Business Interruption Insurers Expect 'Ripple Effect' From Terrorist Attack Claims

There will be claims from firms that have New York City locations downtown, but not in the World Trade Center. Their buildings still exist and they may not have had any property damage at all, but such businesses may have "ingress and egress-type claims," he said.

"You can't get down the street because a civil authority won't permit it," he said, referring in this case to the New York City Police Department. While some outfits can operate by setting up temporary offices in other locations with phones and computers, others are essentially shut down by such actions, he said.

"These claims are not obvious in the sense that your building is not damaged," he said. "If you could get down the street, you would," he said, noting that a civil authority's actions might not just shut down business at the local delicatessen, but prevent the continuation of normal business operations at large commercial trade related-businesses, such as freight-forwarders. Such firms just can't operate remotely, he said.

For such firms to be covered, their policies would have to have endorsements for unique situations. In particular, they must have endorsements covering situations where business is stopped because of actions by a civil authority.

Beyond New York City, businesses in other areas of the country–and throughout the world, he said, could have contingent business interruption claims. "If someone that was located in the Trade Center is a major supplieror a major customer that's now out of commission," then a company could have a contingent business interruption claim, he said.

Giving a hypothetical supplier scenario, he described a "Bloomberg-type" operation located in the twin towers that might have been supplying data on commodity prices for a commodity-trading firm in the Midwest. That Midwestern firm may not be able to conduct any business without that data, he said.

Giving a different example, he said, "You as a company out of Ohio may have a customer in the World Trade Center. If that customer is no longer around, youre obviously going to have less sales."

Mr. Dorf explained that, in addition to covering lost income stemming from business interruptions, policies can cover the extra expense of finding an alternative supplier of goods or services that a policyholder company might need to conduct its business, if the usual supplier is not around.

Given the presence of all these types of claim possibilities, "I would have to think that the numbers are going to be at the high ends of the ranges we're hearing about," Mr. Dorf said when asked if the $15 billion to $20 billion ranges that have been quoted seem likely.

He also noted, however, that contingent business interruption coverage is one that insurers "dont just give out willy nilly"–precisely because there can be such a "ripple" of claims.

The consultant said his office is getting calls from clients related to property damage and business interruptions in the New York area. In addition to providing coverage analysis–telling clients "what they have and what they dont" have coverage for–he said, some clients are not worried about coverage issues. "Well be helping some get advances of funds," he said, noting that one particular immediate problem client firms face is finding alternative locations.

Mr. Dorf noted that Ernst & Young is allowing some of its clients to use office space at its New York location for now.

Outside of property/business interruption-type claims scenarios, and anticipated workers comp claims for companies whose workers were injured or killed in the terrorist attacks, the consultant said there could be some unusual liability claims that will emerge down the road. For example, he said that directors and officers of some companies that suffer financial consequences might become defendants in lawsuits alleging that they should have been better prepared.

Similarly, he said that situations where service-oriented businesses can not deliver their services for some time could prompt professional liability claims. Those who depended on the services might allege that the providers should have been prepared, he said.

When asked about the possibility that specialty policies covering special events might be triggered, in light of the fact that many events were cancelled in the wake of the disaster, Mr. Dorf speculated that many policies would not provide coverage. Many of the cancellations were voluntary–based on conscious decisions that event organizers made, rather than orders by government authorities.

It really depends on the type of coverage you have, he said. While policies typically cover event cancellations caused by weather, this type of situation might not be covered.

"These are issues that will have to be dealt with policy-by-policy," he said, referring not only to the specialty event policies, but to business interruption policies as well. "Insurance companies are going to pay out billions of dollars and there will be coverage litigation. None of this is straightforward."

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, September 21, 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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