This is another in Viewpoint’s series of guest essays submitted by organizations that are associate members of AAIS. For information on associate membership, contact Rick Maka, director of marketing, at rickm@AAISonline.com or by calling 800-564-AAIS.
The introduction of H.R. 2671 in late June thrust the federal government’s terrorism reinsurance program back into the national spotlight and found insurers struggling-as they have since the Terrorism Risk Insurance Act (TRIA) was first enacted in 20021 -to understand the contours of the terrorism coverage that they must “make available” to the marketplace.
While politicians and commentators go on about whether TRIA’s reinsurance backstop provision is critical to the financial health and stability of the property/casualty sector or a gift that the insurance industry does not need, the insurers charged with complying with the government’s terrorism insurance mandate are more concerned with defining the nature and extent of an essentially unpredictable risk. This article discusses the many types of perils that could give rise to a claim under a terrorism insurance policy and suggests some of the issues that companies writing terrorism coverage will need to address.
Most individuals have an idea about what terrorism is but do not have a truly explanatory definition of the concept. As Bruce Hoffman states at the start of his insightful book Inside Terr`orism:
“One can find such disparate acts as the bombing of a building, the assassination of a head of state, the massacre of civilians by a military unit, the poisoning of produce on supermarket shelves or the deliberate contamination of over-the-counter medication in a drugstore, all described as incidents of terrorism. Indeed, virtually any especially abhorrent act of violence perceived as directed against society-whether it involves the activities of antigovernment dissidents or governments themselves, organized-crime syndicates, common criminals, rioting mobs, people engaged in militant protest, individual psychotics, or lone extortionists-is often labeled ‘terrorism.’”2
Terrorism is difficult to define because the meaning and usage of the word changes over time to accommodate the political vernacular and discourse of successive historical eras.3
When the word was first popularized during the French Revolution it had a positive connotation and was associated with virtue and democracy. Universal ideologies like Marxism that arose in connection with the socio-economic changes of the industrial revolution ushered in a new era of terrorism in which the concept gained revolutionary, anti-state connotations.
By the 1930s, “terrorism” was used to describe the mass repression that the totalitarian regimes of Fascist Italy, Nazi Germany and Stalinist Russia practiced against their own citizens. After World War II and into the late 1950s “terrorism” referenced violent revolts by nationalist and anti-colonialist groups in Asia, Africa and the Middle East that opposed European rule.
During the 1960s and 1970s, the term continued to be viewed in the revolutionary context, as it expanded to include separatist radical groups outside the colonial framework (such as the PLO) and left-wing political extremists drawn mostly from radical student organizations and communist movements in Western Europe, Latin America and the United States.
It wasn’t until the early 1980s that terrorism began to denote the broader concept of a global conspiracy that uses calculated means to achieve its goal of destabilization in the west.
The meaning of terrorism shifted once again in the 1990s (with the advent of narco-terrorism4 and developments associated with the so-called gray area phenomenon5) from individual episodes of quasi-national violence to events comprised of several elements that formed part of a wider pattern of political and socio-economic conflict.
Al Qaeda’s attacks on September 11, 2001 re-defined terrorism yet again by requiring a response as comprehensive and far-reaching as the terrorist onslaught itself. President Bush’s repeated invocation of the word “terror” rather than the specifically political word “terrorism,” heralded what Professor Hoffman calls “a virtually open-ended struggle against anyone and anything that arguably scared or threatened Americans.”6
The various departments and agencies of the federal government also define terrorism in very different ways. Rather than developing an agreed upon definition, each department or agency uses a definition for terrorism that reflects its own priorities and interests.7
The U.S. State Department definition8 emphasizes the premeditated or calculated nature of terrorism and includes both civilians and “noncombatant targets.” The FBI’s definition9 addresses the psychological dimensions as well as the intimidation and coercive aspects of terrorism. The Department of Homeland Security’s definition10 focuses on the threat of mass destruction, whereas the definition used by the Department of Defense11 refers to the religious and ideological aims of terrorism in addition to its fundamental political objectives.
Whether an insurer limits its coverage offerings to policies designed to comply only with TRIA’s definitions of terrorism and insured loss or incorporates additional aspects of terrorism (including some of the recent legislative proposals) into its products, any attempt to analyze the coverage risk associated with terrorism insurance must necessarily include consideration of the perils outlined in the ensuing discussion.
Conventional terrorism includes loss arising from the following perils:
- Assassination;
- Kidnapping;
- Hostage-taking;
- Shootings;
- Aircraft hijackings; and
- Bombing of mass transit, electricity, telecommunications, energy and other critical infrastructures
If the State Department’s definitional reference to non-combatants is used in this context, a policy that insures against conventional acts of terrorism would encompass not only violent acts against military personnel deployed on peacekeeping missions, but also attacks on cafes, discotheques, and other facilities frequented by off-duty service personnel. Military installations and armed personnel could also be included here, provided a state of open hostility does not exist at the military site.
