On December 17, Congress adjourned without taking action to renew the Terrorism Risk Insurance Act (TRIA), which is scheduled to expire after December 31 of 2014. TRIA was a law adopted after the September 11, 2001, terrorist attacks, when insurance companies were understandably hesitant to insure commercial office buildings in New York City and other large metropolitan areas. Property owners were unable to purchase coverage at a reasonable price, which affected their willingness to further invest in those properties.
In response, the Congress passed TRIA, which provided that the federal government would cover 85 percent of the losses from a terrorist attack which exceeded $100 million. This law allowed insurers to better predict potential losses, which created a market for insurance which covered the risk of loss associated with terrorism. The law was subsequently renewed and amended in December 2005 and December 2007, and most in the insurance industry expected another extension before the end of the current session of Congress.
Congress’ failure to renew TRIA means that insurers are back to their pre-TRIA reluctance to insure against terrorism risks, as they will once again be solely responsible to pay losses resulting from a terrorist attack. Because the premiums that were charged post-TRIA assumed government participation in paying for losses, insurers will have the right, effective January 1, 2015, to cancel such coverage, and to charge higher premiums for the coverage if customers desire to continue to carry it. Many lenders may require, as a standard condition of loan documents, that borrowers maintain appropriate terrorism coverage, and so cancellation of that coverage has the potential to affect compliance with those covenants.
There is still much which is unknown with regard to this issue. For example, insurance companies have not yet indicated whether they will cancel their terrorism coverages. It is also possible that the Congress will act to renew the program when it reconvenes in January. However, business owners should all be aware of the possibility that they may receive a notice of cancellation of terrorism coverage from their insurance companies.
Those who receive such a notice, or who have questions regarding this issue, are encouraged to contact their insurance broker.