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Can We Insure Against Future Terrorism?
By Allison Thompson& Elizabeth Omara-Otunnu
Have the terrorist attacks on September 11 changed the world as we know it? During the two-day symposium March 21-22, "Liability and Insurance After September 11th," dozens of lawyers, insurers and academics gathered at the School of Law to answer this question as regards the insurance industry.
The industry was not prepared for September 11, according to Roger Singer, general counsel for OneBeacon Corporation.
"It was a risk that no one really imagined could happen," said Singer, whose property casual group writes medium and small accounts.
Nor does the industry have the tools to underwrite the risk, he said, a situation that poses a serious problem for a primary insurer.
Because the future risk of terrorism isn't predictable or containable, there should be some government involvement, Singer said. "This is too big a risk for the private industry."
Insurance companies aren't the only ones exposed to risk in the event of a catastrophe. Just as insurers protect businesses or consumers, reinsurance companies insure the insurers and in turn buy their own reinsurance, said David Robb, executive vice president of The Hartford Financial Services. Because reinsurers pick up part of many companies' risks, the problems are worse at their level. If the terrorism-related loss in New York City is assumed to be $50 billion, 80 percent of it - or $40 billion - would be reinsurers' loss, he said.
"That's not the kind of loss the industry can handle again," he noted.
As a result, reinsurers around the world have begun to exclude terrorism, which is a risk that can't be either measured or monitored, from coverage. According to Frolly Boyd, senior vice president at Aetna, about half of the reinsurers the company uses won't cover terrorism, while the other half will cover it but have exclusions for nuclear, chemical and biological terrorist acts.
Terrorist attacks can be prepared for, however, said Joseph DeMauro, associate counsel in the State of New York Insurance Department's Office of General Counsel.
His department began preparing for possible attacks in March 2000, when it began to work on a disaster preparedness plan. Although the plan was tested in August 2001, it was first used after the September 11 attacks, and it allowed for a swift response to the attacks, DeMauro noted.
Still, "the effects of the lack of terrorism coverage have yet to be fully realized," he said.
Another panel discussed the Victims' Compensation Fund that was established by legislation just 12 days after the terrorist attacks.
The legislation grew out of a bail-out for the airline industry, said Larry Stewart, president of Trial Lawyers Care. Because of the large number of people injured or killed at the same time, the government had no choice but to limit the liability of the airlines for the terrorist attacks, he said. "The airline industry was going to crash and take down the U.S. economy with it. That was the context."
But the bail-out could not happen without compensation, added Stewart. "You can't take away victims' rights after the event, without substituting an alternative right."
The bill establishing the Victims' Compensation Fund was introduced in the House and Senate on Friday, September 21, and became law the next day.
"I don't think we will ever see something like this again in the history of this country," said Stewart. "The political planets and stars were lined up in exactly the right line for this to happen. There was no way the legislation would not be passed. But I don't see this as establishing a precedent."
Although the legislation was passed in a matter of hours, it raised many knotty issues, that were debated extensively for nearly six months while the regulations concerning the fund were being drawn up. These issues included questions such as whether to place a cap on the amount of an award - an option that was rejected - and how to deal with remote victims, who also suffered harm from the attacks: "How many people were running on the streets of Manhattan and were exposed to all kinds of contaminants?" asked Richard Campbell, chair of the American Bar Association Torts and Insurance Practice Section.
A particularly thorny issue has been how to define the class of beneficiaries. "There is a problem with the wrongful death law," said Campbell. "How do you define family in the new millennium?"
The issue is a huge problem, agreed Stewart. "We expected there to be a majority of traditional family units in the population of victims, but that is a distinct minority. We have every variation you can think of - multiple spouses at the same time, and children by all kinds of marital and non-marital relationships. We fought hard for them all to be included."
Establishing the fund also has significant implications for state law. With the Victims' Compensation Fund, the federal government has taken over a responsibility that usually falls under state law. "We are dispossessing the state of jurisdiction," said Campbell.
Victims may choose whether to make a claim from the fund or pursue their case through the courts. Several panelists said that, with many of the claims for damages from the 1993 bombing of the World Trade Center still pending, they expect the majority of the September 11 victims will opt to receive compensation from the fund within the statutory 120 days after filing a claim.
"Fund" is a great misnomer, however, observed Stewart. "There is no fund of money, there is the U.S. Treasury." Unlike other mass tort cases, this program does not depend on a government appropriation.
Programs such as this are rare, he added. The only other examples of a direct obligation bill in U.S. history have been those establishing Medicare and Social Security.
The fund, said Stewart, spreads the risk over all the taxpayers of the United States. "This was an attack on America, its institutions, its culture, its way of life. There is an appropriateness in the government stepping up to take care of the victims."
Discussant Franois Ewald, a professor at the Conservatoire National des Arts et MŽtiers in France, drew a sharp distinction between the fund and insurance.
"A fund that comes after the event is relief, not insurance," he said. "Insurance always comes before the event, it requires us to foresee the future."
The ongoing risk of terrorism poses new challenges for the insurance industry, he said.
"We can either invent a new type of insurance to compensate terrorism or insurance will have lost its universality to make compensation for loss," Ewald said. "It is the risk of liberty that has to be insured."