Terrorists may respond to security measures by employing a substitution strategy and shifting their attention to more vulnerable or ‘soft’ targets. Terrorists may also use an adaptive learning strategy that involves using a variety of attack methods rather than copycat methods that have proven or have the potential to be successful in an effort to keep counterterrorism forces guessing.12
Carriers that provide coverage to critical state and municipal infrastructures, industrial infrastructures and agricultural centers should keep modern terrorists’ target substitution and adaptive learning strategies in mind when assessing risk level for corporate, urban and industrial insureds.
Alternative modes of attack include the following perils:
- Terrorist break-ins and vandalism;
- Riots and wanton violence;
- Arson;
- Agricultural sabotage;
- Food and water contamination; and
- Brand-name attacks.
One of the changes currently being contemplated in connection with the 2007 renewal of TRIA is removing the distinction contained in the existing program between terrorism committed by foreign terrorists (which TRIA covers) and terrorism committed by their domestic counterparts (which TRIA now excludes).
If this coverage gap is addressed in the expected 2007 TRIA extension, insurers will need to focus on those aspects of terrorism highlighted in the FBI’s definition and stand ready to process terrorism claims involving acts of vandalism and sabotage on abortion clinics by militant opponents of legalized abortion; retail businesses and stores by anarchists; medical research facilities by groups opposing experimentation on animals; and ski resorts, condominium vacation developments, commercial logging operations and the like by radical environmentalists.
Universities that host large crowds and conduct scientific research may be the type of “soft target” that is particularly vulnerable to alternative modes of terrorist attack.
In his Risk Report on understanding terrorism risk13, Gordon Woo references intelligence on Al Qaeda surveillance of tourist “postcard” sites and key transport infrastructures such as the Brooklyn Bridge, the Holland Tunnel and LAX airport as justifying extra security expense for properties in major U.S. cities.
Dr. Woo suggests that insureds create multiple layers of protection against terrorism, including gates, uniformed guards and other visible security that may encourage terrorist surveillance operations to search for softer targets. Surveillance equipment should be used to detect unauthorized intrusion into sensitive areas and terrorists should be denied opportunities for sabotage, fraud or other criminal business disruption through tight internal security measures.
The “NBCR” category of loss includes perils associated with the following types of attack:
- Nuclear;
- Biological;
- Chemical; and
- Radiological.
If passed in its current form, H.R. 2761 will require insurers to offer coverage for nuclear, biological, chemical and radiological attacks with the same terms and conditions as the coverage offered for conventional terrorist attacks.
Extending TRIA to include NBCR attacks may amount to requiring coverage for uninsurable risks. NBCR events involve doomsday scenarios-such as chlorine gas tankers, detonation of dirty bombs in places like Times Square, the release of anthrax spores in subway systems or the opening of suitcase nukes in Walt Disney World-that are impossible to predict or quantify.
While a small private market exists that offers stand-alone terrorism coverage that includes NBCR risks, Bestwire reported on June 25 that underwriters have tended to employ costly “rate on line” pricing schemes that are unaffordable to many companies.14
The commercial real estate industry and other major purchasers of terrorism coverage are desperately seeking a NBCR expansion of TRIA, but many commentators question whether small and mid-size insurers will be able to comply with an NBCR mandate. Industry analysts are also studying the market effect of offshore captives in this regard and support extending TRIA to allow captives direct access to TRIA’s federal terror backstop.
This category of loss involves terrorist attacks on the computer networks upon which virtually all major businesses rely. According to estimates from PricewaterhouseCoopers, the total worldwide business losses from the various collateral effects of cyber-attacks totaled $1.45 trillion in 2000 alone.15
Since a cyber-attack will not, in all likelihood, result in physical damage, a majority of the resultant losses will not be covered by the typical property policy.
From the insurer’s standpoint, drafting and obtaining regulatory approval of new policy forms, perhaps never before seen in the regulatory environment, and pricing the cover, including reinsurance for it, are all challenges to be faced.
From the insured’s standpoint, issues to be addressed are evaluating their own exposure, finding cover through brokers who may be somewhat, but perhaps not fully conversant in it, and purchasing sufficient cover for a panoply of quickly changing exposures. These difficulties are compounded by a historical perspective that has often excluded or greatly limited computer-borne risks.
While some insurers have already come out with products that, by their very nature, address some of these issues, the big question for the future is what regulatory authorities will require, and how willing and able the marketplace is to respond.
