Attorney points out what's missing from new terrorism insurance law. (Insiders Outlook).

When the federal government enacted that Terrorism Risk Protection Act in November 2002, it eliminated the "terrorist exclusion" which insurers had begun to add to their policies in late 2001.

While the Act provides that such exclusions are void, insurers may in effect reinstate the same exclusions if the insurer discloses to its customer a separate premium for terrorism coverage and the customer insured elects not to incur this expense.

While the government will incur the lion's share of losses incurred due to terrorist acts as set forth in the Act, the marketplace is free to determine the cost that building owners must pay in order to obtain coverage against these acts. As a result, many properties are left uninsured or underinsured against terrorists acts and this article will address some of the reasons for this result.

The good news is that the existing database for evaluating and underwriting risks against terrorists acts in the United States does not provide a statistically significant sampling. Combining the underlying lack of data with the large dollar exposure in areas with dense concentrations of real estate values, causes the marketplace to struggle to determine appropriate pricing for coverage. While high-profile properties provide the most inviting target for terrorist acts, they are similarly the most in need of the market stabilizing influences of the federal legislation. While premiums have been reduced since the Act's passage, the Act does not provide any pricing structure for this insurance. Contrast this for example, with the British system called "Poo! Re" which fixes premiums at the highest levels in Central London with premiums declining as properties are located further from the central business district.

The Act requires that disclosure of the terrorism insurance premium be made "at the time of offer, purchase, and renewal of the policy." Inherent in the reasonable evaluation of market pricing is adequate opportunity to compare and evaluate competing bids. When insurers, as the Act permits, refuse to bid or insurers provide quotes at the last minute before a policy expires, property owners have little choice in their selection of coverage.

Even immediately after 9/11, lenders were not mandating that owners purchase insurance for lower profile or non-centrally located properties. Under the Act, losses from terrorist acts aggregating less than $5 million are excluded from coverage. Also excluded from the definition of terrorist acts are domestic or "home-grown" acts of terrorism, such as the Oklahoma City bombing. These provisions exclude the types of properties subject to these risks from the risk-spreading pool. This in turn may result in higher premiums for the higher profile properties seeking coverage.

"Trophy" properties still struggle to find appropriately priced protection. Even with the market stabilizing influence of the Act, premium quotes for these properties vary greatly between companies and, even quotes obtained from the same company can range dramatically. Anecdotal evidence indicates swings of several hundred percent in premiums quoted by the same company for the same coverage.

While the Act primarily addresses property and casualty insurance policies, premiums for liability coverage have also experienced a dramatic increase in the last few years. The Act prescribes an exclusive federal cause of action for personal injury, claims arising from terrorists acts. While subjecting these claims to the more stringent federal negligence standards, there are no safe harbors providing a standard duty of care in this arena.

Although the Act provides a welcome relief to property owners, insurers and lenders alike, the marketplace will take time to develop a reliable and predictable framework for analyzing the risks covered and developing a consistent pricing structure. Until the new dynamic created by the Act can be digested, owners of high-profile properties will have to persevere through the volatility and uncertainty of appropriately and economically protecting themselves.