Will insurance cover you if terrorists strike?

By Chris Kissell Posted : 05/11/2011

Terrorism insuranceMillions of people around the globe exhaled in relief when news broke that U.S. forces had stormed a house in Pakistan and killed Osama bin Laden.

But bin Laden's demise does not end the threat of future acts of terrorism. Indeed, several U.S. government agencies recently have warned that Al-Qaida and other terrorist sympathizers may strike back and try to avenge their fallen leader.

Surely, loss of life is the worst consequence of terrorism. But such violence also can be costly in dollars and cents. The 9/11 attacks created insured losses of $32.5 billion. That remains the second largest insurance loss in the history, eclipsed only by the $40 billion in damages associated with Hurricane Katrina in 2005, according to the Insurance Information Institute (III).

Experts say another terror attack is all but inevitable in the United States. If that unfortunate day finally arrives, will your insurance company be there to help you pick up the pieces?

Would your insurance cover you?

For the most part, the answer is "yes." Standard home insurance policies do not have exclusions for losses due to most terrorist attacks. Whether your home burns down as the result of a burning cigarette or a terrorist explosion, you're covered.

Your car insurance company also has your back. If terrorists firebomb your truck and you have comprehensive coverage, you can expect to receive a check from your auto insurance company.

On the other hand, damages related to some acts of terrorism – such chemical or biological attacks – fall under the umbrella of war-risk exclusions and are considered "fundamentally insurable."

In states where such exclusions are permitted, insurers do not have to offer coverage, according to III.

The government offers a helping hand

The picture is a bit more complicated if you own an apartment building or office building. Shortly after 9/11, nervous insurers started to include terrorism exclusions in commercial insurance contracts. Suddenly, businesses could not get insurance coverage necessary to rebuild following a terror attack.

Enter the federal government. Legislation known as the Terrorism Risk Insurance Act (TRIA) of 2002 created a temporary partnership between the federal government and the commercial insurance industry in which both parties agree to share the burden of picking up the tab for terror-related commercial insurance claims.

Essentially, private insurers cover the initial cost of terror-related losses. Once an insurer meets its deductible, the federal government absorbs 85 percent of any additional losses. TRIA goes into effect for government-declared acts of terror that cause losses exceeding $100 million.

Michael Barry, a spokesperson for the III, says the government's willingness to share the burden of terrorism related losses with insurers "has enabled the market to function much more effectively than it otherwise would."

Commercial insurance storm clouds gather

However, storm clouds are gathering for commercial insurers and their customers. TRIA has been extended and modified twice since it was passed, and each time insurers have been asked to shoulder an ever-greater share of costs tied to terrorism-related claims.

The modifications to TRIA – which is scheduled to expire in December 2014 – also have reduced the scope of commercial insurance covered by the program.

And the situation may get worse for commercial insurers. President Obama's proposed 2011 budget includes plans to reduce federal funding for the program.

The Insurance Information Institute recently issued a white paper saying provisions of the program are "under attack" and noting that the international nature of terrorism and its fundamental unpredictability "makes terrorism risk extremely problematic from the insurance standpoint."

Why you should care

Even if you don't own a business or apartment building, you should be concerned about whether or not commercial insurers are willing to climb out on a limb and offer coverage for damages related to acts of terror. 

Own a condo? Your condo insurance policy would cover any possessions destroyed as the result of an act of terror. But damage to common areas such as roofs, pools and hallways would not be covered unless the condominium association purchased terrorism coverage in the association's own policy.

And, as Barry points out, commercial property insurance likely affects other areas of your life, whether you know it or not.

"The average person should care because just about every place where the public gathers in large numbers -- sports stadiums, office buildings, amusement parks -- is owned and operated by an entity in need of property insurance coverage," he says.

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