Terrorism Insurance: The What-ifs for Hotels

The hotel industry is fortunate

The hotel industry is fortunate. The federal government's terrorism insurance backstop has been in place since 2002 with no disruption in coverage. In fact, in 2007, Congress approved the Terrorism Risk Insurance Act (TRIA), which extends the coverage through 2014. However, the language in both acts has made it clear federally backed terrorism insurance is only temporary.

That's because the government does not want to assume the role of insurer, and insurers would agree. Yet the much-needed coverage does provide coverage that lenders require. Should it become privatized once more, the costs could become prohibitive.

Hotels that have such coverage aren't talking. But experts suggest that anywhere from 50 to 60 percent of hoteliers carry terrorism insurance on their hotels and properties under development. At the moment, the cost of a hotel terrorism insurance policy ranges from 2 to 10 percent of the overall hotel property insurance premium.

The good news is that terrorism insurance rates are dropping. Last year, hotels could expect to pay 7.7 percent of premium. This year, 7.1 percent, according to the Insurance Information Institute.

The bad news? If Congress doesn't extend TRIA, hotels can expect any terrorism coverage coming out of the insurance markets to increase in price. As well they should the TRIA coverage includes terrorism coverage for all businesses, which allows the premiums to remain low. Insurers may also offer terrorism coverage with limitations and exclusions.

Currently, TRIA includes these parameters:

A $100 billion cap on claims.

A requirement that the US Treasury distribute regulations to determine pro-rata shares of insured losses when insured losses exceed $100 billion.

A directive to the Comptroller General to determine which areas of the country have capacity constraints higher concentrations of risk

The current administration has proposed a reduction in its commitment to TRIA, which could send terrorism insurance into the private market sooner than expected. When TRIA was established, it was made clear the program was temporary until the insurance market could build adequate reserves to cover such losses. While Congress is expected to pass another extension to the plan, hoteliers need to consider their exposure and what future costs might be.

Terrorism Insurance: The What-ifs for Hotels

By: Kurt Kramer

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