|
Terrorism Risk Insurance Act of 2002
Holds Holiday Surprise for Aviation Industry
This article was written for the National Business Aviation Association by Stuart C. Hope, CPCU and Eric W. Barfield of Hope Aviation Insurance, Inc. It will be available for download from the NBAA web site in PDF format, if desired.
|
 December, 2002 – As you pour over your Holiday mail, you likely have found unexpected greetings from your insurance company. This however is strictly business and addresses the impact on your aviation policy of the Terrorism Risk Insurance Act of 2002 (TRIA) signed into law by President Bush on November 26, 2002.
With the passage of this new law, many in the aviation industry concluded relief from the higher premiums charged for War Risk/Hijacking insurance since September 11 would be the logical result. Instead, because the wording in the Act actually expands the definition of terrorism and the scope of terrorism coverage, premiums will typically increase for those who elect to purchase this coverage.
The good news is you have a choice. You can either accept or reject the coverage.
What is the Terrorism Risk Insurance Act of 2002 (TRIA)?
- The act creates a short-term federal backstop program for the insurance industry in the event of a major terrorism event in the U.S.
-
Upon enactment, the terrorism exclusions in existing policies are suspended to the extent the policies exclude losses resulting from acts of terrorism as defined by the Act.
- Insurers must make an offer to continue the terrorism coverage, for an additional premium, to every insured within 90 days.
- Each insured must make the decision to accept or reject the coverage. An insured may elect to pay an additional premium for the increased terrorism coverage or elect to reinstate the terrorism exclusion in full for the remainder of the policy period.
This law is limited in scope to terrorism as defined in the Act and is not to be confused with the War, Hijacking and Other Related Perils coverage. TRIA defines an “Act of Terrorism” as any act that is certified by the Secretary of the Treasury, in concurrence with the Secretary of State and the Attorney General of the United States:
- to be an act of terrorism;
- to be a violent act or an act that is dangerous to human life, property, or infrastructure;
- to have resulted in damage within the United States, or outside the United States in the case of an air carrier (as defined by section 40102(a)(2) of Title 49 of the United States Code as “a citizen of the United States undertaking by any means, directly or indirectly, to provide air transportation”) or a U.S. registered or U.S. flag vessel or the premises of a United States mission; and
- to have been committed by an individual or individuals acting on behalf of any foreign person or foreign interest, 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.
But, no act shall be certified by the Secretary as an act of terrorism if:
- the act is committed as part of the course of a war declared by Congress, except that this clause shall not apply with respect to any coverage for workers compensation; or
- property and casualty insurance losses resulting from the act, in the aggregate, do not exceed $5,000,000.
The full text of TRIA may be accessed through the following website link:
http://thomas.loc.gov/cgi-bin/query/z?c107:H.R.3210.ENR:
I thought a federal reinsurance program would reduce insurance costs; why the additional premium for aviation insurance?
- The Act is not a rebate program for the insurance industry. It is not a “first-dollar” program for future terrorism losses either.
- The Act makes it mandatory for all insurance companies to offer terrorism coverage.
- Given the fiscally volatile, crippling and catastrophic nature of terrorism claims, the only way insurance companies can underwrite terrorism risks is by having some type of safeguard to diminish the potential insolvency from those risks.
- TRIA acts as this safeguard by authorizing the US Government to become a reinsurer for commercial insurance companies. Insurance companies are still on the hook for paying claims, administering coverage and offering services under the terms of the new law. For this they are of course entitled (and required by the Act) to charge a premium.
How much does the terrorism coverage cost, what does it cover and how is it handled?
- Each insurance company will price and administer their own terrorism coverage. However the Act requires that all insurers offer coverage in a manner that does not differ materially regarding terms, amounts or other limitations of coverage they offer for acts other than terrorism.
- Light aircraft owners with limits of liability of $1,000,000, will likely see a nominal premium charge.
