An Overview of the Attack
At 6:30 am on December 25, 2020, police reported an intentional explosion of a recreational vehicle outside 166 2nd Avenue North in downtown Nashville. Within days, state and federal investigators identified a 63-year-old Tennessee resident as what has been described as a suicide bomber. While public speculation currently centers on his apparent fascination with conspiracy theories and other unusual beliefs, the authorities have yet to hint at a motive for the bombing or even whether we should expect any discernible motive will ultimately emerge.
The explosion occurred outside an AT&T facility serving as a network hub for regional internet services as well as local wireless, internet, and video. As a result of the blast, service interruptions persisted for several days across parts of Tennessee, Kentucky, and Alabama. At least eight people appear to have been injured and more than 40 nearby businesses suffered damage.
The Definition of Terrorism
The Terrorism Risk Insurance Act defines an “act of terrorism” as:
[A]ny act that is certified by the Secretary [of Treasury], in consultation with the Secretary of Homeland Security, and the Attorney General of the United States—
· to be an act of terrorism;
· to be a violent act or an act that is dangerous to human life, property or infrastructure;
· to have resulted in damage within the United States … ; and
· to have been committed by an individual or individuals, as part of an effort to coerce the civilian population of the United States or to influence the policy or affect the conduct of the United States Government by coercion.
No act shall be certified by the Secretary as an act of terrorism if … property and casualty insurance losses resulting from the act, in the aggregate, do not exceed $5,000,000.
Based on what we currently understand of the Nashville bombing, the two most interesting (but unresolved) criteria under the statutory definition of terrorism are (1) the motivation behind the attack; and (2) the amount of insured loss.
The Certification Process
The Secretary of Treasury alone is empowered to certify an act of terrorism under TRIA. His or her decision is final and cannot be appealed.
If the Secretary decides to launch a formal review, Treasury must publish a notice to that effect within 30 days after the review starts. During the pendency of the review, Treasury will update its public notice after the first 30 days and then every 60 days. Within 5 days of deciding whether to certify an act of terrorism, Treasury must issue notification of the Secretary’s decision to the public, relevant state insurance supervisors and Congress.
Treasury may collect data from insurance companies to determine whether the $5 million insured loss threshold has been met.
At this point, there is nothing to indicate the Secretary of Treasury intends to commence a review of the Nashville bombing. The first suggestion of a potential review would probably be a request by Treasury for data from insurance companies on loss amounts.
Reason Not to Certify #1 – Terrorism Exclusions
The Terrorism Risk Insurance Act requires insurers to make available commercial property and liability coverage without a terrorism exclusion. According to the latest report from Treasury
, about 40% of Tennessee businesses elect to save the terrorism premium and take the exclusion. Terrorism exclusions typically only apply once the Secretary of Treasury certifies an act of terrorism.
If 45 small businesses suffered damage, the Secretary’s decision to certify the bombing as an act of terrorism would leave only about 30 with coverage for their losses. If the Secretary instead decided to pass on certification, all 45 small businesses would presumably be entitled to an insurance payout.
It seems rather unlikely the Secretary of Treasury would act to strip Nashville’s small businesses - already wracked from the pandemic as well as a tornado earlier in the year - of their coverage for the bombing. Had the event been large enough to imperil the survival of a number of insurance companies (or the insurance industry as a whole) that calculus may well change. As it is, this event appears modest in terms of the industry’s claims paying capacity.
Reason Not to Certify #2 – The Program Trigger
Even if the Secretary of Treasury did certify the Nashville bombing as an act of terrorism, it is unlikely any insurer would receive reimbursement from the backstop. Under the program, an insurer that has satisfied its individual deductible is entitled to reimbursement of 80% of claim payouts resulting from the act of terrorism. However, no reimbursements will be made to any insurer unless the “program trigger” has been reached. For 2020, the program trigger is $200 million.
Because there were no other acts of terrorism certified in 2020, the Nashville bombing would have to have caused $200 million of property and casualty insurance losses for the backstop to open – even for insurance companies that satisfy their individual deductibles. The property damage from the explosion alone appears unlikely to have reached this amount – with the wildcard being the value of insured loss caused by the AT&T outage. It is difficult to estimate how much insured loss AT&T may have sustained given the critical role the Nashville facility plays in the regional communication system. If the explosion caused enough insured loss to satisfy the program trigger, it would have to come from AT&T.
If the program trigger has not been met, a decision to certify the Nashville bombing as an act of terrorism would activate the terrorism exclusions in 40% of small business policies - yet not deliver a dime of relief from the federal government to insurance companies. It is difficult to see the point of such a decision.
Reason Not to Certify #3 – Mandatory Policyholder Surcharges
Even if the $200 million program trigger is satisfied, the Secretary may be reluctant to certify an act of terrorism. AT&T is insured through its own subsidiary – a Texas “captive insurer” known as Gateway Rivers Insurance Company. Because captives and the deals they make with their corporate owners are secret
(even from Treasury), we have no idea what kind of terrorism coverage AT&T designed for itself or how small its individual backstop deductible may be.
Suppose Gateway Rivers Insurance Company issued AT&T a $1 billion terrorism insurance policy subject to a $1 million backstop deductible under TRIA. Further, assume AT&T sustained $200 million of insured loss from the Nashville bombing while the surrounding small businesses suffered $10 million in loss.
If the Secretary of Treasury certified the Nashville bombing as an act of terrorism:
- 60% of small businesses would get paid by their insurers ($6 million) while the remaining 40% would have their claims denied because of terrorism exclusions; and
- AT&T would receive $159.2 million directly from the Terrorism Risk Insurance Program ($199 million x 80% rate of reimbursement).
If the total amount paid out under the backstop is $162 million, Treasury is required by law to levy policyholder surcharges
of $226.8 million (140% x $162 million). That would translate into a single annual assessment of 0.1% on all commercial property and casualty premium nationwide.
To recap, under this hypothetical if the Secretary were to certify the Nashville bombing as an act of terrorism:
- 40% of impacted small businesses would forfeit their otherwise available insurance coverage;
- AT&T would receive nearly $160 million directly from Treasury; and
- Commercial policyholders throughout the country would pay a 0.1% premium surcharge totaling more than $225 million.
It is difficult to imagine the Secretary of Treasury – or AT&T, for that matter – eager to turn a $210 million industry loss event into a $274 million economic hit with the bulk of the burden falling on small businesses, nonprofits, and local governments through policyholder surcharges.
TRIA has been in place for 18 years and never once has the Secretary of Treasury certified an act of terrorism. Whatever the ongoing criminal investigation may uncover about the motive behind the attack, it is very unlikely the Nashville bombing will become the first.