On Monday, President Barack Obama signed into law a six-year extension of the Terrorism Risk Insurance Program after the House and Senate passed the bill by votes of 416-5 and 93-4, respectively. As we previously reported, Congress' failure to extend the program, under which the federal government is responsible for a substantial share of insured losses resulting from "certified" acts of terrorism, could have significant implications for property or casualty policyholders. Many such policies include an endorsement, commonly designated as the "Conditional Exclusion of Terrorism Endorsement," which conditions terrorism coverage upon the existence of the Federal Terrorism Insurance Program. While the government's extension of the program is a positive sign for policyholders, it may not necessarily mean a return to the status quo. A question remains: Will insurance carriers that issued policies containing the Conditional Exclusion of Terrorism Endorsement argue that the exclusion has been triggered despite the Terrorism Risk Insurance Program's revival?
Three Things to Be Aware of
First, the standard form of the endorsement provides that it is triggered if the Terrorism Risk Insurance Program "has terminated." It remains to be seen whether insurers will argue that there is no coverage because the program terminated on December 31, 2014, despite the fact that the program is now in place again.
Second, the endorsement is arguably triggered if the Terrorism Risk Insurance Program is revised in a way that decreases the federal government's statutory percentage share in potential terrorism losses above the insurer's "deductible." The new law gradually decreases the federal government's "share" of insured losses from 85% to 80%, dropping one percent annually beginning on January 1, 2016. Thus, insurers might take the position that the endorsement has been triggered by the change in the program.
Third, if insurers perceive the changes to the Terrorism Risk Insurance Program under the new law as requiring them to bear a larger share of insured losses, terrorism risk insurance coverage might become more expensive. Just how much more expensive is unclear, though one can say with some confidence that it would have been significantly more expensive, and harder to find, had Congress not passed, and the President not signed, the law reauthorizing the program.
What to Do
Given these uncertainties, policyholders should, at a minimum, review their property and casualty policies to determine if they include the Conditional Exclusion of Terrorism Endorsement, or a similar endorsement or policy exclusion. If so, policyholders should carefully review the language of that endorsement, or seek the assistance of experienced coverage counsel to do so, to determine if it is arguably triggered by Congress' changes to the Terrorism Risk Insurance Program.
Finally, policyholders should keep in mind that it is unlikely that an insurer would successfully argue that the temporary lapse of the Terrorism Risk Insurance Program, or any change to the program, relieves the insurer of providing terrorism risk coverage for the remaining term of policies that were in force when it lapsed. All property and casualty insurers, with few exceptions, are required to participate in the Terrorism Risk Insurance Program and they all must make terrorism risk coverage available to their policyholders. Given this, and the fact that most of the substantive changes to the program will not take effect until a year from now, policyholders should insist that their insurers continue to provide the terrorism risk coverage under the policies that were in force when the program lapsed.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.