- For those involved in commercial aviation or with high-value aircraft or large limits of liability, the price will be proportionately higher. For example, a $2,000,000 Citation with a $10,000,000 limit of liability may elect terrorism coverage for around $1,500 (the premium may be less if war risk coverage was already purchased).
- For those clients who elect terrorism coverage, most insurance companies will compute the pro-rated premium by dividing the amount due by 365 to determine the daily additional charge, and then multiplying the daily additional charge by the number of days from the date coverage became effective (November 26, 2002) until policy expiration.
- For future policy renewals, insurers will be required to disclose the charge as a separate line item within the policy.
 We already purchased War, Hijacking and Other Related Perils coverage, which includes terrorism insurance. Why elect to carry a coverage already purchased?
The short answer is the TRIA expanded the definition of terrorism, which in turn obligates the insurance carrier to be potentially responsible for more losses. For example, consider the following possibilities:
-
On a given loss and regardless of the circumstances, under the TRIA definition, if the Secretary of the Treasury, certifies the loss, in concurrence with the Secretary of State and the Attorney General of the United States, to be an act of terrorism, the insurance carrier is automatically required to cover it. Previously, the loss would need to meet the scope of coverage as defined in the War, Hijacking and Other Perils coverage endorsement.
-
Some insurers will no longer place an aggregate limit on terrorism coverage as they currently do on their war risk endorsement, making it a per occurrence limit.
-
Some insurers will no longer “sublimit” the coverage for terrorism. For instance, some customers who have $100,000,000 in liability coverage, typically have a maximum “cap” for war risk claims of $50,000,000. By electing the terrorism coverage, the full $100,000,000 limit becomes available for terrorism claims.
-
Defense costs for terrorism claims will again become supplementary payments (not part of the limit) under some insurers’ forms.
-
The provision for seven days notice of cancellation under the war risk endorsement may not apply for terrorism claims.
What are my options and what are the consequences if I accept or reject the coverage?
- Your options are either to accept the coverage and pay the additional premium, or reject the coverage.
- If you reject the coverage, the terrorism exclusions on your policy prior to November 26, 2002 will be reinstated and there will be no additional premium charge.
- No one is an expert on this topic as we are in uncharted waters, but if you accept it, your chances of being covered for just about any terrorist act conceivable are very good. On the other hand, rejecting it obviously increases your exposure to an uncovered loss resulting from an act of terrorism.
- If you already purchased War Risk, Hijacking and Other Perils coverage and elect to reject the TRIA coverage, you would continue to have terrorism coverage to the extent provided under the War Risk endorsement.
- Be sure to discuss this with your broker for a more in-depth examination of how this might impact your aviation insurance program.
Aren’t the insurance companies taking an opportunity to further profit from an aviation industry that is already down?
No, this is simply not the case. Yes, insurance companies are in business to make money and yes they sometimes earn the bad rap they get, but as recently as 4 years ago, there were 15 aviation insurance companies in the US competing for your business. Now there are 7. Contrast that with US companies writing automobile insurance which number in excess of 500. If aviation insurance were a lucrative line there would be more than 7 insurance companies in the arena.
September 11 was far and away the largest catastrophic insurance event in history, and coupled with a stock market decline that has decimated investment returns, we could see a further reduction in the number of insurance companies willing to write aviation insurance. Even with the federal backstop on terrorism claims, there is still concern within the industry about covering losses below what will be provided by the government. The insurance companies will be exposed to a substantial amount of new risk and they are only charging a premium for a coverage they have been forced to provide.
Eric W. Barfield and Stuart C. Hope are brokers with Hope Aviation Insurance, Inc. The firm focuses on business aviation insurance for the general aviation industry. Eric is a Commercial pilot and former underwriter for USAIG. Stuart is an Airline Transport Pilot and Certified Property and Casualty Underwriter (CPCU). Both have received the Certified Aviation Insurance Professional (CAIP) designation through the Aviation Insurance Association. |
This article is available for download from the NBAA web site in PDF format.
Note: To access the file you must be an NBAA member.
You will be prompted for your login ID and passcode.
|
