In this article, IRMI reviews the evolution of the ISO terrorism exclusions,
explains exactly what is excluded, and provides the approval status of these
exclusions by states and other regulatory organizations.
The destruction of the World Trade Center on September 11, 2001, represents
the largest single insured event in history. Knowledgeable estimates of total
covered losses—property, general, and aviation liability, workers compensation,
life—range from $30 billion to as much as $70 billion. Liability claims are the
slowest to emerge, and have been slowed even further by calls from attorney
groups for a "moratorium" on lawsuits stemming from the attacks, and
by proposals for a federal compensation program for the families of victims.
(One element of such a program would be a waiver of legal action by recipients
as a condition for receiving benefits.) No matter how the final figures shape
up, September 11 will easily overshadow the next largest insured disaster: the
$19 billion in losses caused by Hurricane Andrew in 1992.
The scope of the disaster, and the disturbing ease with which the attack was
apparently carried out, struck a devastating psychological blow to the
international insurance industry, which had already begun to respond to
mounting losses by raising rates and imposing restrictions on coverage. Well
before the renewal of reinsurance treaties on January 1, 2002, reinsurers
announced the imposition of new terrorism exclusions as a condition of
coverage.
Faced with an inability to spread the risk of terrorist attacks through the
worldwide reinsurance network, domestic insurers sought relief on two
alternative fronts: governmental action to fill the void left by the
reinsurers; or contract language that would exclude injury and damage caused by
acts of terrorism. (Initial moves by some insurers toward invoking standard war
exclusions as a basis for denying coverage in the September 11 attacks were
quickly abandoned. See "Attack on America: The Insurance Coverage
Issues" for a detailed discussion of insurance policy war exclusions
and terrorist acts.)
In November, Insurance Services Office, Inc. (ISO), made an initial filing
of exclusionary language that would address injury and damage from terrorist
acts. A number of insurers had already by this time drafted their own similar
terrorism exclusions. As it became more and more likely through December that
Congress would not be able to reach a consensus on providing a federal
"backstop" to insured terrorism losses, state insurance departments
began examining the various approaches taken by ISO and individual insurers
with regard to terrorism. In consultation with state regulators, ISO revised
its original terrorism filing, limiting the exclusion to specifically
catastrophic losses.
When the first session of the 107th Congress adjourned in December without
passing any of the federal reinsurance proposals that had been introduced, the
insurance industry acted quickly on the second of its alternatives: excluding
terrorism losses from coverage in standard property and casualty insurance
policies. On December 21, the National Association of Insurance Commissioners
(NAIC) endorsed the revised ISO language and recommended its approval by state
insurance departments. Those filings, which have to date been approved—and
implemented—in 45 states, the District of Columbia, Puerto Rico, and Guam, are
the subject of the rest of this article.
The Evolution of the ISO Terrorism Exclusions
ISO filed the first version of exclusionary language for use with standard
commercial property and liability policies in mid-November. Unlike most ISO
filings, which allow several months for regulatory approval and company
implementation, the terrorism filings were made with a proposed effective date
of January 1, 2002—the date on which many reinsurance treaties would renew,
presumably with exclusions for loss arising from terrorism.
ISO's approach in the initial filings was simply to replace the war
exclusion, as it currently exists in different forms in commercial property and
commercial general liability coverage forms, with new exclusions pertaining to
both war and "terrorism." With respect to property coverages, the
proposed exclusion applied to:
loss or damage caused directly or indirectly by terrorism, including
action in hindering or defending against an actual or expected incident of
terrorism. Such loss or damage is excluded regardless of any other cause or
event that contributes concurrently or in any sequence to the loss.
In the version intended for general liability coverages, the exclusion
applied to bodily injury, property damage, and personal and advertising
injury:
arising, directly or indirectly, out of "terrorism," including
any action taken in hindering or defending against an actual or expected
incident of "terrorism" regardless of any other cause or event that
contributes concurrently or in any sequence to the injury or damage.
Both sets of filings—property and liability—used the same definition of
"terrorism":
"Terrorism" means activities against persons, organizations or
property of any nature:
- That involve the following or preparation for the following:
- Use or threat of force or violence;
- Commission or threat of a dangerous act; or
- Commission or threat of an act that interferes with or disrupts an
electronic, communication, information, or mechanical system; and
- When one or both of the following applies:
- The effect is to intimidate or coerce a government, or to cause chaos
among the civilian population or any segment thereof, or to disrupt any
segment of the economy; or
- It is reasonable to believe the intent is to intimidate or coerce a
government, or to seek revenge or retaliate, or to further political,
ideological, religious, social or economic objectives or to express (or
express opposition to) a philosophy or ideology.
