Terrorism Insurance: The Policy and the Federal Backstop

Introduction

A business buys commercial property insurance. A violent attack damages its building. Two separate questions follow:

1. Does the business's own policy pay? This is a contract question between the business and its insurer.
2. Does the federal government help the insurer pay for it? This is a separate arrangement between the insurer and the U.S. Treasury.

The federal arrangement is called the Terrorism Risk Insurance Program: a temporary federal program that shares the cost of certain terrorism losses with insurers. A backstop is a safety net behind the main payer. Here, the insurer pays its customer first, and the federal program may later reimburse part of the insurer's losses.

Most mistakes in this topic come from mixing up those two money flows. This lesson keeps them apart.

What You Will Be Able to Do

• Explain who pays whom under the federal backstop, and why the policyholder does not file a claim with Treasury.
• Decide whether an event can count as a certified act of terrorism under the program.
• Sort insurance lines into those the program covers and those it excludes.
• Check whether an insurer's terrorism coverage offer and disclosures meet the federal requirements.
• Calculate the federal share of an insurer's loss in a simple case, and tell the insurer's program deductible apart from a policyholder's deductible.

Before you start: You should know what a commercial package policy contains, from building and classifying commercial property coverage. You should also know how offers, acceptance and policy parts fit together, from contract formation and the policy map.

Two Money Flows: The Policy and the Backstop

The Terrorism Risk Insurance Act (TRIA) is the federal law that created the program. The Secretary of the Treasury runs the program with help from the Federal Insurance Office, an office inside the Treasury.

Picture the money moving in two separate steps:

• Step A, the policy: The insurer pays its policyholder for a covered loss, under the policy's terms.
• Step B, the backstop: If the program's conditions are met, Treasury pays the insurer a federal share of compensation, meaning the government's portion of the insurer's terrorism losses.

The policyholder appears only in Step A. Treasury pays insurers, not the business that owns the damaged building. The federal rules also set no deadline or claim form for the policyholder to send to Treasury.

The program is temporary. Federal law has extended it through December 31, 2027. Do not assume it continues after that date unless a later law extends it.

Checkpoint: A restaurant owner's building is damaged in an attack. The owner asks their producer, "Should I send my repair bill to the U.S. Treasury?" What is the correct answer, and why?

Certification: The Official Federal Decision That an Event Counts

The program applies only to a certified act of terrorism. Certification is a formal decision by the Secretary of the Treasury, made after consulting the U.S. Attorney General and the Secretary of Homeland Security. News reports calling an event "terrorism" do not certify it.

To certify an act, the Secretary must find all four of these:

1. It is an act of terrorism.
2. It is violent or dangerous. The act is violent, or it is dangerous to human life, property or infrastructure.
3. The damage is in the right place. The damage occurred within the United States. Damage outside the country also qualifies if it involves: - an air carrier, or - a U.S.-flag vessel (or a qualifying vessel based principally in the United States), or - the premises of a U.S. mission.
4. The purpose is coercion. It was committed by one or more individuals to coerce the U.S. civilian population, or to influence U.S. government policy or conduct by coercion.

The Secretary cannot certify an act in two situations:

• Declared war: The act was part of a war declared by Congress. The exception is workers' compensation coverage, which can still be included.
• Not enough loss: Total property and casualty insurance losses from the act are $5 million or less. The losses must exceed $5 million.

The Secretary's decision to certify, or not to certify, is final and cannot be challenged in court.

One fact changes the answer. A coordinated attack in a U.S. city aims to pressure the government. It causes $40 million in insured property and casualty losses. That event can be considered for certification.

Now change only the loss total to $3 million. Everything else stays the same, but the Secretary cannot certify it, because the losses do not exceed $5 million.

Checkpoint: An attack damages an office building in the United States and is widely reported as terrorism. Insured losses are $12 million, and the act is not part of a declared war. A business owner says, "It's definitely a certified act; every news channel says so." What is wrong with that reasoning?

Program Lines: Which Kinds of Insurance the Backstop Covers

The program covers only certain lines of insurance, meaning categories of insurance as insurers classify them for reporting. For this program, "property and casualty insurance" means specific commercial lines. Commercial lines are insurance for businesses and organizations, not personal or household coverage.

Included lines:

• Fire, and allied lines
• Commercial multiple peril, both the property and liability portions (this is the commercial package category)
• Ocean marine
• Inland marine
• Workers' compensation
• Other liability, including a stand-alone cyber liability policy reported in that line unless it is identified as a non-property-and-casualty line such as professional liability
• Products liability
• Aircraft
• Boiler and machinery
• Excess insurance, and directors and officers liability

Excluded lines (examples relevant to a property producer):

• Commercial auto
• Farmowners multiple peril
• Surety
• Burglary and theft
• Professional liability
• Flood insurance under the National Flood Insurance Program
• Earthquake insurance reported in its own line
• Crop and livestock insurance
• Title insurance
• Reinsurance
• Health and life insurance

Why the word "commercial" is not enough: Commercial auto insures businesses, but the rule names it as excluded. To decide, check the specific line against the lists. Do not rely on the word "commercial" alone.

