No Easy Answers On CoverageFor Future Losses From Terrorism

Sometimes, circumstances force you to confront problems for which there are no good solutions.

That is the situation in which the insurance industry finds itself in the wake of the Sept. 11 terrorist atrocities.

The insurance industry distinguished itself by its response to the tragedy. It quickly assured the public that it had sufficient resources to pay all the claims.

Many insurance companies set up special 800 numbers for policyholders to call so that claims could be settled expeditiously. And above all, most insurance companies promised not to invoke the “act of war” clause in insurance contracts as a means of denying claims.

It is difficult, as the nation still mourns the loss of thousands of innocent human beings and as we face an ongoing military campaign to bring the murderers to justice, to deal with the mundane realities that face the insurance industry.

But that must be done if the insurance industry is to remain a viable institution that plays a pivotal role in the economic recovery from events such as this.

As difficult as this is to say, the “act of war” exclusion in insurance policies exists for a reason. War is not an insurable risk. War is inherently unpredictable. Moreover, it can cause so many losses over so short a period of time that the entire resources of the insurance industry can be drained virtually overnight.

Insurance companies do not underwrite losses from acts of war; they do not collect premiums for this risk, nor do they set up reserves.

That is why insurance companies went above and beyond the call of duty following the Sept. 11 tragedy by voluntarily agreeing not to invoke the act of war exclusion, even though a plausible case probably could be made that the exclusion applied.

It is important to note also that the industry took this step well before Congressional leaders called for it.

Many insurance companies announced just a couple of days after the event that they would not try to use the exclusion to avoid paying claims. Indeed, this was noted in the Sept. 17 letter sent by leaders of the House Financial Services Committee to Kathleen Sebelius, president of the National Association of Insurance Commissioners and insurance regulator for Kansas.

“It is a testament to the good faith of the industry that numerous insurers have already publicly stepped forward and pledged their full cooperation and commitment to honoring their contracts,” the letter said. It was signed by Chairman Michael G. Oxley, R-Ohio; Ranking Democrat John J. LaFalce, D-N.Y.; Richard H. Baker, R-La.; and Paul E. Kanjorski, D-Pa.

But the letter went on to say the following: “Any attempt to evade coverage obligations by either primary insurers or reinsurers based on such legal maneuvering would not only be unsupportable and unpatriotic–it would tear at the faith of the American people in the insurance industry.”

The letter added that while government used words of war to express its outrage, this does not describe the legal reality of the event. “We do not believe that any just interpretation of last Tuesdays tragic events would permit an insurer or reinsurer to invoke an act of war exclusion to escape its obligations to the victims of Tuesdays tragedy,” the letter said.

This warning is understandable in the context of this particular tragic event. But I cant help but wonder what will happen in the future if a precedent is established that insurance companies are expected to pay claims from losses they probably never intended to cover.

I cant help but wonder what the impact on industry solvency will be if, God forbid, another similar terrorist attack occurs, or if a natural disaster, another Hurricane Andrew, strikes sometime in the next few months.

The insurance industry is big and powerful, but even its resources are finite. And there are serious implications to repeatedly asking the industry to pay for losses that insurers never intended to cover.

As the economist Martin Feldstein once said, something that cant go on forever, wont.

Thats why the insurance industry is wise in quietly pursuing establishment of some type of federal role in resolving losses arising from terrorist events–something patterned after the British concept of Pool Re.

Naturally, there are many troubling issues that need to be resolved. For example:

What is the definition of an “act of war?” If the tragedy of Sept. 11 does not come under that definition, what does?

Will the insurance industry be able to work cooperatively to help federal policymakers develop a plan, or will the same forces that helped scuttle the Natural Disaster Coalition manifest themselves again?

Will the industry be able to defend itself from the inevitable, albeit unfair, charge that it is simply seeking a federal government bailout?

These are just a few of the broad questions to be addressed. There are probably thousands of other technical issues that will be just as troubling to resolve.

But they will have to be resolved if the public is to continue looking to the private insurance industry as the primary vehicle for the nations financial recovery from events like those of Sept. 11.

Steven Brostoff is NU's Washington Editor. He can be reached at sbrostoff@nuco.com.

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, October 1, 2001. Copyright 2001 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.

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No Easy Answers On Coverage For Future Losses From Terrorism

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