A Risky Business

The slogans and jingles of insurance advertising may change with the times, yet the theme always remains the same: We’ll be there to catch you when you fall. But when the World Trade Center towers collapsed and American soil suddenly seemed unsteady, insurers weren’t so sure about their own footing. The Sept. 11 catastrophe, the largest insured loss ever, is estimated to cost the industry at least $40 billion. However, it could take years to tally the bill. Insurance companies told the public that the sector could weather the hit but that the future risks of terrorism loomed too large for them to bear alone. Last fall, U.S. insurance industry leaders trooped to Capitol Hill to plead their case for a federal program that would cushion potential blows from underwriting terrorism. But Congress ended 2001 without passing any legislation on this issue, and in January, White House officials asked the industry for more evidence that federal help is required. Most states say they will let insurers off the hook for losses from terrorist acts that cause damages exceeding $25 million. (But the country’s commercial anchors, New York and California, refuse to limit liability for terrorist attacks.) If the insurance industry can’t spread the financial burden of underwriting terrorism insurance, what does that mean for the companies, buildings and individuals who need it? In-house lawyers, many of whom are now more involved than ever before in reviewing their businesses’ insurance polices, are grappling with these questions. To help cut through the thicket of issues facing insurers and policyholders, Corporate Counsel brought together lawyers from both camps. Neal Wolin, general counsel of The Hartford Financial Services Group Inc., provided the perspective of the insurance industry. On the other side was Robert Chesler, a partner at Roseland, N.J.’s Lowenstein Sandler who represents corporate policyholders. Staff reporter Margery Gordon asked the pair about regulation, coverage disputes and risk management in an altered landscape. Corporate Counsel: What were your first thoughts after Sept. 11 about how this would affect the insurance business and policyholders? Robert Chesler: It’s going to have an immediate impact on premium prices and how insurance is underwritten. There are also going to be tens of thousands of claims, many of which aren’t even anticipated yet. It’s not just the World Trade Center towers themselves, but the ripples of this [catastrophe that] will be felt for years. These are large claims in relatively unexplored areas of insurance coverage that will be very difficult to work through. Neal Wolin: We had 350 employees who worked in 7 World Trade, and so our first thoughts turned to them and all the other folk who worked in those buildings. Of course, insurance companies hadn’t ever contemplated an enormous loss of this sort from a terrorism event. We hadn’t priced for it, we hadn’t thought through the enormous implications it would have for us in the near term about sorting through coverages and assessing claims. It began very intensive discussions both internally and within the industry, and ultimately with people in Washington, D.C., about how to deal with terrorism from an insurance perspective. THE REGULATORY FRONT CC: What would a federal program to help insurers underwrite terrorism coverage mean for corporate policyholders? Chesler: National insurance problems need national solutions … . The insurance industry should not get away from its function of protecting people by just eliminating risks whenever they appear. This is why you need a federal program watching over the insurance industry — to make sure that if risk is rejected, it’s rejected for the proper reason, and there are proper safeguards put in place to protect people. CC: Do the states’ efforts to help insurers make up for Congress’ delay in addressing this issue? Wolin: The states have acted as a stopgap in the absence of federal legislation in this area … .[But] it’s going to be very complicated for many insurance companies to actually use these state exclusions in a competitive marketplace. To the extent that exclusions are used, American businesses are left without adequate insurance protection against a very real risk. [Having the state exclusions] is better than not having them, but it doesn’t at all compromise the need for a federal backstop for the private marketplace on terrorism insurance. CC: The Hartford has been pretty active in lobbying for federal involvement on this issue. At this point, what is the likelihood that this legislation will actually pass? Wolin: We are continuing to work with the Bush administration as well as key members of both the House and the Senate. Although I think it’s going to be a hard row to hoe, we’re going to continue to fight that fight. We in the insurance industry are not calling for the United States taxpayers to bear the entire burden of terrorism risks, although it is obviously a national security issue. We are not looking to abnegate our responsibility. But, because of both the nature and the enormity of terrorism risks, we just simply can’t perform the right amount of actuarial analysis on terrorism risks that would allow us to accommodate it in the private marketplace. THE BOTTOM LINE CC: What premium increases are you seeing on commercial policies? Chesler: I’m hearing stories of increases of 30 to 40 percent, with higher deductibles and tougher policy conditions. Wolin: In certain targeted locations, where the market perceives that terrorism is more likely to occur, like midtown Manhattan or downtown Chicago or central Los Angeles, you may see substantial price increases more quickly than in other places. We’re not seeing anything like 30-to-40 percent price increases, but we’re seeing double-digit increases. CC: How much do the current premium increases stem from the terrorist attacks, as opposed to pre-existing factors? Wolin: The price increases in the marketplace today for primary insurance are related to increased costs from health care and litigation [coverage]. And also, we’ve been paying a lot more for our reinsurance [financial coverage for primary insurers] … . That is attributable to 9-11. But if we had sat here on Sept. 1, [2001], we would have said quite clearly that premiums were going up, and were expected to continue to go up for the foreseeable future. CC: How do you respond to charges that insurers are profiteering? Wolin: It’s hard to say that the insurance industry is capable of profiteering or gouging, just based on how competitive it is and how much capital there is coming into the marketplace to replace some of the capital that was lost from the events of 9-11. Chesler: Of course people want premiums to go down, people are suspicious about how much of this is really necessary, and if there is a profiteering motive involved. But the difficulty of coping with this market is what’s keeping people’s minds busy, not trying to cast blame right now. The big problem is going to be paying out on claims from this disaster and making sure that people get the money they’re entitled to. Wolin: We’ve already paid out over a hundred million dollars on the claims that have come in from 9-11. But for those who seek claims that are not part of the coverage for which they paid premiums, we’re obviously going to look at those carefully. RUNNING FOR COVER CC: How directly would a company have to be affected by the World Trade Center explosion in order to get payment on business interruption claims? Wolin: For direct business interruption claims, you need actual physical damage to your premises, it has to come from a “covered peril,” [a potential danger covered by a policy] and it has to interrupt your business. The second kind of business interruption claim that we’re seeing is so-called “civil authority” coverage. It has to be a civil authority — a city, a state, a police department, a governmental entity — that closes down the insured’s premises. And the order has to be a direct result of physical damage at a location other than the insured’s premises. This does not apply to worsened market conditions or just less flow of foot traffic. Chesler: There’s a lot of room for people in good faith to disagree. There is very little business interruption law on the books in terms of case decisions. These are the types of issues that can be spun out for a long time and can lead to disputes in litigation. BRAVE NEW WORLD CC: What role do corporate in-house legal departments play in all this? Chesler: In-house counsel need to get more involved in working with insurance and risk management departments in identifying risks, helping to decide what remedies there are and what risks are properly dealt with through insurance. CC: What advice would you give to corporate policyholders about handling these issues in the future? Chesler: Make sure you have the right coverage. Corporate policyholders need to pay a lot more attention to the drafting and wording and types of insurance they buy, not just take policies off the shelf. Wolin: It’s important for insureds to understand what their insurance needs are and make sure that their insurance program is well tailored to those needs. There is also an increasing need to have more robust risk management programs, together with insurance, so they’re well protected in the event of a catastrophe.