TRIA – When the Ball Drops, No Need to Panic But…
At exactly 12:00 a.m. on January 1, 2015, the New Year will be celebrated amidst ball drops and renditions of “Auld Lang Syne.” However, amidst the celebrations, the Terrorism Risk Insurance Act (TRIA) will expire. While there is a very real possibility that Congress will pass legislation renewing it in some form when the 114th Congress convenes in January 2015, insurance companies and their insureds are already feeling the anticipated effects of the non-renewal and planning for the future.
Most large real estate transactions and many other commercial transactions depend on the availability and procurement of terrorism coverage as part of the insurance requirements for the deal. Policyholders should be reviewing the terms of their binders confirming renewals and assessing whether or not they will have terrorism coverage as of January 1, 2015 and to determine whether there are any contractual obligations to procure or keep this coverage.
Commercial mortgagors whose terrorism coverage expires after January 1, 2015 need to make difficult choices before that date, particularly since lenders typically require borrowers to have terrorism coverage in place as part of their loan policies. January 1 is a common renewal date, and some terrorism risk policies also have exclusions that void coverage in the event of TRIA’s expiration. Whether or not the commercial policy, which includes terrorism coverage, expires on or after January 1, 2015, the failure by Congress to reauthorize TRIA in a timely manner could have a huge impact since, as is commonly suggested, some policies will expire by their terms, precipitating technical defaults by many policyholders, while other commercial policies will not protect insureds against terrorist acts occurring after that date, whereas for still others, paying large increases in premiums will be their only viable alternative.
Timothy Bunt, Senior Vice President and global Chief Risk Officer of CBRE, a California-based real estate services company, said in a statement on December 22, 2014 that the burden of providing terrorism coverage would be greater for small and midsize insurers, so the largest premium increases could come from them.
Another consequence predicted by a risk modeling vendor, is that commercial insurers who continue to cover terrorism after December 31 will “likely be required to maintain higher capital standards.”
On December 18, Marsh, Inc. suggested that one option is for clients to look to the stand-alone terrorism market for stop-gap coverage, which, in any event is a market with limited capacity.
Finally, New York Department of Financial Services Opinion of General Counsel 2003-189 (Commercial property insurance terrorism limitation for ‘fire following’ an act of terrorism), addresses the issue of “following fire.” While Section 3404 of New York’s Insurance Law (Fire insurance contracts; standard policy provisions; permissible variations) does not address the “following fire” issue, OGC Opinion 2003-189 does. As a result of that opinion, New York’s interpretation of the standard fire policy requirement currently rejects sub-limits or exclusions for fire losses caused by acts of terrorism. That is a sobering thought as the New Year looms large.