New Federal Terrorism Insurance Law Will Not End Disputes Over Coverage
In the Feb. 11 edition, I wrote a column discussing potential problems with the definition of terrorism in the then-recently adopted terrorism exclusions.
Just as everyone got a handle on the exclusions, Congress passed the Terrorism Risk Insurance Act of 2002. The act was immediately effective when President George W. Bush signed it on Nov. 26, nullifying existing terrorism exclusions to the extent that they exclude losses that would be covered under the act.
In the wake of the Sept. 11, 2001, terrorist attacks, reinsurers announced that they would not provide coverage for terrorism risks, making direct coverage difficult to obtain. Now, reinsurers do not have a vested interest in reinsuring terrorism risks as they are exempt from the act. Instead, the federal government will act as reinsurer, providing a backstop after insurers have paid their share of covered losses.
The purpose of the new federal backstop is to protect consumers by maintaining available and affordable terrorism coverage and to allow for a transitional period for the stabilization of private markets. President Bush also stated that he hopes the new program will stimulate the construction industry and create new jobs.
One of the key features of the Act is the immediate rollback of existing terrorism exclusions. However, these preexisting exclusions may be reinstated if insureds formally reject the coverage in writing, or if the insured fails to pay the increased premium for terrorism coverage.
The insurer must provide at least 30 days notice of the increased premium and the insureds rights with respect to the terrorism coverage before an exclusion may be reinstated.
One of the issues I raised in my previous column was that the exclusions definition of terrorism contained some vague wording that may have been difficult to interpret.
Fortunately, we havent had the opportunity to test that wording. And now theres a potentially new twist because of how the new law defines acts of terrorism.
The new legislation has a slightly different take on the definition than the exclusions had.
The acts definition of "act of terrorism" consists of two parts–certification and limitation.
The action must be certified as an act of terrorism by the Secretary of the Treasury in concurrence with the Secretary of State and the Attorney General.
The act offers some guidelines on what constitutes an act of terrorism, but it does not outline how the certification process will be conducted.
Unlike insurance policy controversies, courts will not be involved if a dispute arises over certifying actions as acts of terrorism. The Act states, "Any certification of, or determination not to certify, an act as an act of terrorism under [the Act] shall be final, and shall not be subject to judicial review."
To be certified, the act of terrorism must meet certain criteria.
First, it must be a violent act or an act that is dangerous to human life, property or infrastructure.
This stipulation seems to include not only physical attacks on persons or structures, but also bioterrorism and cyberterrorism.
The terrorism must have resulted in damage within the United States.
Damage outside of the United States qualifies in the case of any U.S. citizen, directly or indirectly, undertaking to provide air transportation, U.S. flag vessels, or other vessels based principally in the United States on which U.S. income tax is paid and whose insurance coverage is subject to U.S. regulation.
Damage is also included if it occurs on any U.S. mission.
The Act does not specify what constitutes a U.S. mission. Therefore, U.S. companies with foreign interests may need additional coverage.
Oil and gas production companies with offshore operations may also need to supplement their coverage.
The terrorism must be committed by an individual or individuals acting on behalf of a foreign person or foreign interest, as part of an effort to coerce the U.S. civilian population, or to influence the policy or affect the conduct of the U.S. government by coercion.
Damage caused by disgruntled U.S. citizens acting on their own behalf and others who have no foreign connection do not seem to fall within the scope of this program. It appears that actions such as the Oklahoma City bombing would not be certified as an act of terrorism under this legislation.
The Act also contains two limitations–no action will be certified as an act of terrorism if it is committed in the course of a declared war, or if it does not cause more than $5 million in aggregate property and casualty losses. The war limitation does not apply to workers' compensation insurance.
The legislation is a much-needed boost for insurers, but it certainly does not put an end to the terrorism coverage discussion.
Some experts predict that premiums will still be too high for many businesses to afford. Coverage gaps will almost definitely exist.
In addition, as is ordinary in insurance, provisions will probably be interpreted differently by insureds and insurers. Since the definition of terrorism differs from that on the exclusions, it will be interesting to see if they will be revised and refiled.
Susan Massmann is a staff writer for the FC&S Bulletins, published by the National Underwriter Company in Erlanger, Ky. The FC&S editors welcome comment and questions and may be reached by fax at 859-692-2293 or via e-mail at FCS@NUCO.COM.
Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, December 8, 2002. Copyright 2002 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.
© Arc, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to TMSalesOperations@arc-network.com. For more information visit Asset & Logo Licensing.