A Lesson in Patriotism: the Boston Marathon Bombing and Insurance Industry on the 9 / 11 Anniversary

Yesterday was the anniversary of the 9/11 terrorist attacks. It was a day of remembrance for those who lost their lives in the worst attack on US soil. It was ironic that yesterday we learned that the US Treasury had declared that the Boston Marathon bombing was not determined to be an “act of terrorism” under the Terrorism Risk Insurance Act (TRIA).

Small and mid-sized Boston business owners who lost thousands of dollars after having to close their doors for weeks while their streets became a crime scene were shocked and dismayed. The insurance industry on the other hand cheered with delight. They did not have to pay out $1.9 million in aggregate claims related to the attack.

President Obama has made press statements categorizing the bombing as an act of terrorism. The Department of Justice is prosecuting Dzhokhar Tsarnaev for federal crimes of terrorism. So what does TRIA say anyway?

In order to answer that question, we have to briefly analyze some background information. The 9/11 terrorist bombings resulted in financial losses of approximately $40 billion. Most of the losses were paid out by insurance companies, and the companies that actually opened their wallets were reinsurance companies.

After having to pay out all of those claims, the reinsurance companies withdrew from the terrorism coverage market. It was not profitable. Without reinsurance, and faced with the risk of actually having to pay out claims that premiums were already being collected on (gasp), primary insurance companies began to exclude terrorism coverage.

This became a concern for the Federal Government because investors now required terrorism protection before they lent to economic sectors such as real estate, transportation, construction, energy and utility in metropolitan areas post 9/11. The Federal Government feared this made our country economically vulnerable. They were right.

So Congress responded by enacting the Terrorism Risk Insurance Act (TRIA) which was signed into law by President George W. Bush in 2002. Under the Act, the Federal Government essentially stepped into the role of the private reinsurance industry. Terrorism coverage was now federally backed. Primary insurance companies could feel comfortable writing terrorism coverage policies, investors would start lending again, and our crucial industries would continue to grow.

However, somewhere along the way in the crusade for patriotism on Capitol Hill, the Federal Government ended up advancing the interests of the private insurance industry.

The statute included language that set a high bar which must be met before the primary insurance company would be responsible for paying out claims; a statutory trigger. Before the primary insurance company is responsible for paying out a terrorism claim, the Secretary of the Treasury, Secretary of State, and Attorney General must all declare that the event was an “act of terrorism.” Seems easy enough right?

Here is the fine print; a destructive act cannot be certified as an “act of terrorism” unless the aggregate insurance losses total more than $5 million. In the case of the Boston Marathon bombings, as of March, 2014, only $1.9 million in aggregate insurance claims were reported which mostly consisted of lost profits associated with temporarily shuttering businesses.

Since the aggregate claims did not exceed the $5 million hurdle, the US Treasury could not deem the bombings an “act of terrorism.” That declaration saved the private insurance industry $1.9 million.

The small and mid-sized Boston business owners who lost thousands of dollars? The members of our community? They were out of luck. But the private insurance industry is happy to accept their premiums. In fact a local insurance brokerage reported that 80% of their commercial clients now own terrorism coverage since the Marathon bombing.

TRIA is set to expire at the end of 2014. There is congressional support to extend the Act until 2019. The private insurance industry could not be happier – they get the best of both worlds: a high bar for what constitutes “terrorism”and federal backing. They are protected on the front and back end.

Going forward, perhaps we should re-think our definition of an “act of terrorism” to conform to reality – not the profitability of the insurance industry. It doesn’t seem very patriotic now does it?