Obscure terror insurance fee faces renewal fight in Congress

Over the past 10 years, Minnesota employers have paid out more than $130 million for insurance to protect themselves against terrorists.

The little-known surcharge has been tacked onto the workers’ compensation insurance that employers must carry, whether the business is a multinational employer or a convenience store in a remote corner of the state. Many business owners don’t even realize they’re paying extra to cover death or injuries from workplace acts of terrorism, such as a truck bomb or sarin gas attack.

Now, as the post-9/11 law comes up for renewal in Congress, some business people are wondering why they’re shelling out for terrorism at all.

“I just think it’s bogus,” said Naomi Williamson, owner of Sanctuary Restaurant in Minneapolis. “It’s like a bank fee, a hidden fee that’s giving me something that’s not of value to me.

“When’s the last time we had a terrorism event in Minnesota?”

The workers’ comp charge itself isn’t big. In Minnesota, it’s typically 2 cents per $100 of payroll, or $44 a year in the case of Williamson’s restaurant. But taken together, the payments form a noteworthy revenue stream for insurers, who are fighting to keep the federal backstop from expiring at the end of December.

In 2011, Minnesota’s private employers, excluding those who are self-insured for workers comp, paid about $17 million for the protection, according to payroll numbers from the Minnesota Workers’ Compensation Insurers Association.

“It’s free money to the insurance company,” said Sheryl Frieman, president of Golden Valley-based Array Financial Services Inc.

The government enacted the workers’ comp charge in 2002 when President George W. Bush signed the Terrorism Risk Insurance Act (TRIA) into law to stabilize insurance markets after 9/11. The terrorist strikes were the nation’s costliest disaster for insurers aside from Hurricane Katrina, with insurers eventually paying out $30 billion in claims.

TRIA was meant as a temporary backstop to protect insurers from catastrophic terrorism losses. Insurers pay the first aggregate $100 million in insured losses from a certified act of terrorism; the U.S. government picks up most of the rest.

TRIA has never been used. The Boston Marathon bombing didn’t trigger TRIA because it was not a workplace attack and the property damage didn’t meet a $5 million threshold.

TRIA requires insurance companies to offer terrorism insurance. In addition to the workers’ comp charge, companies can typically buy terrorism coverage as part of their property and casualty insurance.

The property coverage isn’t mandatory, but about 65 percent of U.S. companies buy it, according to insurance brokerage Marsh & McLennan Cos. Lenders often require the coverage on commercial real estate, but one local agent said she doesn’t know of any small business in Minnesota that buys it.

The Rand Corp. estimates that terrorism coverage is now about 4 percent of property insurance premiums, meaning business policyholders pay an estimated $4.6 billion for terrorism coverage each year in their property policies.

With workers’ comp, which employers must carry unless they self-insure for workplace injuries, insurers automatically tack on the terrorism surcharge. States were left to devise their own formulas for the fee. Relying on data from EQECAT Inc., an Oakland, Calif.-based catastrophe risk modeler, Minnesota settled on 2 cents as a guide, then dropped it to 1 cent in 2008, according to Craig Anderson, head of actuarial services at the Minnesota Workers’ Compensation Insurers Association. The 2-cent mark is still widely used.

In Illinois it’s around 4 cents; Virginia is about 3 cents, insurance agents say.

Extended twice since 2002, TRIA is set to expire at the end of December. Bills are circulating in Congress to extend it.

The insurance industry is pushing hard for renewal, arguing that it needs the backstop because it cannot adequately model for terrorism attacks the way it can for natural catastrophes such as hurricanes.

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