It’s a tragic yet unavoidable fact that terrorist acts continue to occur around the world. While you as a businessperson may not personally be able to prevent violence, you are far from powerless against its results. While Terrorism Insurance is a relatively emergent field, it shares elements of other commercial insurance policies, which makes it easier to understand.

What is Terrorism Insurance?

Don’t make the mistake of underestimating the havoc a terrorist attack can wreak. In addition to loss of life, major injuries, and the psychological footprint of a scarring incident, your business could also suffer property damage, work interruptions, and other difficulties related to the attack. You run the risk of losing millions of dollars given the potentially large amount of destruction involved, so it’s well worth investigating whether Terrorism Insurance is appropriate for your business.

Historically, insurance companies were reluctant to underwrite Terrorism Insurance policies given the difficulty of predicting their occurrence and, of course, the potentially catastrophic liability involved. However, since the passage of the Terrorism Risk Insurance Act (TRIA) in 2002, all property and casualty insurers have been federally required to offer Terrorism Insurance. A policyholder may waive this coverage, in which case exclusions for terrorism may be written into the policy.

Example:

• A contractor is in the middle of completing a major office and retail project when it is destroyed by a terrorist’s bomb. The loss is significant—$2 billion—and it is uncertain whether the project will reach completion. While the contractor holds general liability and property insurance policies, he waived Terrorism Coverage, which would have protected him against much of the loss in this scenario.

The TRIA made it more feasible for insurers to offer Terrorism Insurance by creating reinsurance coverage to insurers following a certified act of terrorism, essentially leveraging the government to shoulder the costs of casualty insurance and commercial property loss due to an attack.

Under this legislation, the insurer is responsible for the whole amount of a smaller loss but is assisted in the case of a medium or larger loss. For medium losses, the assistance is temporary and must be reimbursed; however, for larger losses, the assistance is more widespread without expectations that the money will be returned. However, there are no dollar amounts attached to the small, medium, and large classifications, further muddying the nascent industry.

What qualifies as a certified act of terrorism?

Under the TRIA, an event that is eligible for coverage and certified as an act of terrorism by the Secretary of the Treasury must:

• Be an act that is dangerous to human life, property, or infrastructure and results in damage within the U.S. or U.S. sovereignty
• Result in over $5 million of property and casualty losses
• Include no damage resulting from war or a biological, chemical, nuclear, or radiological attack
• Have been committed as an attempt to influence U.S. governmental policy or conduct or as an attempt at coercing U.S. citizens

If these standards do not apply to an attack, the federal government is not required to provide reinsurance coverage to insurers, and in turn, insurers are not required to cover their policyholders.

Example:

• An annual Halloween parade is hit with two different explosives, killing 10 people and injuring hundreds of others. However, since aggregate property and casualty damage did not exceed $5 million, the incident was not certified as an act of terrorism under the TRIA, and insurance companies refused to cover the event.

What does Terrorism Insurance cover?

In general, Terrorism Insurance covers primarily property and general liability, typically only in cases where the terrorist act is a certified act of terrorism under the TRIA.

Example:

• A mass shooting at a local shopping mall damages your retail store. The shooting is deemed an act of domestic terrorism by the Secretary of Treasury. Your commercial property insurance policy includes coverage for certified acts of terrorism, meaning the property damage your business suffered will be covered.
• You own a local amusement park, which is targeted in a terrorist attack. The terrorists set off a bomb inside your park, which causes multiple injuries to visitors of the park. Your business is sued by a customer who was injured, claiming you did not do enough to secure your facility. Under your general liability insurance, which includes coverage for acts of terrorism, you would be covered for any damages awarded to the customer if your company is found liable.

Outside of property and general liability, Terrorism Insurance may also cover losses associated with the interruption of your business or reputational damage. Because Terrorism Insurance is highly dependent upon the insurer, coverage widely varies.

It’s important to note that for certain types of insurance, including workers’ compensation, acts of terrorism may not be excluded, meaning an on-the-job injury as a result of a terrorism attack will always be covered.

For small businesses, most insurers will offer Terrorism Insurance as additional endorsements to liability and property policies, limiting coverage to acts certified by the TRIA. Larger firms may consider standalone Terrorism Insurance policies, which often include broader coverage, including both certified and non-certified acts of terror.

