PASSING TERRORISM INSURANCE LEGISLATION:
By NICOLE BELSON GOLUBOFF
|Monday, May. 06, 2002|
What would happen if future terrorist attacks were to cause losses the insurance industry could not bear? In April, President Bush supported one solution - expressing renewed interest in stalled legislation that would provide a federal backstop in this circumstance.
The legislation has had some measure of bipartisan support but, so far, it has not been enacted. One main reason has been a disagreement over whether the law should limit liability in civil suits brought by terrorism victims.
On the one hand, trial lawyers are urging that the legislation should permit recovery of punitive damages against businesses whose recklessness results in terror-related losses. On the other hand, Congressional Republicans have opposed the availability of punitive damages in this situation. Both sides reportedly see the issue as having potentially broader implications - in that it may set a precedent that will affect the availability of punitive damages in cases unrelated to terrorism.
There is a way to split the difference. It would make Republicans happy by withdrawing the threat of punitive damages. And it would make employees, consumers, and customers happy by deterring employers from recklessly disregarding terrorism risks.
The solution is this: The government should condition its assumption of liability for terrorism-related losses on employers' implementation of sound risk management strategies.
Prominent among these strategies are telework and flextime work arrangements - which lead to geographically dispersed workplaces and avoid the possibility that a single firm will lose all or virtually all its employees, or that it will be rendered unable to function, by terrorism.
The Need for Legislation: Without It, Insurers May Not Provide Coverage
The once inconceivable horrors of September 11 raised the specter of incalculable risks. The commercial insurance industry understandably became concerned - especially when it came to providing workers' compensation coverage to companies with large numbers of employees concentrated in one office.
One option was to continue to offer terrorism coverage but at astronomical rates. The problem would be setting those rates. How high would be high enough? What if future terrorist acts dwarfed those committed on 9/11?
Another option was to write policies with exclusions for terrorism losses. But use of such exclusions generally requires state regulators' approval. Last fall, Insurance Services Office, Inc., which develops standardized insurance policy language, proposed certain terrorism exclusion language.
As of February, most states, the District of Columbia, and Puerto Rico had approved the language (in some cases, with certain conditions). However, states may prohibit terrorism exclusions in workers' compensation policies.
Finally, the third option for primary insurers was simply to refuse to write certain commercial property and casualty policies altogether.
The result of these three limited options for commercial insurance customers was a bleak one: Coverage was either so exorbitant as to be unaffordable, or simply was unavailable.
The Problems that Occur If Coverage Is Scarce or Unavailable
The absence of commercial property and casualty insurance can create numerous problems. One is that banks may not lend money to uninsured businesses. Some lenders may also declare existing loans in default if adequate insurance becomes unavailable. Without loans for construction and other business projects, a struggling economy can plummet.
Initially, after September 11, it was feared these possible problems would become reality. Did they? Seven months after the attacks, there are mixed reports. Some suggest that, at this point, federal intervention is unnecessary, because terrorism coverage is becoming increasingly available, and available at lower cost. Others say coverage remains scarce and, where available, extremely expensive.
Meanwhile, there is evidence supporting the concern that lenders will indeed hold mortgagees in default if their insurance policies no longer cover terrorism losses. And, in February, the General Accounting Office issued a report indicating that some firms have had to cancel or delay various projects because of the lack of terrorism coverage.
The House and Senate Bills Addressing the Terrorism Insurance Coverage Problem
In November, the House passed a bill entitled the "Terrorism Risk Protection Act." The bill sought to create a temporary risk-sharing program relating to losses resulting from terrorist acts. The federal government would help commercial insurers cover such losses, but the aid would have to be repaid.
The Senate was unable, however, to pass this or any other legislation addressing the problem. One Senate bill, entitled the "Terrorism Risk Insurance Act of 2001," would have established the "Terrorism Insured Loss Shared Compensation Program." This program envisioned a splitting of losses in which companies would not have to repay the government for aid.
Under the proposed program, during the program's first two years, the government would cover 90 percent of the aggregate amount of losses in excess of $10 billion. Then, if the program were extended an additional year, the government would cover 90 percent of such losses in excess of $20 billion. Neither insurance companies nor the government would be responsible to cover any portion of losses in excess of $100 billion in any given year of the program. If estimated or actual aggregate insured losses exceeded $100 billion, Congress would have to revisit the problem.
A Legislative Proposal: Incentives For Company to Avoid Reckless Risk
With the Senate unable to agree on legislation for this problem, is there some compromise that can be reached? I believe so. If Congress truly believes the current market requires terrorism insurance legislation, then it can limit liability and still include incentives for businesses to minimize terrorism risk.
Indeed, such incentives are imperative. First, they are consistent with our new focus on homeland security. Second, any legislation that renders the government - and ultimately the taxpayer - a re-insurer must include measures to reduce the risk of loss. It is not fair for the government to issue what is, in effect, a blank insurance payment check if companies do not agree to make their best efforts to keep the tab reasonable.
Accordingly, the law should key the government's assumption of insurance obligations to policyholders' use of appropriate risk management strategies.
How Telework and Flextime Contribute to Minimizing Terrorism Risk
One way to reduce terrorism-related insurance risks - and particularly workers' compensation risks - is to have companies decentralize their employees. Especially for the substantial number of information-based businesses in our country, maintaining only a limited workforce - say, 50 or fewer workers - at any single worksite, is a sound safety strategy.
Having employees telecommute - either from satellite offices, telework centers, or their homes - can minimize or eliminate the risk that large numbers of employees of any one business will be injured or killed in a single terrorist attack. It can also lessen or eliminate the economic losses that could occur if no one had the knowledge, skill, or equipment to carry on a firm's business after an attack or even a credible false alarm. Flextime has similar effects - when employees work on different schedules, only a portion of the workforce is together in one office at any given time.
The More Distributed the Workforce, The More Liability Should Be Assumed
One way to frame the legislation would be to have Congress key the percentage of workers' compensation-related losses the government would cover to the percentage of the insurers' policyholders that have workforces working in small, distributed, or flexibly scheduled offices. (Or, alternatively, if the scheme required repayment by the insurers to the government, insurers whose policyholders fit the bill could have some of their repayment obligation forgiven.)
Congress could similarly reduce its re-insurance exposure for personal injury losses sustained in a terrorist attack on a tunnel, bridge, or other transportation system. It could key the percentage of such losses it would cover to the percentage of insurers' aggregate premiums paid by public agencies that have taken specific steps to promote telework and flextime work arrangements among both public and private employers. (Such steps could include tax or other economic incentives and outreach efforts, for example.) Public agencies would thus have a significant incentive to take these steps.
Legislation with such provisions would give insurers an incentive to write affordable workers' compensation policies both for small companies and for large ones that maximize the use of multiple alternative worksites and flexible scheduling. It would also give insurers an incentive to write affordable policies for transportation authorities that promote alternatives to the traditional commute.
Most importantly, by requiring businesses seeking affordable insurance to take certain safety precautions, such legislation would reduce the chance that insurers will actually face a level of risk that requires federal help. And of course, when risk is reduced, we are all safer.
Concededly, this proposal offers little to plaintiffs' lawyers favoring unlimited liability - indeed, in attempting to limit terrorism casualties, it can limit the number of plaintiffs they will have in future cases. But that is only because it can save lives.
This proposal might also create some initial risk management costs for businesses. However, for businesses, having control of the costs at the outset is surely better than suffering the whim of a jury's punitive damage award. Accordingly, offering a government safety net later for wise risk management now is more than a fair trade.