THE EVOLUTION OF TERRORISM EXCLUSIONS
The insurance industry continues to react, and in some cases over-react, to the events of September 11, 2001. Some insurers were quick to roll out new Terrorism exclusions without giving much thought to their impact or state filing requirements. Through all this, the Insurance Services Office (ISO) and the National Association of Insurance Commissioners (NAIC) have been working on various reasonable versions of Terrorism Endorsements.
Last December 14, NAIC President and Iowa Insurance Commissioner, Terri Vaughan, wrote a letter to Congress stating that "there is strong consensus among NAIC members that if Congress doesn't act, state insurance regulators will be left with no choice but to begin approving some exclusions for commercial lines." One week later, on December 21, citing Congress's failure to enact a legislative backstop for acts of terrorism, the NAIC agreed upon wording of insurance policy exclusions for acts of terrorism. With that backing, ISO's endorsements were further legitimized and efforts were stepped up to gain approval by the various state insurance departments.
While the new ISO endorsements still represent a significant reduction in coverage, they are an improvement upon some of the egregious exclusions foisted upon policyholders by various insurers in September and October. ISO's softened Terrorism exclusion under Property and Liability insurance policies now applies only when acts of terrorism result in industry-wide insured losses that exceed $25,000,000 for related incidents that occur within a 72-hour period. An earlier version pegged it to insured and uninsured losses.
ISO's Liability insurance policy exclusion also applies if fifty or more persons sustain death or serious injury. ISO further improved upon the exclusion for biochemical hazards by requiring such hazards to be an overt part of a terrorist attack. Prior wording would have excluded such hazards if they were simply an inadvertent result of a terrorist attack.
Clearly, these improvements will not have policyholders embracing the new exclusions, but in this marketplace, even slight broadenings of coverage must be acknowledged. So, with these exclusions being approved for use in the majority of states (as of the time of this writing, California and New York have not approved them), the availability of coverage should improve and pricing should begin to stabilize. Unfortunately, the ripple effect of these exclusions may soon give rise to new concerns for policyholders, beyond the actual uninsured exposures they create.
Perhaps the first such ripple will arise from insurance requirements in various agreements. When drafting insurance language for leases, construction contracts, lending agreements, etc., terminology has frequently left much to be desired in terms of the industry language or jargon that has found its way into such agreements. Insurance professionals often cringe when faced with property insurance requirements that contain wording along the lines of "fire insurance and extended coverage insurance, with sprinkler leakage, vandalism, malicious mischief and flood endorsements." Concern also arises when property insurance requirements simply refer to "all-risks" insurance, a term that even before September 11 had vague meaning.
Since September 11 and the introduction of Terrorism exclusions, however, agreements calling for "all-risks" property insurance may be the subject of closer scrutiny. Does the term "all-risks" contemplate the peril of Terrorism? If a firm has been contractually required to maintain "all-risks" property insurance and that term is not further defined in the agreement, will that firm be deemed to be in default if their "all-risks" Property insurance policy now excludes the peril of Terrorism?
The "all-risks" Property insurance requirement will, no doubt, need to be clarified going forward. Will lenders, landlords, or tenants specifically require Terrorism insurance? Will it be required regardless of cost or will it be required if available at a reasonable cost? Which party will determine if the cost is reasonable? Questions such as these will arise as insurance buyers grapple with the new Terrorism exclusions.
-- Charles H. Cox
Vol. XV, No. 3
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As we commemorate the first anniversary of the September 11th tragedy, we are taking a look at some of the changes that have since taken place in the insurance landscape. One of the most obvious is the carving out of coverage for losses caused by acts of terrorism. Exclusions for this are being added to policies and then the coverage is being offered separately, usually at a high price and with very restrictive terms and conditions. The impact of those losses a year ago on the Property insurance market are explored in an article by Carl Swinamer, while Charlie Cox takes a look at terrorism exclusions in general. As insurance premiums escalate, Mike Coyle expounds on some of the alternatives to the purchase of insurance for dealing with risk. But there are other concerns, as well. Workers' Compensation insurers, particularly those providing Excess coverage for self-insured employers, are looking closely at risks with large concentrations of employees at one location, and Liability coverage for public venues is difficult to obtain. One thing to keep in mind, however, when analyzing the current insurance market is that it was starting to tighten before last September and the terrorist attacks accelerated a process that was already under way. Furthermore, that process has been made worse and extended by recent declines in the stock market that make it impossible for insurance companies to rely on investment returns to offset underwriting losses. So you can thank, in part, the executives of Enron, WorldCom, Adelphia Communications, etc., for the fact that competitive pricing has yet not returned to the insurance marketplace. --- Ed.
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