A primer on the Terrorism Risk Insurance Program Reauthorization Act of 2015, and how it impacts business aviation, as published in the January 2016 issue of AvBuyer Magazine, by Stuart Hope.
With passage of the Terrorism Risk Insurance Program Reauthorization Act of 2015 (TRIA), the Act is now extended to expire December 21, 2020. With the exception of a few changes, TRIA continues to provide a backstop for domestic insurers required to offer terrorism coverage on specified lines of commercial insurance. But what are its origins?
In the wake of 9/11, insurance companies who were already providing terrorism coverage to aircraft owners under the War Risk Perils endorsement immediately cancelled that coverage per the cancellation provisions of the endorsement. Other insurers who wrote commercial insurance for building developers, construction companies and related industries ceased providing terrorism coverage forthwith. Meanwhile the banks stopped offering loans where they could not get terrorism insurance to protect their investments.
Within a few weeks of 9/11, the War Risk [for aviation] market again offered the coverage but a greatly increased premiums. Most aircraft owners had to purchase the coverage due to the contractual insurance requirements contained in the loan agreements on their aircraft.
In late November 2002, Congress signed into law the Terrorism Risk Insurance Act of 2002 which required domestic insurers to offer terrorism coverage to commercial clients. In return the Federal Government would provide a financial backstop (similar to reinsurance) for any terrorism losses incurred that exceeded a certain threshold.
This coverage must be offered to this specified class of commercial clients (which include aircraft owners) every year and the client has to accept or reject it.
As mentioned above, most aircraft owners already carried coverage for terrorism which is an included ‘peril’ under the War Risk Perils endorsement. With subsequent passage of the TRIA act, aircraft owners were met with a dilemma…
Since they already had terrorism coverage under the War Perils endorsement, it appeared to be an easy decision to decline the TRIA coverage every year since it would apparently amount to double coverage for the same peril, and therefore not be needed. However, there are some differences in coverage which complicates the decision.
Aggregate vs Occurrence
Terrorism coverage provided under the War Risk Perils endorsement provides the same liability limit carried on the aircraft policy, but is provided on an aggregate basis. This means regardless of the number of claims submitted during the policy term, once the policy limit has been paid cumulatively, the coverage is exhausted and the owner would have to re-load its limit by purchasing additional liability coverage limits.
Terrorism coverage provided under TRIA is written on an occurrence basis, meaning each separate occurrence during a policy term is provided the full policy limit. In addition, if the aircraft owner carriers a liability limit of $300M, the War Risk Perils carries a sub-limit of $50M for all bodily injury and property damage claims – except bodily injury to passengers. You can purchase excess third party war coverage to amend to an occurrence basis and delete the $50M sub-limit if desired.
The War Risk Perils coverage trigger is governed by the insurance policy contract language. If the claim is determined to be terrorism per the policy and there are no applicable exclusions, then the policy will respond. In order for coverage to be triggered under TRIA, the loss must be certified by the Secretary of Treasury – in consultation with the Attorney General and the Secretary of Homeland Security – to:
- Be an act of terrorism;
- Be a violent act or an act that is dangerous to human life, property, or infrastructure;
- Have resulted in damage with the US, to an air carrier, US-flagged vessel, or the premises of a US mission; and
- Have been committed by an individual(s) as part of an effort to coerce the civilian population of the US or to influence the policy or affect the conduct of the US Government by coercion.
The take-away is the trigger for TRIA is not controlled by contract language but rather by three individuals.
Terrorism coverage provided under the War Risk Perils endorsement has numerous cancellation options. TRIA coverage cannot be cancelled except by the US Government.
Should You Buy Both?
If you don’t already have it, buying the War Risk Perils coverage is a no-brainer. You pick up coverage for roughly 25 excluded war perils for a small premium. If the premium to also include TRIA coverage is not expensive, I would certainly recommend buying it for the advantages it offers (occurrence basis, coverage trigger, and cancellation provisions).
In any case, you should speak to your aviation insurance broker about your particular situation.