The broad scope of these original ISO terrorism filings paralleled that of
exclusionary language already being developed and used by some individual
insurers. For example, one major commercial insurer began endorsing its
property policies at the end of the year with an exclusion of:
any act of one or more persons, whether known or unknown and whether or not
agents of a sovereign power, for Terrorist Purposes …
…Terrorist Purposes means the use or threatened use of any unlawful means,
including the use of force or violence against any person(s) or property(ies),
for the actual or apparent purpose of intimidating, coercing, punishing or
affecting society or some portion of society or government.
The problem with language like this—or the language of the original ISO
filing, which it resembles closely—is that it is broad enough to encompass even
an act of simple vandalism if ideological or coercive motives can be seen in
it. Under the original ISO language, damage caused by a brick thrown through
the window of a political party headquarters by a member of the opposing party
would be an excluded act of terrorism. In response to criticisms of this
kind—and to charges from some state regulators that the language in question
could even be used to deny insurance coverage to victims of hate crimes—ISO
decided to amend its filings.
The most significant of the amendments was the imposition of two
quantitative thresholds for triggering the exclusion. The threshold is designed
to make the exclusion applicable only when the terrorist act causes
catastrophic injury or damage. A property damage threshold was set at $25
million, including both direct damage and business interruption. A bodily
injury threshold was also imposed—50 or more persons killed or seriously
injured. Only when one or both of these thresholds are met does the terrorism
exclusion apply—but then it applies to all injury and damage caused by the
terrorism, both below and above the threshold. (A second amendment to the ISO
filings was made in late December, specifying that the $25 million property
damage threshold is applicable only to insured damage.)
With the imposition of a threshold came the need to specify rules for
measuring that threshold. Accordingly, ISO defined in the revised exclusions
what constitutes a single "terrorism incident," since both the bodily
injury and property damage thresholds apply on what may be termed a
"per-incident" basis. (Further motivating ISO to address this point
in its filings may have been the suits and counter-suits filed by the World
Trade Center leaseholder and its insurers, disputing whether the plane crashes
that brought the buildings down were one occurrence of property damage, or
two.) The ISO definition of a single terrorism incident is expressed as
follows:
Multiple incidents of "terrorism" which occur within a 72 hour
period and appear to be carried out in concert or to have a related purpose
or common leadership shall be considered to be one incident.
In its amended filings, ISO also revised the definition of
"terrorism" to remove terminology that could invite dispute or that
required too subjective an application. For example, the original reference to
"chaos among the civilian population" was dropped, perhaps to avoid
arguments over what constitutes "chaos." Likewise, "revenge or
retaliation" as one of the triggering motives for "terrorist"
acts was dropped, since it was needlessly specific and added nothing to the
scope of the definition.
Finally, additional provisions regarding terrorism that involves the use of
nuclear, chemical, or biological weapons were added to the exclusions, in light
of the anthrax incidents that had followed on the events of September 11 and
growing fears that known terrorist groups might have or be seeking access to
nuclear weapons.
The ISO terrorism exclusions for both commercial property and general
liability policies were filed in their final amended form in late December
2001, and state regulatory approval began almost immediately, to implement the
exclusions' use as quickly after January 1, 2002, as possible.
What the Exclusions Exclude
It should be noted here that the new exclusions filed by ISO, and already
being used in 45 states, are technically not just "terrorism"
exclusions. For property policies, the endorsement is entitled "Exclusion
of War, Military Action and Terrorism." The endorsement for use with CGL
policies is entitled "War or Terrorism Exclusion." Both endorsements
combine a terrorism exclusion with the standard war and military action
exclusion already found in commercial property causes of loss forms.
The net effect on coverage under a standard commercial property policy,
therefore, is limited to terrorism claims (since the war exclusion is identical
to the one already applicable to the same policy). For some other property
lines (e.g., commercial crime), the endorsement will arguably impose a broader
war exclusion as well as imposing a new terrorism exclusion. With respect to
the CGL policy, which excludes only contractually assumed war risks, the
"war or terrorism" exclusion will significantly restrict coverage for
liability arising out of war. On the assumption that the new ISO exclusions (or
their equivalent) will be attached to most new commercial property and
liability policies, the "war" portion of the exclusions alone will
mean a considerable narrowing of coverage.
