The tragic events of September 11, 2000, have affected individuals and businesses to an unprecedented degree. As individuals and businesses attempt to recover and rebuild, all major lines of insurance-- commercial property and casualty, business interruption, directors and officers, life, disability, workers compensation, professional liability, errors and omissions, credit and auto-- will play a role. Insurers and policyholders alike face a host of difficult issues, in resolution of current claims and in the availability and pricing of coverage going forward.
Most U.S. policy forms expressly exclude coverage for losses caused by "war" but not by "terrorism." Will various insurance policy forms cover the losses arising from the September 11th attack? This issue will be determined by the language of the acts of war exclusion, if any, in the particular policy under which the claim arises. Generally, most major U.S. insurers are taking the position that coverage for losses arising from the September 11 attack is not excluded under war exclusions unless "terrorism" or "acts of terrorism" are specifically excluded.
Number of Occurrences
How many "occurrences" were there on September 11th? This is an important issue for insureds such as the airlines and building owners that experienced losses arising from the September 11th attack, because it affects the number of per-occurrence limits potentially available under each policy. Insureds will likely argue for multiple occurrences, thereby maximizing coverage. For example, the lessor of the World Trade Center is taking the position that each hijacked airliner striking the twin towers constitutes a separate occurrence, whereas the WTC insurers say that the coordinated attack was a single occurrence. ("Insurers Dispute Trade Center Claim," The Washington Post, October 9, 2001, p. E4). This issue is also important to potential disputes between insurers and their reinsurers because a cedent’s determination of the number of occurrences may dictate how it presents its claim to its reinsurers.
Business Interruption Claims
Is coverage available to businesses that could not operate in the aftermath of the September 11th attack? Policyholders that sustained physical injury to their business will likely be reimbursed for their losses. Most policies also define "property damage" broadly enough to include loss of use of the property. Coverage for businesses affected by the September 11th attack, but not damaged physically, will depend on the policy endorsements and other coverage purchased by the business. For example, the "civil authority endorsement" is designed to pay for income lost when access to the place of business is prohibited by order of civil authorities. The "ingress/egress endorsement" is designed to cover lost income if a business owner cannot access the business because of an impediment or blockage. Also potentially available is "service interruption coverage" that pays losses arising from lost utilities and "contingent business interruption coverage" that pays if losses are incurred because other entities upon which a business depends fails to provide goods or services necessary to operate. Businesses without these types of coverage may have difficulty recovering for their losses.
Event Cancellation Coverage
Promoters cancelled numerous events, including NASCAR races, National Football League and Major League Baseball games, the Ryder Cup and trade and professional conferences following the September 11th attack. Events cancelled out of a sense of decency may not be covered under typical event cancellation policy language, whereas policyholders that cancelled events as a result of governmental warnings of additional attacks may have valid cancellation claims. ("Out of Respect for Tragedy, Many Events Cancelled," Business Insurance, September 17, 2001, p.23).
Some property and casualty carriers may face a gap in coverage between the war exclusions in the policies they issued to their insureds and the reinsurance treaties they entered into to lay off some of that risk. U.S. general liability policies typically do not exclude coverage for "terrorism" or "acts of terrorism." Reinsurance treaties, on the other hand, often do exclude losses arising from terrorism. This could leave some insurers facing an unrecoverable loss.
Catastrophe Reinsurance Treaties
Catastrophe treaties, open-ended treaties that accept a portion of all risks underwritten by a cedent, are likely to be hard hit by claims arising out of the September 11th attacks. ("Reinsurers See Long Term Effects," Business Insurance, September 17, 2001, p.3, 22). How will the catastrophe reinsurance market respond and will there be underwriting changes to new catastrophe treaties as a result of the September 11th attacks?
Solvency and Capacity of Insurance and Reinsurance Markets
Do the insurance and reinsurance markets have the capacity to absorb the billions of dollars in losses arising from the September 11th attack? Estimates of the damage, ranging from $30 to $72 billion, are predicted to "leave most major insurers and reinsurers damaged but still solvent." ("Insurers Shaken but Solvent-- So Far," Business Insurance, October 1, 2001, p.1). While some smaller, weakly capitalized Lloyd’s of London syndicates are predicted not to survive, overall Lloyd’s is expected to withstand the losses it faces from the attack. ("Lloyd’s Can Absorb Loss," Business Insurance, October 1, 2001, p.1).
Other issues on the horizon include terrorism exclusions and coverage. Insurers will likely revise war exclusion clauses to explicitly exclude "terrorism" and/or "acts of terrorism."
Terrorism exclusions will create a specialized need for terrorism coverage. We expect that some carriers will offer separate terrorism coverage for an additional premium.
Increased Premiums/Hardening Markets
In the wake of September 11th, there has been an immediate, intense hardening of insurance markets and increases in insurance costs. For example, after the attack, airline insurers immediately increased premiums and cut their coverage for third-party war and terrorism liabilities to a maximum of $50 million per airline per "event." ("Risk’s New Dimension," The Economist, September 29, 2001, p.70). Analysts warn that losses from the terrorist attack could produce short-term liquidity problems for the market. ("Lloyd’s Can Absorb Loss," Business Insurance, October 1, 2001, p.1).
Formation of Government-Backed Risk Pools
Already existing in Europe and Israel, there are currently several proposals for a U.S. government-backed risk pool for terrorism-related risks. ("Insurers Outline Pool Ideas," Business Insurance, October 8, 2001, p.1). Under some models, premiums collected by voluntary participants in a pool would be available to cover terrorism-related claims, and the government, acting as an insurer of last resort, would cover claims in excess of the pool’s premiums plus reserves. ("Risk’s New Dimension," The Economist, September 29, 2001). Under such proposals, the government would provide catastrophic excess coverage. ("Industry Needs Safety Net," Business Insurance, October 1, 2001). Most of the current proposals include a sunset provision, whereby coverage written by the government-backed pool would be supplanted by the private insurance and reinsurance markets once they become willing to write affordable terrorism coverage or the threat of additional terrorism subsides.
McDermott, Will & Emery lawyers have a wealth of experience resolving insurance issues arising from some of the insurance industry’s, and the United States, toughest challenges. We have experience in claim presentation, dispute resolution through litigation and arbitration, negotiation and placement of coverage, analysis of coverage under all major lines, and contract interpretation issues.