What are the key exclusions of Terrorism Insurance?

Depending on your state regulations and the specific policy, Terrorism Insurance may exclude coverage for:

• Terrorist acts involving nuclear, biological, chemical, or radiological (NBCR) materials
• Fire following a terrorist act
• Non-certified acts of terrorism
• Terrorist-related cyberattacks
• Losses related to acts of war

It is best to consult your specific policy or your insurer to determine if certain exclusions are prohibitive for the protection your business needs.

How can I better protect my business from terrorist attacks?

In addition to purchasing the right Terrorism Insurance policy, a good way to reduce your risk is to understand your business’s most vulnerable areas and create a terrorism management plan. This entails the following:

General Assessment. Your first step in the process is an overall survey of your property in order to determine your weakest spots. As you do this, keep structural vulnerability paramount in your mind—not just of your facilities, but the threats presented by the buildings surrounding you given the most common terrorist attacks such as bombings have a widespread effect. Your assessment should include the standoff distance around your entire facility—this is a key measurement of how effective your property, employees, and security plans are in foiling a person or vehicle from getting in.

Risk Assessment. Using the information gleaned from your overall assessment, you can now continue to narrow in on the potential damage a terrorist attack can inflict on your premises and how you can mitigate it. Make sure to include:

• Avoiding Business Interruption. Your data and equipment are mission-critical, and if they’re compromised, this could very well affect how long your business is on pause. With this in mind, make sure you have other resources at a separate location or at the very least that they are properly backed up.
• Structural Integrity. Evaluate how vulnerable a variety of locations in your building may prove in an attack, particularly from an explosion.
• Employee Strength. If all workers are consolidated in a single area, they are at particular risk. All personnel should have access to more than one exit should an attack occur.

Risk Management. Using information gathered during the above assessments, you should be able to have a clearer sense of your exposures in the case of an attack. Now you can begin to incorporate basic protections such as security systems and reinforced window films. Think of this as akin to shoring up against a natural disaster.

Example:

• A technology firm wants to shore up its defenses against terrorist attacks. After going through a series of assessments, the company’s owners determine that the greatest areas of exposure are their large glass front door and the fact that their employees are gathered in a single space. They are now not only equipped to begin putting in front-line protections of their own, but they have a better understanding of the types of concerns they wish to address through insurance.

What are the most common types of terrorist attacks?

One of the most challenging elements of terrorism is that it has a seemingly random nature. You never truly know when an attack may be afoot, and these events do not typically target a single individual or business property.

According to the U.S. Department of State, these are the most frequent types of terrorist attacks:

• Explosions and bombings
• Armed assault
• Facility and infrastructure attacks

Comprising 54 percent of attacks, bombings and explosions are by far the most common types of attacks. According to the Department of Homeland Security’s “Securing Soft Targets and Crowded Places Resources” publication, areas that many people can access with limited security available comprise some of the most vulnerable locations. These include:

• Shopping centers
• Schools
• Sports or event venues
• Transportation systems

The DHS has placed special focus on renewing protection for these targets, but you should take particular care to secure coverage if you work in or around them.

Conclusion

According to the Insurance Information Institute, approximately 60 percent of U.S. businesses carry Terrorism Insurance. Terrorism Insurance typically covers equipment, furnishings, inventory, and buildings damaged or destroyed by terrorist acts and protects businesses against liability claims.

When evaluating the value of Terrorism Insurance to your business, make sure to consider the following:

• Location. You’re less likely to see attacks in residential and rural areas than in commercial urban centers.
• Industry. If you work in a high-risk profession such as the energy sector, which has a heightened risk of attack, you should seriously consider Terrorism Insurance.
• Cost. At an estimated price tag of $19 to $49 per million of insured value—between 3 and 5 percent of your firm’s property-insurance costs—this is no small consideration. Think about whether it is worth it given your business’s location and circumstances.

Unfortunately, in addition to the loss of human life and injuries associated with terrorist attacks, there are also major economic repercussions stemming from terrorist attacks. If you believe that these costs may impact your business in a significant way, you should talk to your insurance broker about adding Terrorism Insurance to your policy.