Personal lines, such as a homeowners policy, are not program lines, because the definition covers commercial lines.

Checkpoint: Sort these into "program line" or "not a program line": (a) a contractor's inland marine floater for tools, (b) a delivery company's commercial auto physical damage coverage, (c) a family's homeowners policy, (d) a retailer's commercial package property coverage.

The Offer: "Make Available" With No Material Difference

For program lines, the insurer must make available terrorism coverage. This means the insurer must offer it. The customer does not have to buy it.

The offer must not differ materially from the policy's coverage for non-terrorism losses. "Differ materially" means a meaningful change in the terms of the coverage. The rule checks three things:

• Terms, meaning the coverage conditions
• Amounts, such as limits
• Other coverage limitations, which specifically include deductibles

Price is the exception. For this rule, "terms" does not include price. The insurer may charge a separate price for terrorism coverage.

Worked example. These amounts are fictional. A Nevada retailer is offered a commercial package with a $1,000,000 building limit and a $5,000 deductible for ordinary covered losses.

• Compliant offer: The terrorism coverage also has a $1,000,000 limit and a $5,000 deductible, for an added price. This meets the rule. Limit and deductible match, and only the price is new.
• Change one fact: The terrorism coverage instead has a $10,000 limit. This does not meet the rule. A building insured for $1,000,000 against ordinary losses but only $10,000 against terrorism is a material difference in amount.
• Change a different fact: The limit matches at $1,000,000, but the terrorism deductible is much larger than $5,000. That can also be a material difference, because deductibles count.

Limits on what the insurer must offer:

• The insurer does not have to cover risks it normally excludes or does not write. For example, if applicable state law permits an exclusion for nuclear, biological or chemical events and the policy uses it, the terrorism offer does not have to add that coverage.
• The offer must match the federal definition of an act of terrorism from the previous section.

When the offer is required: At the initial offer of a new policy, and again at the initial offer of renewal.

How long the requirement lasts: Through calendar year 2027. Coverage for terrorism losses does not have to be made available beyond December 31, 2027, even if the policy period runs past that date.

Checkpoint: An insurer offers a manufacturer a policy with a $4,000,000 property limit and a $25,000 deductible. The terrorism coverage has the same limit and deductible but costs extra. The manufacturer complains, "The terrorism coverage has to be the same as everything else, so the price must be included." Is the manufacturer right?

The Buyer's Choice: Accept or Decline

The policyholder may decline a compliant terrorism offer. Declining has three effects to remember:

• Partial coverage is optional. After a decline, the insurer may negotiate partial terrorism coverage at a lower amount, but only if applicable state law permits it. The federal rule does not require the insurer to offer partial coverage.
• Timing matters for the backstop. A condition for federal payment is that the insurer offered terrorism coverage and the insured accepted it before the act that caused the loss. Coverage accepted after the act does not meet this condition.
• Declining does not settle every policy question. A decline does not by itself decide whether the policy pays for a particular terrorism loss in every state. The answer depends on the policy wording and on applicable state law. This lesson's sources are federal rules; they do not supply Nevada-specific law on how a declined terrorism offer affects the policy.

Checkpoint: A gym owner declines the full terrorism offer and then asks for coverage at half the building limit. The insurer refuses. Did the insurer break the federal rule?

Disclosures: What the Insurer Must Tell the Policyholder

A disclosure is information the insurer must clearly give the policyholder. Two disclosures are conditions for federal payment. If the insurer does not provide them properly, it puts its federal reimbursement at risk.

1. The general disclosure must clearly and conspicuously show:

• the premium charged for the terrorism losses the program covers, and
• the federal share of compensation.

It must appear as a separate line item in the policy, at the time of offer and at renewal.

The insurer may show the terrorism premium as a portion or percentage of the policy premium, if the policy premium or the method used to determine it is also stated. The insurer must not describe that premium in a misleading way, such as calling it a "surcharge."

2. The cap disclosure tells the policyholder that a $100 billion annual cap exists. If total insured losses in a calendar year exceed $100 billion:

• Treasury pays nothing for the amount above $100 billion, and
• an insurer that has met its program deductible is not liable for the amount above $100 billion.

The cap disclosure is due at the time of offer, purchase and renewal.

Compare the timing:

• General disclosure: offer and renewal.
• Cap disclosure: offer, purchase and renewal.

Using a producer: An insurer that normally communicates through a producer may deliver both disclosures through that producer. The insurer still remains responsible for making sure the producer actually delivers them.

Checkpoint: An insurer's renewal notice shows one combined premium, with a footnote calling part of it a "terrorism surcharge." There is no mention of the federal share. Name two problems.

The Federal Share: Who Absorbs Which Part of the Loss

Once an act is certified, the federal share depends on several numbers. Each one answers a different question.