With respect to incidents that meet the exclusions' definition of
"terrorism," there will now be no coverage of damage to insured
property under the following circumstances:
- When nuclear materials are used in the terrorist act
- When the terrorist act consists of the "dispersal or
application" of chemical or biological weapons—that is, chemicals or
biological materials that are poisonous or cause disease
- When poisonous or disease-causing chemicals or biological materials are
released by a terrorist act in such a way that it appears the release was one
purpose of the act
The distinction drawn by the second and third categories above is between a
terrorist act that involves the direct release of a chemical or biological
agent (such as the mailing of anthrax-contaminated letters); and the use of
non-chemical, non-biological terrorist tactics to cause such a release (for
example, the terrorist bombing of a military facility where chemical or
biological agents are stored). Terrorism under either of these sets of
conditions, or when nuclear materials are involved, is excluded regardless
of the scope of the resulting injury or damage. Under any other scenario
involving a release of biological or chemical agents - where, for example, it
appears that the release is an unintended result of other terrorist
acts—the exclusion applies only when a property damage threshold (see next
paragraph) is met.
With respect to terrorist incidents that do not fall into one of the three
categories listed above—that is, non-nuclear, non-chemical, non-biological—the
exclusion in property policies is triggered when the total insured damage
(including business interruption losses sustained by owners and occupants of
the damaged property) exceeds $25 million. It is important to understand that,
when applying this threshold, all insured property damage under all policies
written by all insurers for all insureds is totaled. Thus, the exclusion may be
applicable even to an insured with far less than $25 million in insured
property.
Damaged property must be located in the United States, its territories and
possessions, Puerto Rico, and Canada. As mentioned earlier, the $25 million
threshold applies to all related terrorist acts (i.e., those carried out in
concert, or with a related purpose, or under common leadership) within a
72-hour period. And it applies, once triggered, to all damage stemming from the
terrorist act—not, in other words, only to damage that exceeds the
threshold.
The ISO terrorism exclusion that applies these restrictions to property
coverage exists in two forms: one that imposes the exclusion absolutely,
without regard to the nature of the property damage; and another that makes an
exception for direct loss or damage by fire. This exception is mandated by law
in certain jurisdictions where property coverages of whatever type may not be
more restrictive than the provisions of the standard fire policy (SFP)
recognized by statute in that jurisdiction. (Standard fire policies insure
direct loss by fire regardless of the cause of the fire.) The exception that
applies in these so-called SFP jurisdictions applies only to direct fire
damage—not to any consequential loss (loss of income, for instance) resulting
from the fire.
In non-SFP states, the terrorism exclusion applies to property losses
without exception, including terrorist acts that cause direct damage from fire.
Figure 1 lists the SFP and non-SFP jurisdictions. (This list refers only to the
applicable law of the jurisdiction and the form of the commercial property
terrorism exclusion filed in that jurisdiction. It is not a list of
jurisdictions that have approved the filing. Approval information is contained
at the end of this article.)
Arizona
California
Connecticut
Georgia
Hawaii
Idaho
Illinois
Iowa
Louisiana
Maine
Massachusetts
Michigan
Minnesota
Missouri
Nebraska
New Hampshire
New Jersey
New York
North Carolina
North Dakota
Oklahoma
Oregon
Pennsylvania
Rhode Island
Texas
Virginia
Washington
West Virginia
Wisconsin
|
Alabama
Alaska
Arkansas
Colorado
Delaware
District of Columbia
Florida
Indiana
Kansas
Kentucky
Maryland
Mississippi
Montana
Nevada
New Mexico
Ohio
Puerto Rico
South Carolina
South Dakota
Tennessee
Utah
Vermont
Wyoming
|
With respect to commercial general liability (CGL), the ISO "war or
terrorism" exclusion alters the policy's basic coverage considerably.
As pointed out above, the CGL war exclusion already contained within the policy
applies only to liability assumed in a contract. The "war" portion of
the new ISO endorsement, on the other hand, imposes a sweeping exclusion of
liability arising out of war and any "warlike action," including
defensive and preventive governmental actions, and not limited to contractual
assumptions.
The terrorism portion of the exclusion (the actual exclusionary language and
the definition of "terrorism") is the same as the property insurance
version, with two exceptions. First, the $25 million dollar property damage
threshold is not limited to property in the United States and Canada; a total
of $25 million dollars in property damage anywhere in the world—arising out of
one terrorism "incident"—will trigger the exclusion. Since CGL
coverage applies under certain circumstances on a worldwide basis, the
exclusion is made equally broad.
Second, in light of the fact that liability claims may involve either
property damage or bodily injury, a "serious physical injury"
component is added to the trigger. The exclusion applies to liability claims
when a terrorist incident causes either $25 million of insured property damage
or the death of or serious physical injury to 50 people. As in the property
exclusion, the threshold does not apply to terrorist incidents involving
nuclear, biological, or chemical weapons. Liability stemming from terrorism
using such weapons is excluded regardless of the scope of the resulting injury
and damage.
