Question from an IIABNY member: Can you address if the Boston incident would be considered terrorism and only covered if a commercial client elected the coverage?
Answer: For purposes of the federal Terrorism Risk Insurance Program, an “act of terrorism” is one that causes more than $5 million in property and casualty insurance losses; is not an act that occurred in a declared war; and is certified by the U.S. Treasury Department as:
- An act of terrorism
- A violent act or an act dangerous to human life, property or infrastructure
- An act that caused damage within the U.S. or outside the U.S. (in the case of air carriers, vessels, embassies and other U.S. property), and
- An act committed by one or more individuals “as part of an effort to coerce the civilian population of the United States or to influence the policy or affect the conduct of the United States Government by coercion.”
I haven’t seen any estimates yet on the dollar amount of P&C-insured losses. Certainly the property damage was extensive, and damaged businesses may be shut down for some time. However, some of the properties might have been franchises of national chains that self-insure (one of the bombs exploded in front of a Starbucks.) Therefore, I don’t think anyone knows yet whether the P&C losses will exceed $5,000,000. Virtually all of the injured were not working at their jobs at the time, so I’m guessing Workers’ Compensation losses will be relatively small.
We know this much:
- The bombings did not occur in the course of a war declared by Congress
- The act was dangerous to human life, property and infrastructure
- It caused damage within the U.S.
What we don’t know right now is the alleged bombers’ motivation. One of the suspects is dead, and the other was communicating only in writing (he has since invoked his right to remain silent.) Therefore, not all of the elements that would enable the Treasury Department to certify this as a terrorist act are in place. In addition, if the total P&C insurance losses are $5 million or less, the department cannot certify it as a terrorist act (again, for purposes of TRIP).
If the department does certify this as a terrorist act, here are the coverage implications for Commercial Property insurance:
- If an insured’s policy includes ISO endorsement IL 09 53 01 08, Exclusion of Certified Acts of Terrorism, then the insurance will not cover the losses. This endorsement will be on the policy if the insured rejected the carrier’s offer of terrorism coverage.
- If an insured’s policy includes ISO endorsement IL 09 52 01 08, Cap on Losses from Certified Acts of Terrorism, the insurance will cover the losses. This will be on the policy only if the insured elected to buy the coverage. The carrier’s liability for terrorism losses in any one year is limited should they exceed $100 billion (for all insurers in the aggregate), but no one has yet suggested that the Boston events will approach that level. Hopefully, this is the last incident of this sort that we will see this year, so the cap should not be a concern.
- If an insured’s policy includes ISO endorsement IL 09 87 01 08, Limitation of Coverage for Certified Acts of Terrorism (Sub-Limit on Annual Aggregate Basis), then the insurance will cover the losses. The maximum the carrier will pay is the sub-limit shown on the endorsement.
Note that all three of these endorsements are approved in Massachusetts, but IL 09 87 01 08 is not approved in New York. Carriers may not write terrorism coverage with a sub-limit in New York.