NAIC:No Personal Lines Terror Exclusion

Terri Vaughan, NAIC president and Iowa insurance commissioner, said the commissioners voted in favor of the following motion:

"It is the sense of the NAIC membership that terrorism exclusions are generally not necessary in personal lines to maintain a competitive market and they may violate state law.

However, we recognize that state laws vary in their authority and discretion.

Furthermore there may be unique company circumstances that need to be considered in individual cases. We expect these cases to be limited."

Ms. Vaughan indicated that there had been considerable discussion about the existence of differences among state laws and the desirability of allowing state regulators "to maintain the flexibility to respond to very unique circumstances."

She explained that "very unique" meant "highly unusual." She said the NAIC does not expect terrorism exclusions in personal-lines policies to be widely permitted among the states.

Montana insurance commissioner John Morrison, chair of the NAIC's Legal Issues Ad Hoc Working Group, added that the plenary vote was in line with the Working Group's recommendation to the NAIC last week.

Ms. Vaughan believes that now that the NAIC has taken a stance on this issue, more states will start acting on proposals for such exclusions that have been presented in their states.

Mr. Morrison stressed that the NAIC's vote pertained only to property-casualty personal lines. Both he and Ms. Vaughan said that the issue of terrorist exclusions in life and health policies will be taken up at commissioners retreat in early February in San Antonio, Tex.

As to what types of state laws the NAIC believes terrorist exclusions in personal-lines policies might violate, Ms. Vaughan said that there are laws governing regulators' ability to disapprove policy language. There are also laws requiring policy language to be clear and unambiguous, not misleading and not contrary to public policy.

Mr. Morrison added that many states have language that authorizes the insurance regulator to disapprove language that is "unreasonable" or that "deceptively affects the risk purported to be assumed in the general coverage."

As for criteria for deciding when a terrorist exclusion might be acceptable in a personal-lines policy, Ms. Vaughan said there was some concern among the members about individual company situations. For example, exclusions might be allowed for "small companies that are having trouble getting reinsurance coverage," Ms. Vaughan suggested.

She also revealed that there had been "a fair amount of discussion about nuclear and biochemical exclusions."

It was not entirely clear from all the research performed by Mr. Morrison's working group or by the Reinsurance Task Force about how the reinsurance market is evolving, said Ms. Vaughan.

But the NAIC members believe that reinsurance remains available in the personal-lines area, she stated. There is also a sense that "the catastrophe exposure in personal lines is not as great as in commercial lines" and that there is a "greater spread of risk," Ms. Vaughan said.

While the commercial-lines resolution in favor of terrorist exclusions was a recommendation to the states by the NAIC, Mr. Morrison emphasized that the personal-lines motion was not a recommendation that states undertake any statutory changes. Instead, he said, the motion deals with how the states handle the exclusions in their "rate and form work" in the regular course of business.

Although the motion is non-binding on the states, Ms. Vaughan said that its practical effect is to send a clear signal to the industry –as insurers file for exclusions in the states –about what the nation's regulators are thinking.

"We have been working very hard at the NAIC to have a deliberative, collaborative process and to be speedy in our deliberations on this terrorism issue and to really provide a more unified sense of what the commissioners are thinking to the industry."

Finally, Ms. Vaughan said the NAIC believes that federal backstop legislation is still necessary.

She noted that one of many ongoing issues in this regard in the commercial-lines area is that, due to statutory requirements, there is no terrorism exclusion in workers' compensation policies. Because of the difficulty of obtaining reinsurance, this requires a federal solution, Ms. Vaughan said.