Examkin

Question

Difficulty: Very hardTerrorism Risk Insurance Act (TRIA)

A commercial property insurer had a direct earned premium of $50 million for TRIA-eligible lines in the previous calendar year. The insurer writes a commercial property policy for a high-rise office complex, and the insured accepts the mandatory offer for terrorism coverage, paying the applicable premium.

A coordinated attack occurs at the complex, resulting in 12millionincommercialpropertydamage.TheincidentisofficiallycertifiedasanactofterrorismbytheSecretaryoftheTreasury,inconsultationwiththeSecretaryofHomelandSecurityandtheAttorneyGeneral.Thetotalindustry−wideinsuredlossesforthissingleeventare12 million in commercial property damage. The incident is officially certified as an act of terrorism by the Secretary of the Treasury, in consultation with the Secretary of Homeland Security and the Attorney General. The total industry-wide insured losses for this single event are 12 million.

The insurer attempts to deny or limit the insured's claim, arguing that the 12millioninindustrylossesfallsfarbelowthe12 million in industry losses falls far below the 200 million TRIA program trigger, and therefore the federal backstop is not activated.

Which of the following describes the correct legal obligation of the insurer under the Terrorism Risk Insurance Act (TRIA)?

  1. The insurer is legally obligated to pay the entire $12 million claim to the policyholder, but will receive no federal reimbursement because the industry-wide program trigger was not met.Answer
  2. B
    The insurer is permitted to deny the claim in its entirety because TRIA coverage for the policyholder is only activated when industry-wide losses exceed the $200 million federal program trigger.
  3. C
    The insurer must pay its 10millionstatutorydeductibletothepolicyholder,andthefederalgovernmentassumesdirectliabilityfor80percentoftheremaining10 million statutory deductible to the policyholder, and the federal government assumes direct liability for 80 percent of the remaining 2 million.
  4. D
    The insurer is only obligated to pay 10million,representingitsstatutoryTRIAdeductible,leavingthepolicyholderresponsibleforretainingtheremaining10 million, representing its statutory TRIA deductible, leaving the policyholder responsible for retaining the remaining 2 million.

Answer

The insurer is legally obligated to pay the entire $12 million claim to the policyholder, but will receive no federal reimbursement because the industry-wide program trigger was not met.
The Terrorism Risk Insurance Act (TRIA) mandates that insurers offer terrorism coverage and pay covered claims just as they would for other covered perils. The 200millionprogramtriggerandtheinsurer′s20200 million program trigger and the insurer's 20% deductible dictate whether the federal government acts as a financial backstop to reimburse the insurer, not whether the insurer must pay the policyholder. Since the 12 million loss is below the $200 million trigger, the insurer is fully liable for the claim and receives no federal funds.

Step-by-Step Solution

1
Determine the primary insurer's obligation to the policyholder.
The insurer must pay the full $12 million claim.
Under TRIA, if an insured accepts terrorism coverage, the insurer must treat terrorism like any other covered peril, meaning they are liable up to the policy limits regardless of federal reimbursement.
2
Evaluate the insurer's TRIA deductible.
The insurer's deductible is $10 million.
The statutory deductible is calculated as 20% of the previous year's direct earned premium for TRIA-eligible lines (20% of 50million=50 million = 10 million).
3
Evaluate the federal program trigger.
The $200 million trigger is not met.
The total industry-wide losses for the event are only 12million,whichfallsshortofthe12 million, which falls short of the 200 million threshold required for federal financial participation.
4
Determine the federal reimbursement amount to the insurer.
The insurer receives $0 in federal reimbursement.
Because the program trigger was not met, the federal government provides no financial backstop, leaving the insurer to absorb the entire $12 million loss from their own funds.

Key Concept

TRIA Program Triggers and Insurer Obligations
Rate this question

Topics

Terrorism Risk Insurance Act (TRIA)

More questions from this topic