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| Bar Bulletin |
August,
2003 |
| MSBA News |
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Insurance and Terrorism
By Clark
H. Carter
In the wake of the
9/11 tragedy, the U.S. insurance industry awoke to the need to confront
the peril of terrorism. While other countries around the globe had
grappled with this insidious menace for years, no actuarial contemplation
of the consequences of terrorism had ever been seriously addressed here.
Overnight, it became abundantly clear that the U.S. insurance industry
could not remain solvent if another Twin Towers incident were to occur.
The initial
reaction of insurance executives was to implement the obvious – a
terrorism exclusion was added to every policy. Congress and the President
acted promptly to forestall this and the Terrorism Risk Insurance Act was
passed and went into effect January 1, 2003.
Without going into the details of the Act, the U.S. government basically
agreed to become a reinsurer for the private insurance market in the event
of another terror catastrophe.
At this time, the
personal lines of insurance – Homeowners and Automobile – remain
unaffected. The Commercial lines, however, are another story. Beginning
with the new year, terrorism premium loads were added to all Workers’
Compensation policies. Those insured will see a charge of between .03
percent and .05 percent of subject payroll added to the premium. There is
no option to exclude the terrorism peril for Workers’ Compensation
insurance. Insurance company underwriters have begun to ask about
concentration of employees in particular locations and have been
investigating those locations. High concentrations of employees and
workplaces in high hazard areas are now a part of underwriting analysis.
On virtually every
other stripe of commercial insurance, companies are offering terrorism
coverage – often at a price. A surcharge of 1 percent of premium is
common. Insureds have the option of accepting or rejecting coverage and
this can be a hard decision. If the risk is the World Trade Center in
downtown Baltimore, the choice may be obvious – buy the coverage. If it is
an office building in Salisbury, there may be some logical reasons why the
policy holder would elect to reject coverage. But remember, one of the
9/11 planes crashed in rural Pennsylvania. The exact type of insurance
coverage also has a bearing – for example, while an insurance buyer may be
offered an election on an Employee Dishonesty policy, it may be difficult
to imagine how an act of terrorism could impact this kind of protection.
Thorough and imaginative thought must go into an insured’s decision.
Even with the
purchase of terrorism coverage, insurance buyers should be aware that
other exclusions still apply; namely, nuclear, biological and chemical
events remain uncovered. With the insurance mechanism removed for these
types of situations, it behooves all commercial insurance buyers to study
what risk management steps can be taken to address the loss of life of
their employees and visitors – predetermined evacuation procedures, for
example. To ignore addressing these issues, however, could make an insured
vulnerable to allegations of negligence.
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