According to a special report issued by A.M. Best, the information insurers need to set proper pricing for terrorism risk is simply not available. A.M. Best also posits that another affordability or availability crisis similar to that seen shortly after 9/11 will emerge if Congress fails to extend TRIA, thereby sparking another real estate crisis and cutting off major lending programs in major cities and higher-risk locations.16
Although terrorism is a risk that very few insurers are willing to cover, insurance will nevertheless play a critical role in protecting the nation against terrorism.
Before a market for terrorism insurance can flourish, both buyers and sellers need to perform a more systematic analysis of the relationship between the price of protection and the implied risk,17 and the private sector must find a way to act in concert with the government to provide coverage for these types of extreme events.
Karen C. Yotis has been an Illinois attorney for 18 years. She is also a legal editor for LexisNexis, and specializes in topics associated with insurance regulatory compliance, life and health insurance, and property/casualty law. Ms. Yotis is the editor of Mealey’s Insurance Regulatory Compliance Report and participates in the development and enhancement of LexisNexis® Insurance Compliance. She has a BA in Literature from the University of Illinois and a JD from Northwestern University School of Law.
1 The Terrorism Risk Insurance Act of 2002 (Public Law 107-297) created an insurance backstop that is designed to provide reinsurance coverage to insurers following a declared act of terrorism. TRIA also requires that insurers offer terrorism insurance in all commercial policies on terms identical to the terms applicable to other insured losses. TRIA was extended by the Terrorism Risk Insurance Extension Act of 2005 (Public Law 109-144). The Terrorism Risk Insurance Revision and Extension Act of 2007 (H.R. 2671) was recently introduced to revise and extend the current 2005 version of TRIA, which expires on Dec. 31, 2007.
2 Hoffman, Bruce, Inside Terrorism (New York: Columbia University Press) p. 1.
3 Hoffman, Bruce, Inside Terrorism (New York: Columbia University Press)
pgs. 3-20.
4 Narco-terrorism is the use of drug trafficking to advance the objectives of governments and terrorist organizations associated with the Marxist/Leninist regimes of the Soviet Union, Cuba, Bulgaria and Nicaragua.
5 The term “gray area phenomenon” refers to the forming of strategic alliances between entirely criminal organizations (in which violence is economically motivated) and terrorist groups or guerrilla organizations.
6 Hoffman, Inside Terrorism, p. 19
7 Hoffman, Inside Terrorism, pgs. 30-33.
8 “Premeditated, politically motivated violence perpetrated against non-combatant targets by sub national groups or clandestine agents, usually intended to influence an audience.” 22 U.S.C.S. § 2656f(d)
9 “The lawful use, or threatened use, of force or violence by a group or individual based and operating entirely within the United States or its territories without foreign direction committed against persons or property to intimidate or coerce a government, the civilian population, or any segment thereof, in furtherance of political or social objectives,” quoted in Counterterrorism Threat Assessment and Warning Unit, Terrorism in the United States 200/2001 (Washington, D.C.: U.S. Department of Justice, FBI Publication #0308, 2002), p. 3.
10 “Any activity that involves an act that: is dangerous to human life or potentially destructive of critical infrastructure or key resources; and . . . must also appear to be intended (i) to intimidate or coerce a civilian population; (ii) to influence the policy of a government by intimidation or coercion; or (iii) to affect the conduct of a government by mass destruction, assassination or kidnapping.” Homeland Security Act of 2002, H.R. 5005-7 (Jan. 23, 2002).
11 “The calculated use of unlawful violence or threat of unlawful violence to inculcate fear; intended to coerce or to intimidate governments or societies in the pursuit of goals that are generally political, religious, or ideological objectives.” See Department of Defense Dictionary of Military and Associated Terms, http://www.dtic.mil/doctrine/jel/dodict/data/t/05373.html.
12 Woo, Gordon, “Understanding Terrorism Risk,” The Risk Report, Volume XXVI, No. 5, January 2004.
13 Id. At pg. 13.
14 “Terrorism Backstop Bill Leaves Lingering Questions,” BestWire, A.M. Best Company, Inc., Jun. 25, 2007.
15 Testimony given by the Pennsylvania Insurance Department before the Pennsylvania House Veterans Affairs and Emergency Preparedness Public Hearing on Cyber-Terrorism: The Security of Banking, Financial and Insurance Systems on Oct. 16, 2003.
16 Ryan, Daniel J. and Mosher, Matthew, 2007 Special Report Excerpt: U.S. Federal Terrorism Legislation-Trend Review, A.M. Best, June 25, 2007.
17 Kunreuther, Howard and Michel-Kerjan, Erwann, “Dealing with Extreme Events: New Challenges for Terrorism Risk Coverage in the U.S.,” The Center for Risk Management of the Wharton School, Apr. 26, 2004.
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