It’s only a matter of time before a terrorist again targets American infrastructure for a deadly act of violence. We have seen attacks across Europe—at airports, on pedestrian avenues and atop bridges. When such a tragedy eventually reoccurs in the U.S., the victims and their survivors are likely to sue the owners, developers, contractors or design professionals involved in creating the structures where the attack occurs. Will the companies and professionals have adequate insurance coverage?
Many in the construction industry think terrorism insurance is adequately addressed by spending a relatively small additional premium on the insurance policies associated with the Terrorism Risk Insurance Act (TRIA), which offers the add-on. A federal statute passed in 2002 in response to the 9/11 attacks, TRIA has been implemented to alleviate concerns that private insurers would withdraw coverage or substantially increase premiums as a result of terrorism risks.
TRIA creates a government backstop to the insurance industry through subsidized reinsurance for catastrophic losses from an act of terror. TRIA, however, has significant shortcomings. The coverage applies only if an act of terrorism causes at least a $5-million loss, and the backstop reinsurance does not kick in until aggregate losses exceed $100 million.
More troubling, the coverage applies only to “certified” acts of terrorism. Certification is a political process: The secretary of the Treasury, the U.S. attorney general and the secretary of Homeland Security must all agree that the event was terrorism. This certification has not occurred one time since TRIA was enacted.
In other words, TRIA did not apply to the Boston Marathon bombings or the shootings at Pulse Nightclub in Florida or the San Bernardino, Calif.; Fort Hood, Texas; or Oak Creek, Wis., slayings. None of these events was “certified.” How likely is it that the Trump administration will recognize and identify a “certified” act of terrorism on its watch?
Thus, TRIA most likely will not provide the construction industry with much comfort in the wake of a significant terrorist event on American soil. Outside of TRIA, most industry players have only three realistic avenues for terrorism coverage: professional liability, property insurance and stand-alone terrorism liability, which is not commercially available for contractors and design professionals.
Professional liability insurance is exempt from TRIA, but many insurers have terrorism exclusions in base forms or endorsements. A knowledgeable broker should be able to place firms with carriers willing to remove such exclusions. Property insurance often has first-party terrorism coverage for property damaged in an attack, but this coverage applies only if the property is owned or in the control of the insured, which would rarely be the contractor or the design professional. For owners and developers, property insurance is a viable method of insuring against terrorism exposure for physical property damage. Beyond TRIA, owners and developers also have access to the third option for coverage, stand-alone terrorism liability coverage.
Despite that, several options exist for improving terrorism coverage for the construction industry. Contractors and design professionals must encourage owners and developers to build in contingency for terrorism by purchasing substantial limits of first-party and liability insurance that cover non-certified acts of terror. Any iconic or high-profile project (bridges, monuments, museums and tall buildings) that is heavily used by or accessible to the public (stadiums, convention centers, airports, dormitories and parks) or that houses particularly dangerous or sensitive materials (military facilities, data centers, prisons and water treatment plants) is a potential target.
Contractors and design professionals on these types of projects should seek further protection than their current insurance programs can offer. During construction, builder’s-risk policies can cover terrorism, but brokers must negotiate away standard exclusions. Other project-specific liability coverages, such as professional liability and controlled insurance programs, also must have additional broad terrorism coverage. Where available, active-shooter coverage should be considered for individual projects and home-office exposures.
Longer term, the insurance industry needs to expand offerings to provide liability coverage for non-certified acts of terrorism, specifically for contractors and other construction-related parties. In particular, general-liability underwriters must determine how to price a project that exposes their construction-industry insured to litigation related to terrorism. This coverage should apply to events where TRIA does not apply, either due to statutory requirements or the political nature of certification. Finally, innovative owners, contractors and designers should avail themselves of Homeland Security SAFETY Act certification for technologies and services that help to prevent terrorism, as several sports-facility owners have already done.
It is impossible to know when another rare but potentially catastrophic act of terrorism may occur. Thus, it is critical for firms to push their clients, underwriters and brokers for improvements in and placement of additional coverages now.