The American Insurance Association (AIA) last week applauded Massachusetts Gov. Deval Patrick’s signing of legislation, House Bill No. 960, which amends the standard fire insurance policy statute. The legislation allows commercial property insurers to exclude coverage for the “fire following” an act of terrorism.
Policyholders will now have the option of purchasing commercial property insurance with or without terrorism coverage. The bill was signed by Gov. Patrick late last week and becomes effective on April 13, 2011.
“The legislature and Governor Patrick correctly recognized that terrorism is a unique peril that was not contemplated by the standard fire policy,” said Gary Henning, AIA vice president, Northeast Region. “That’s why AIA led the charge in seeking an amendment to the Massachusetts statute.”
Standard fire policies date back to the 19th century when fire was the primary culprit of commercial property loss. Terrorism risk in the 21st century is a new threat that is difficult to price and underwrite and potentially threatens insurers’ solvency. In 2002, the U.S. Congress passed the Terrorism Risk Insurance Act (TRIA), which requires carriers to make terrorism coverage available, but allows policyholders and insurers to agree to alternatives to “full coverage.” Of the 28 states that continue to have standard fire insurance policies on their books, 14 have amended their laws since 2002 in order to allow for a terrorism exclusion. Prior to Massachusetts, the most recent enactment was New Jersey in January 2008.
“Like other states, Massachusetts policyholders will now have the option of purchasing commercial property coverage with our without terrorism coverage,” said Henning. “This enables policyholders to more cost effectively tailor their individual policies according to their individual needs. Without this amendment, the potential existed for commercial policyholders to be inadvertently covered for ‘fire following’ an act of terrorism without having paid for such coverage.”
Current Massachusetts statute mandates coverage for that portion of the event caused by fire – even though the policyholder may desire to structure its terrorism risk management through a stand-alone terrorism policy or through some other more cost effective or better tailored approach. H. 960 amends Massachusetts statute to allow commercial policyholders the ability to agree to completely exclude terrorism coverage and is consistent with federal law.