U.S. terrorism insurance legislation carries through

The U.S. Congress has finally put the seal on a terrorism legislation package, approved by both the House and Senate and signed into law by president George Bush.

The “Terrorism Reinsurance Act” sets up excess coverage for terrorism losses wherein insurers will pay a deductible equal to 7% of the previous year’s direct written premiums. This deductible increases to 10% and then 15% in subsequent years of the program. In excess of this deductible, the government will pay for 90% of losses up to a ceiling of US$100 billion. In the case of a loss above this magnitude, Congress will have to decide at the time how to handle claims.

Participation in the three-year program is mandatory for all commercial carriers, requiring them to offer the coverage. A 3% surcharge will be levied on each policy to pay for the program. As well, terrorism lawsuits will be consolidated in one federal court. Bush pushed for the bill, saying that the lack of terrorism insurance was holding up development deals.

However, the same push has not been made here in Canada, notes Stan Griffin, president of the Insurance Bureau of Canada (IBC). Early on the IBC and other groups lobbied the Canadian government for a backstop plan but were told that a U.S. decision was being awaited. “In the U.S. there was a very strong case made to Congress by the real estate industry, real estate developers, a cross-section of industry. That really made a huge difference in terms of pushing the legislation forward.”

Griffin says he had been in contact with the Finance Ministry just weeks before the U.S. bill was signed into law and the response was “we haven’t seen any evidence in Canada that a lack of terrorism insurance had a dramatic impact on the economy”. The government’s reasoning is that “you’ve put exclusions in place and no one seems to be knocking on our door to complain”. For insurers, the most immediate concern is clarifying provincial regulations around fire-following coverage for terrorism acts, to ensure that insurers will not be expected to cover such a result.