The thresholds

• Certification threshold ($5 million): Is the act large enough to be certified at all? Insured property and casualty losses from the act must exceed $5 million.
• Program trigger ($200 million): Has the whole insurance industry lost enough this year for any federal payment? Total industry insured losses from certified acts in the calendar year must exceed $200 million, for 2020 and later years.

The insurer's own layers

• Insurer deductible (20 percent): How much must this particular insurer absorb before federal help begins? It equals 20 percent of the insurer's direct earned premium for the prior calendar year. Direct earned premium is the insurer's premium income from program lines. (An insurer without a full prior year of operations uses a different calculation.)
• Federal share (80 percent): What does Treasury pay? It pays 80 percent of the insurer's insured losses above its insurer deductible. This amount is subject to adjustments and to the $100 billion cap.

Not to be confused with the policyholder's deductible

The insurer deductible is a program amount for the insurer. It is not the policyholder's deductible. A business's own policy deductible is part of the policy, covered in calculating deductibles, limits and coinsurance. Amounts the policyholder pays under the policy terms are not counted as the insurer's insured losses.

Worked example. All figures are fictional. Assume the act is certified, every payment condition is met, no adjustments apply, and the $100 billion cap is not reached.

• Industry insured losses from certified acts this year: $450 million.
• Sierra Mutual's direct earned premium last year: $100 million.
• Sierra Mutual's insured terrorism losses this year: $30 million.

1. Is the program trigger met? Yes. $450 million exceeds $200 million.
2. Find the insurer deductible. $100 million × 20% = $20 million.
3. Find the losses above the insurer deductible. $30 million − $20 million = $10 million.
4. Calculate the federal share. $10 million × 80% = $8 million.
5. Calculate what Sierra Mutual keeps. $20 million deductible + $2 million (its 20 percent of the excess) = $22 million.

Check: $8 million + $22 million = $30 million, which equals the insurer's total losses.

Change one fact. If Sierra Mutual's losses were $18 million, they would fall below its $20 million insurer deductible. The federal share would be $0, even though the industry trigger was met.

Change a different fact. Keep Sierra Mutual's losses at $30 million, but lower industry losses to $150 million. The $200 million trigger is not exceeded, so no federal share is paid.

Tempting mistake: Applying 80 percent to the whole $30 million and getting $24 million. The 80 percent applies only to the part above the insurer deductible.

Checkpoint: An insurer's prior-year direct earned premium was $60 million. Its insured terrorism losses this year are $15 million, and industry losses are $500 million. Assume all conditions are met. What is the federal share?

Practice on Your Own

Question 1: A Reno warehouse owner is offered a commercial package with a $3,000,000 building limit and a $10,000 deductible. The terrorism option has the same limit, a $250,000 deductible, and a higher price. Does the terrorism option meet the "no material difference" rule? Which feature matters, and which does not?

Question 2: Which of these are program lines? (a) workers' compensation, (b) a surety bond, (c) farmowners multiple peril, (d) boiler and machinery, (e) commercial auto liability.

Question 3: These figures are fictional. Assume all conditions are met and the cap is not reached. An insurer's prior-year direct earned premium was $250 million. Its insured terrorism losses this year are $90 million. Industry losses are $1.2 billion. Find the insurer deductible, the federal share, and the amount the insurer retains.

Question 4: A producer forgot to give a client the terrorism disclosures at renewal. The insurer says, "That's the producer's problem, not ours." Is the insurer right?

Question 5: A business declined terrorism coverage at its 2026 renewal. Later that year, a certified act damages its building. Can the insurer receive a federal share for this business's loss under the declined coverage? Does the federal rule alone decide whether the policy pays the business?

What to Remember

• Two money flows. The insurer pays the policyholder under the policy. Treasury may reimburse the insurer through a temporary program, extended through December 31, 2027.
• Certification. The Treasury Secretary formally certifies an act after consulting the Attorney General and the Secretary of Homeland Security. The act must meet all four criteria, cannot be part of a congressionally declared war (except for workers' compensation), and must cause more than $5 million in insured losses.
• Program lines. Specific commercial lines are included. Personal lines are not. Commercial auto, farmowners, surety, professional liability and the other listed lines are excluded.
• The offer. At the initial offer and the renewal offer, insurers must make terrorism coverage available with no material difference in terms, amounts or limitations, including deductibles. Price may differ. Insurers need not add risks they normally exclude.
• The choice. Policyholders may decline. Partial coverage afterward is optional and depends on state law. For federal payment, the coverage must have been accepted before the act.
• Disclosures. The terrorism premium and the federal share go on a separate line at offer and renewal. The $100 billion cap disclosure goes out at offer, purchase and renewal. The insurer stays responsible even when a producer delivers them.
• Federal share. Industry losses must exceed $200 million in the year. The insurer absorbs its deductible (20 percent of prior-year direct earned premium). Treasury pays 80 percent of losses above that, subject to adjustments and the cap. Always check that the federal share plus the insurer's retained amount equals the total loss.