Boston Bombings: "Act of Terrorism" Definition Could Mean Small Businesses Lose Insurance Money

Was the Boston Marathon bombing an act of terrorism? Your first gut instinct, as mine is, would probably be to say yes. After all, it was a heinous act of violence against innocent people by two young men who were allegedly inspired by radical Islam, sympathetic to a foreign group’s political goals, and motivated by opposition to U.S. wars. In addition to that, the pressure-cooker bombs the Tsarnaev brothers used in the attacks were modeled after an al-Qaeda blueprint. Scores of politicians, including President Obama, have called the attacks an “act of terror,” but the April 15 attacks have not been officially deemed an act of terrorism yet, and whether or not they are have serious financial consequences for the businesses that were affected most by such acts. These financial consequences stem from the level of coverage that these businesses' insurance policies offer, and for their own sake, some Boston businesses are really hoping the U.S. government does not officially deem the bombings an act of terrorism.

In the wake of 9/11, Congress passed the Terrorism Risk Insurance Act in 2002, which created a federal “backstop” for insurance claims related to acts of terrorism. The law, reauthorized in 2005 and 2007, “provides for a transparent system of shared public and private compensation for insured losses resulting from acts of terrorism.” In other words, it provided a new market of insurance coverage for businesses damaged by terrorist acts. In the past decade, many large businesses in big cities purchased insurance that covers damage sustained through acts of terrorism, but many small businesses have not. This means that if the secretary of the treasury, in concurrence with the secretary of state and the attorney general, officially designate the Boston Marathon bombing as a certified act of terrorism, many of these mom-and-pop shops that lost a lot of business in the wake of the bombing and when the city was shut down during the ensuing manhunt for the Tsarnaev brothers will not be covered under their insurance policies for their losses. If the Boston Marathon bombings are, on the other hand, not officially deemed an act of terrorism, the business affected could then apply for reimbursement under their regular insurance policies.

Almost all of the businesses affected did not sustain structural damage from the bombs, but suffered significant losses in revenue that they otherwise would not have had the bombings and ensuing manhunt that shut the city down not occurred. Patriots Day is also a huge day for these small businesses, so they were hit even harder when police blocked off the streets and they had to close shop for the time being. Under another circumstance — say a gas-main explosion that shut down the streets — these businesses would very likely be covered by their insurers and reimbursed for their losses of profit they sustained.

If the bombings are deemed an official act of terrorism by the federal government and certain businesses are excluded from coverage because of that, there will be public pressure on insurance companies to do the right thing and cover those who aren’t covered due to this technicality, but those companies are unlikely to bend out of sympathy. Frank O’Brien, a spokesman for the Property Casualty Insurers Association of America, said that the insurance companies fully understand that they may face criticism for denying such claims.

“We’re human beings, as well, so that stuff hurts,” O’Brien said. “But one of the fundamental pillars of insurance — and of business in general — is that the contract is the contract. Sometimes, we might be perceived as uncaring or heartless, but insurers can only price their products based on the risk they’re willing to take on.”