Putting Parameters on Terror

One month ago, when the insurance industry resigned itself to the fact that there would be no immediate provision of a federal terrorism reinsurance backstop, the reactions of individual states to this reality became a center of focus. By the first week of January, a growing number of state insurance departments had approved the adoption of Insurance Service Office’s (ISO) suggested policy language with regard to allowing terrorism exclusions. By press time, the vast majority of states had gone that route.

But a couple of weeks ago, in a unique move that was perhaps something less than a total surprise, California Insurance Commissioner Harry Low announced that the CDI was denying ISO’s “request for limitations and exclusions to coverage for acts of terrorism in Commercial Lines and Homeowners policies.” [Emphasis is the CDI’s.]

In part, the definition of terrorism was said to be at the root of the CDI’s decision. In other words, it felt that since 9/11, terrorism had become a catchword that encompasses acts “ranging from vandalism to hate crimes.” The CDI also listed a number of concerns it had with some of the suggested policy language which would set guidelines as to when a terrorism exclusion could be allowed—one of which was that the $25 million damage threshold for damage caused by an act of terrorism was “unreasonably low.” The department also had a few recommendations for how ISO might respond to the decision, including the right to challenge the notice.

The only other state which has so far balked at adopting the ISO terrorism exclusion filings is New York.

A number of insurance trade organizations have responded with various degrees of disappointment. Regarding California, some have suggested that the CDI’s action virtually “forces” companies writing commercial insurance in the state to continue to provide terrorism coverage—a situation made untenable by the fact that such companies will have an exposure for losses not accounted for in their current pricing structures. The long-term ripple effect could be that some companies may be less willing to continue writing at current levels. And other companies which can’t get a terrorism exclusion might have to pursue a rate increase to cover themselves for potential losses and stay in the market—which could in turn lead to

While many concede that the CDI is most likely acting with the best interest of the public at heart, is the Commissioner’s stance taking caution to the extreme—a move which could have potentially dangerous effects on the economy?coverage affordability problems for some businesses.

So far, Congress has not yet revisited the issue of federal terrorism reinsurance legislation with the same intensity observed in 2001, and some analysts now say there is perhaps only a 50/50 chance that there will be a successful bill this year.

At this point, nobody’s quite sure how insurers will react to California’s choice. Like a lot of other things since 9/11, it seems that the resolution to this conundrum may entail yet another extended “wait and see” situation.