The liability exclusion applies both to bodily injury and property damage
under Coverage A of the policy; and to personal and advertising injury under
Coverage B. Medical payments coverage under the ISO CGL is subject to its own
war exclusion, which is absolute in much the same way as the war component of
the new "war or terrorism" exclusion. When the latter exclusion is
applied to the policy, the basic medical payments war exclusion already in the
policy is deleted. But since medical payments coverage is subject to all
exclusions applicable to Coverage A, the "war or terrorism"
exclusion, in effect, will apply to bodily injury under medical payments
coverage as well.
The general liability exposures related to terrorist acts are still unclear,
since lawsuits connected to the events of September 11 have been slow to
emerge. Nonetheless, a number of potential causes of action have been discussed
in the media and among risk management and legal professionals. Among the most
frequently discussed are claims of failure to warn of a possible terrorist act
and negligence in responding to the emergency conditions created by an actual
terrorism incident. Negligent hiring and supervision could also be the basis
for claims against an employer who provided an employee with the opportunity or
means to commit an act of terrorism meeting the exclusion's threshold.
Approval of the ISO Filings
With the endorsement of the NAIC, the ISO terrorism filings have won rapid
approval by most state regulatory authorities, and are already in use in the
jurisdictions that have approved them. Another policy-drafting and advisory
insurance organization, the American Association of Insurance Services (AAIS),
has filed terrorism exclusions for use with its commercial coverage forms that
are equivalent to ISO's and also conform to the terms approved by the NAIC.
Moreover, ISO has given permission to insurers not affiliated with it to use
the ISO filings, which means that the language of the ISO exclusions should
become an almost universal industry standard.
Forty-five states, the District of Columbia, Puerto Rico, and Guam have
approved the ISO filings. In each of those jurisdictions, regulatory approval
was granted with an effective date of January 1, 2002, except for Alaska, where
the effective date was January 12. ISO expects approval in three additional
states: Florida, Georgia, and Texas.
Two states, California and New York, have refused to approve the filings in
their current form, and are pursuing discussions with ISO about possible
further amendments. The California Insurance Department cited the following
reasons for its refusal: (1) the bodily injury and property damage thresholds
are unreasonably low; (2) the 72-hour definition of a single
"incident" may be unfair; (3) the total exclusion of terrorism
involving biological or chemical agents (without any threshold) is overly
broad; (4) the exclusion may have an anti-competitive effect. The New York
Insurance Department also voiced an objection that the $25 million threshold is
too low.
In several of the states that have approved the ISO filings, steps have been
taken to put in place some form of "sunset" provision governing use
of the exclusion. These provisions would suspend the applicability of the
exclusions at some point (15 days, for example) after federal action is taken
to provide reinsurance or other financial guarantees to insurers for terrorism
claims. Additionally, in some states, use of the ISO filing by an individual
insurer is made contingent on the insurer's documentation of a lack of
reinsurance for terrorism claims. ISO has stated that it will act promptly to
review its terrorism language in the event of federal action addressing the
lack of reinsurance.
Conclusion
Given an insurance policy exclusion that applies only when terrorists have
killed or injured 50 people; or employed nuclear, chemical, or biological
weapons; or destroyed more than $25 million worth of property, the only
legitimate response is a fervent hope that no insurer ever has occasion to use
it. Beyond that, a wait-and-see attitude seems especially appropriate with
respect to this particular coverage issue.
For those who question the reality of the "reinsurance crisis"
that has caused commercial insurers' concerns regarding terrorism, some
answers may come in those states that require insurers to prove a lack of
reinsurance before using the exclusions. Our sources indicate that most of the
reinsurance treaties that renewed in January indeed do not cover terrorism.
Another major round of renewals will take place on July 1, and we expect those
reinsurers will take a similar stance at that time. This will, of course,
affect insurers who rely heavily on reinsurance more than those that do
not.
With the reconvening of Congress on January 23, speculation has renewed
about federal action to provide the insurance industry with some form of
financial guarantee regarding catastrophic terrorism claims. Any ongoing use of
the new ISO exclusions is contingent in a number of states on the
failure of the federal government to enact so-called backstop legislation.
And ISO itself is committed to "responding promptly" to any federal
program that would make the exclusion unnecessary. In the meantime, commercial
insureds and their insurance and risk management advisers should take a close
look at the new terrorism exclusions; they just might find one on their next
policy.
Note: See other terrorism
articles on IRMI.com.