Covering The New Risk Terrorism
And therein lies a story about many businesses directly or indirectly damaged in the attack on the World Trade Center and the Pentagon on Sept. 11, 2001.
Numerous companies were left with nothing — and no one to pay for it but themselves. Now, thanks to the federal Terrorism Risk Insurance Act of 2002, acts of terror, as defined in the new act, will be covered by insurance companies.
“They came up with a backstop program for the insurance agencies to cover terrorism,” said Ed Schinnerer, president of The Campbell Group.
“The act is triggered when the secretary treasurer and the secretary of state and the attorney general declare it an act of terrorism. And it has to be a violent or dangerous act to human life, property and infrastructure. It is a result of damage within the U.S., or outside the U.S. in the case of certain air carriers or vessels, and it is committed by someone acting on behalf of a foreign person or interest or part of an effort to coerce the civilian population of the U.S. or to influence policy.”
Schinnerer said this all came about with the events of 9-11, when leaders in the insurance industry looked at each other and realized they had never thought of this scenario.
He said it turned out that the timing was also bad, because Jan. 1 is the time when insurance renewals come up. And when renewals came up three months after the attack, many insurance firms were refusing to add terrorism coverage to their commercial policies.
To put Sept. 11 into an insurance perspective, Schinnerer said that the biggest previous catastrophe faced by the industry was Hurricane Andrew’s devastation in Florida, which generated claims of roughly $20 billion.
What the insurance industry is estimating for the Sept. 11 devastation — and it is a figure Schinnerer said is a low estimate — is about $50 billion.
After going back and looking at what insurance policies usually covered — such things as vandalism, malicious mischief and civil commotion — the industry started to ask itself how terrorism fits in with these and how it could be differentiated. At the same time there was a lot of lobbying going on in Congress and people were beginning to ask what was going to be done.
“Business leaders and insurance leaders were saying, ‘We can’t just absorb things like this and we want to do something, but we need a federal program,’” said Schinnerer. “They took their time — most of 2002 — and then in November of 2002, they passed the Terrorism Act by definition.”
The aggregate losses in a terrorist attack must exceed $5 million in order to bring the Terrorism Act into effect. Once an event is declared a terrorist attack, the insurance companies pay 90 percent of the loss and the federal government pays 10 percent, with a $1 billion cap on the program.
In addition, the act declared that all commercial insurance policies must offer terrorism coverage as of November 2002 as an add-on to existing policies. Schinnerer said that as far as the insured is concerned, such coverage would have the same deductible as a fire or other loss.
Where it becomes interesting, Schinnerer added, is that it must be offered on all commercial policies, a decision in which he thinks it is hard to find merit.
“There are some policies where you are going to struggle to reason why you would need terrorism coverage,” said Schinnerer. “Think of a directors’ and officers’ policy which is basically insurance for directors and officers in the office. You can’t imagine a scenario where terrorism would ever come into play, but we have to offer it.”
Not only do insurance providers have to offer the coverage, he said, but the insured must sign off if they do not wish to receive the additional coverage.
Typically, Schinnerer said, when people think of terrorism, they think of property damage to buildings and materials, injuries to employees and loss of time.
Where it gets tricky, he said, is evaluating the business and seeing where the exposed areas are — where terrorism could effect the business — and to close up the areas of vulnerability with the coverage.
One area of vulnerability that Schinnerer said is receiving a lot of interest in terms of coverage is workers’ comp.
“The most important thing is to rethink how you look at your business,” said Schinnerer. “What are your people dealing with, where do they go? If you have someone in the mailroom and you get Anthrax in the mailroom, is that person covered?
“If one of your employees goes on a business trip and is kidnapped, is that employee covered overseas? These are all things that come into play with workman’s comp and your employees are often your most valuable asset.”
Schinnerer added that just performing a simple evaluation of the places to which a company ships product and what types of people it deals with often determines whether or not to add terrorism coverage. At The Campbell Group, Schinnerer has seen 10 percent to 15 percent of its clients take property terrorism coverage and 90 percent take workman’s comp terrorism insurance.
“With this option available to businesses now, risk management is more important than ever,” said Schinnerer.
“However, this is really just a case of the standards changing and another evolution into something we hadn’t thought would happen, and something we need to help businesses out with. It is something businesses need to evaluate themselves on, and receive a little education from their insurance provider.”