Connecting you to Insurance and Risk Management Resources About HUBSign-upSearch

Terrorism Insurance is Vital to Businesses

As the tragic events in Boston have made all too clear, businesses are just as vulnerable to man-made disasters as they are to natural ones. In addition to potential loss of life, terrorist activity can result in financial ruin for many businesses. USA Today reported that sales came to a near standstill at some stores and businesses in the area around the Boston Marathon bombings, money which won't likely recouped.

"The revenue lost in the Boston Marathon tragedy aftermath really fell into three categories for our clients," stated Mike Chapman, Chief Sales Officer at HUB International New England. "The first category included businesses that actually suffered direct damage and were subject to the terrorism coverage purchased on their policy.  The second category was the 'crime scene', a large area surrounding the actual explosions that was closed for over a week.  Coverage here was dependent on the interpretation of 'civil authority' under the policy.  The final category was the 'lock-down' of the city and surrounding areas for basically one full business day while pursuing the terror suspects.  Due to the short duration of the city 'lock-down', insurance policies were not triggered," he said. "This was a very complex event."

Since Congress passed the Terrorism Risk Insurance Act in 2002, which provides coverage to businesses for acts designated as terrorism, only businesses that purchased this special rider are protected. However, if the bombings are ultimately not classified as terrorism, businesses may be able to receive coverage from their regular insurance policies.

While President Barack Obama referred to the bombings as an "act of terror," businesses must wait on the final ruling from the Treasury Secretary, Attorney General and Secretary of State.

Commercial Insurance vs. Terrorism Insurance

Commercial insurance, also known as business property insurance, protects businesses from financial loss due to the physical assets of a business being damaged. These can include the building the business is housed in, its inventory, its equipment and other essential contents. This type of coverage protects against things like fire, lightning, hail, wind storms, explosions, riots and vandalism. Additionally, endorsements can be added to a policy that will protect it further. Common endorsements include those for flood, earthquakes, business income and equipment breakdown.

Unfortunately, according to data from the Congressional Research Service, nearly four out of 10 commercial insurance policies have exemptions relating to terrorism, which would allow insurers to reject business interruption claims.  Large office buildings are much more likely to have terrorism insurance than small businesses.

A recent article in Insurance Journal points out how the events of 9/11 forever changed the way insurers look at terrorism coverage.  "In the aftermath of that fateful day, insurers were forced to re-examine the nature of terrorism related risks due to the potentially devastating economic consequences and insurers' lack of any basis for assessing the probability of a major terrorist attack," said Leigh Ann Pusey, president and CEO of the American Insurance Association.

Minimizing Risk

Dealing with the possibility of terrorism can feel overwhelming, but it's essential for businesses to meet the challenge head-on. The first step should be to analyze your current insurance coverage and determine if you are protected in the event of a terrorist attack. Many businesses may have gaps in their coverage relating to terrorism and not even realize it. In addition to physical damage, the potential financial impact of terrorism can be devastating. 

As reported by USA Today, Howard Kunreuther, co-author of Insurance and Behavioral Economics, writes that as many as 70 percent of businesses have terrorism insurance. More businesses should take a cue from this, especially those in urban areas. If the worst should happen, proper insurance coverage could be the only thing standing between a business failing or succeeding.

"Like all risks, the most important thing to do is  to review the exposures with an insurance professional and determine the best way to handle," said Chapman.  "Not everything can be covered, but you certainly want to do the evaluation and make choices based on the best advice."