that, without government backing, they would refuse to sell coverage for terrorist attacks as they did after 9/11. Banks, real estate interests, construction companies, hotel chains, and other businesses impacted by 9/11 said the economy would suffer if they were unable to purchase terrorism insurance.

Canada “Goes Bare” Regarding Terrorism Insurance
In contrast to the federal legislative activity on TRIA since 2002, Canada has no TRIA equivalent. According to Canadian security specialist Margaret Purdy, of Vancouver, BC, “We are unlikely to see any movement in that direction unless and until we experience a serious terrorist attack with massive destruction and loss of life. This is one of the many counterterrorism scenarios where, in the absence of direct experience, it is extremely difficult to marshal support for contingency planning.

“Indeed, it was only after the 9/11 attacks in the United States that the Canadian government agreed to share the costs of aviation war risk liability coverage for air carriers, airports, and other key aviation players in Canada. In that case, the government really had no choice because international insurers withdrew or reduced previous levels of third-party war risk liability coverage after 9/11, putting the Canadian aviation industry in a precarious economic position.

“The Insurance Bureau of Canada ( has criticized the Canadian federal government's lack of action with respect to the gap in terrorism risk insurance for Canadian consumers and businesses. Canadian insurers claim that they cannot calculate and price the cost of insuring against such an unpredictable and dynamic phenomenon as terrorism,” Purdy observes.

National Defense, National Economy
From Wall Street to Main Street, Homeland Security preparation now extends deep into the private sector by protecting the national economy on the macro and micro levels. “Insurers and victims of terrorism should not bear the costs of attacks. Providing terrorism insurance is part of national defense,” said Rep. Barney Frank on the House floor.

We can only hope, at the beginning of 2008, that neither the United States nor any other civilized nation will ever need to trigger TRIA or a similar method of terrorism risk insurance coverage.

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