The insurance costs of the terrorist attacks of September 11, 2001, well exceeded $40 billion. Recognizing the importance of continued availability of insurance for losses associated with terrorist acts to the national economy, Congress enacted the Terrorism Risk Insurance Act ("TRIA"), which was signed into law and became effective on November 26, 2002. The program is slated to run through 2004 with an option to extend it through 2005, hopefully establishing a competitive market for terrorism insurance in that time.

Following the attacks on the World Trade Center and the Pentagon, many property and casualty insurers began either excluding coverage for acts of terrorism or increasing rates to levels where insureds could not afford full coverage. Particularly hard hit were sports stadiums, arenas and amusement parks, which are seen as prime targets for terrorist attacks because they are high profile and attract large crowds. Ten major league baseball teams were only able to obtain affordable terrorism insurance by taking out a joint policy backed by Lloyd's of London. Hospitals in large cities saw drastic reductions in coverage levels because of the increased risk of loss. Likewise, the airline industry presents an obvious need for terrorism insurance. Although many lenders require borrowers to have terrorism insurance, many property owners in high profile locations were not able to secure coverage after September 11.

TRIA now mandates that all insurers licensed or admitted to engage in primary or excess commercial insurance in the United States make terrorism coverage available. The program also applies to excess or surplus lines insurers and state residual market mechanisms, including state workers compensation funds. If a captive is licensed or admitted to engage in primary or excess commercial insurance in any state, it is an insurer within the meaning of TRIA and mandated to make terrorism coverage available. Otherwise, captives and other self-insurers may be included in the future to the extent provided in rules issued by Treasury. More generally, TRIA applies to commercial property and casualty lines of insurance with certain exceptions such as medical malpractice insurance. A study is currently being conducted by the Secretary of the Treasury to determine if group life insurance should also be included under TRIA. In addition, Treasury is required to complete a study on life insurance and personal lines within 9 months.

The types of damages that must be covered under TRIA are those resulting from acts that are certified as terrorist acts by the Secretary of the Treasury. Certified acts of terrorism are defined as violent acts that are dangerous to human life and property perpetrated on behalf of foreign interests or foreign persons, which are not part of a declared war, and which result in losses in excess of $5 million. TRIA does apply to workers compensation losses that are caused by an act of war.

The largest challenge of TRIA currently lies with the insurance industry because the act went into effect on the date it was signed and insurers were forced to quickly determine rates for terrorism for all covered lines in all jurisdictions. Therefore, as of November 26, 2002, insurers are required to disclose the premiums that will be charged for terrorism coverage, in addition to the fact that the federal government will reimburse insurers 90% of their aggregate loss from certified acts of terrorism in excess of the insurer's annual deductible, in conjunction with issuing new and renewal commercial property and casualty policies. That deductible is determined based upon a percentage of the insurer's prior year direct earned premium ranging from 7% in 2003 to 15% in 2005. With respect to insurance in force on TRIA's effective date, insurers have until February 23, 2003, to notify policyholders that any exclusion previously in place relating to terrorism coverage is nullified to the extent it excludes coverage for certified acts of terrorism, to disclose the premium for certified terrorism coverage and to notify the policyholder of the federal government's participation in losses above the insurer's deductible. If an insurer already offers coverage, then they must delineate certified terrorism risk from non-certified terrorism risk and price the two separately. The notice requirements are extremely important. In addition to substantial civil penalties for non-compliance with TRIA, if an insurer fails to provide the appropriate notice, the federal government will not be obligated to reimburse the insurer for covered losses resulting from certified acts of terrorism.

To help insurers meet the disclosure deadlines, state insurance regulations authorizing prior approval of, or establishing waiting periods related to, rate and form filings are preempted by TRIA. Although state insurance departments may conduct post-issuance review and thereby disapprove rates or forms, this waiver of the standard filing requirements through December 31, 2003 allows insurers to make coverage immediately available.

If the federal government is required to pay for insured losses during the course of a year, the Treasury Secretary is required to recoup the difference between the total industry costs, i.e. government reimbursement of the individual insurers' losses in excess of their deductibles plus the industry's 10% share above the deductible, and a set dollar amount per year. The amount increases from $10 billion dollars for the program's first year to $15 billion if the program is extended for a third year. To recoup the costs, commercial policyholders may be assessed a surcharge which will not exceed 3% of the premium paid for a policy in a given year. For example, if the aggregate insured losses from a certified act of terrorism in year one totaled $30 billion and the federal government reimbursed insurers $21 billion, the federal government would recoup $1 billion, which is the amount in excess of the insurers' deductible, or nine billion dollars, subtracted from $10 billion, the predetermined amount for year one. Ultimately, the losses covered by the program are capped at $100 billion annually for insurers and the federal government combined but Congress may determine procedures for and the sources of any excess payments.

As noted above, TRIA was enacted with hopes that a competitive market for terrorism risk insurance would quickly evolve. Unless required to carry terrorism insurance by a lender or by state insurance regulations, property owners who are in lower risk locations or who cannot afford the added premium can still opt out of coverage. Where not prohibited by state regulations, insurers may exclude coverage if the insured provides express notice after full disclosure of the intent to refuse terrorism coverage or where an insured has failed to pay the premium after proper notice and thirty days.

The main objective of TRIA is to make terrorism insurance available in the United States in the post-September 11th world. By limiting the exposure of commercial insurers to losses associated with acts of terrorism and mandating that most property and casualty insurers offer the coverage, it is hoped that a competitive market will develop making the coverage more affordable to the consumers who need it. While insurers are under a time crunch to set premiums for each of their lines and to disseminate the appropriate disclosure notices, post-issuance review of forms and rates, consistent with existing state rate and form filing laws, still ensures that abuses of the process are prevented.