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Why The Terrorism Risk Insurance Act Of 2002 Is Still Stalled In Congress, Limiting Our National Preparedness

Thursday, Jul. 04, 2002

Since September 11, the nation has been preparing, in various ways, for the next terrorist attack. Even though we hope no new attack will occur, it would be foolhardy for us not to prepare in advance to deal with the consequences if it happens. But in one important respect in particular, we are not yet as ready as we might be. That is because the politics of tort reform has distorted our terrorism preparedness.

American business recognized after September 11th that a weak link in our response to terrorism has to do with the cost of "terrorism insurance." Simply put, the cost of insurance designed to cover losses resulting from a terrorist attack skyrocketed after 9/11, to the point where such insurance is out of reach for many businesses.

Why? As far as I can tell, the reason is that House Republicans have, until now, insisted on adding an unrelated and unnecessary tort reform component to their version of the Act.

The Problem the Terrorism Risk Insurance Act Is Designed to Solve

To understand why the Republicans' tort reform demands are unreasonable, one must understand the problem the Act is designed to solve. Right now, insurance companies feel that the risks of terrorism are dramatically higher than they had estimated before September 11, 2001. Consequently, terrorism insurance, which was once relatively cheap and easy to obtain, has become prohibitively expensive.

The government could accept this state of affairs and allow large and small businesses to operate without terrorism insurance. But from society's perspective, this would be a penny-wise and pound-foolish solution.

After all, there is little question that the uninsured companies impacted by the next catastrophic attack will go running to the Government hat in hand, and the Government will bail them out--witness the billions sent to the airline industry in the weeks following 9/11.

It is usually better to spread the costs of a disaster such as a terrorism attack (or a natural disaster such as a brushfire or hurricane) ahead of time, to minimize the cost to any one entity or person, and to ensure that everyone has an incentive to get low premiums by acting to prevent the disaster insofar as is possible.

The insurance market is the best device for ensuring costs are spread. When the insurance market balks at participating in a specific market - as it has in the market for terrorism insurance - the best way to bring it back into that market is to guarantee a certain degree of downside protection.

Such protection allows the insurers to set rates without fear of getting walloped by coverage claims that far exceed their reserves. In turn, because insurers do not have to worry about this fear, customers find this protection ensures that insurance becomes more affordable.

What the Act Does - and Why Its "Corporate Welfare" May Be Justifiable

The House bill would be triggered in the event of a terrorist attack that caused at least $1 billion to the whole industry, or $100 million of damage focused on a few insurers. (The bill that passed the Senate has a lower threshold).

Both bills foresee the Treasury Department paying up to 80-90% of the losses above the trigger amount, subject to a cap of $100 billion. In the House bill, there is a provision designed to recoup some of the money paid out to affected insurers from the rest of the insurance industry - effectively making insurers insure each other - but this is not part of the Senate bill.

Of course, what I just described in the previous paragraph is a subsidy program for the insurance industry and its corporate customers. That does not necessarily damn it: if designed properly, it could be a form of corporate welfare that even a liberal could love.

The Respect in Which the Republicans' Version of the Act Goes Too Far

What is quite annoying about the Act is that the Republican version goes a step further and decides to subsidize the insurance industry by limiting the recovery of anyone who might sue their clients.

Both the House and Senate versions of the Act move any tort litigation resulting from a terror attack (as determined by the government) to federal court, but stipulate that the law of the state in which the injury occurred will still apply. In itself, that venue change seems fine. But the House version-penned by the Republicans-also forces
litigants to give up rights that they would have had in state court, and does so for no other reason (that I can discern) than to limit the recovery of the victim.

Under the House version of the Act, someone who was injured as a result of a tort "arising out of" or "resulting from" an act of terrorism could not collect punitive damages. Nor could that plaintiff receive all of his or her non-economic damages from a co-defendant. Moreover, the plaintiff would have his or her damages set-off by collateral sources such as insurance.

In contrast, in typical state proceedings, punitive and non-economic (usually, "pain and suffering") damages are available, and evidence of insurance coverage is inadmissible so as not to give defendants a pass for their tortious conduct when the plaintiff happens to be insured.

To add insult to injury, plaintiffs' lawyers would be subjected to the first-ever federal price control for legal services: under the Republican's version of the Bill, a lawyer could not receive more than 20% as a contingency fee for handling a tort suit "arising out of" a terrorist attack. The Republicans call this "litigation management."

If the Republicans had wanted to deter the best tort lawyers from representing terrorism victims, they could hardly have done a better job than with the 20% provision - which cuts attorney's fees by more than a third, for no apparent reason.

Terrorism Victims Lose Rights, and Gain Nothing, in the Republicans' Bill

Why would the Republicans want to make sure that a victim of a terror attack would get less than a similarly situated victim of an assault in a parking lot or apartment building? Obviously, it is not out of any tenderness towards terrorists. Indeed, none of the litigation management provisions would apply to the terrorists who actually created the terrorist event, if they could ever find them to sue them.

So why include the "litigation management" provisions at all? What work are they supposed to do? In reality, the real targets of litigation after a terrorist attack will not be the perpetrators of the attack, but the companies that will be accused of having enabled the attack in some way.

That was the lesson of the Airline Stabilization Act of 2001. The Act was passed after September 11 to limit the litigation exposure of any industry remotely connected to the tragic events of that day.

But the Airline Stabilization Act, unlike the Republican's version of the Terrorism Insurance bill, gave litigants something in exchange for reducing their right to sue--the September 11 Victims Compensation Fund. The Republicans' bill, in contrast, gives nothing back to the victims of negligence--it gives only to the insurance industry and its clients.

That is not fair. Had the Airline Stabilization Act left September 11 victims out in the cold - cutting damages and lawyers' fees while giving nothing in exchange - there would have been an outcry. There should be an outcry, too, about the Republicans' bill, which would do the very same thing to the victims of a future terrorist attack.

Terrorism Victims Deserve Punitive Damages If Legal Standards Are Satisfied

Furthermore, the elimination of punitive damages is the wrong "litigation management" tool for a bill designed to help the insurance industry. Punitive damages are awarded very rarely, and if they are, are awarded only in cases of intent to injure or "conscious indifference". These are generally cases of very serious wrongdoing - or at least, conduct a jury sees that way.

When a client of an insurance company has acted in way that evinces conscious indifference, why shouldn't the client be sued for punitive damages?

A Hypothetical Under Which the Republicans' Bill Would Apply

Suppose, for example, that a high rise building's corporate owner fails to maintain a fire escape in working order, and its building is attacked by terrorists. It is clear that the building's manager - and thus, under the law, the corporation, for the manager is its agent - has been consciously indifferent to the fire escape's risk. Not only did city inspectors recently warn him to fix it, but the building has had prior fire drills where the fire escape did not function properly. When the attack comes, many more people die than would have been the case if only the fire escape had worked.

What would happen to the building's corporate owner under the Republicans' bill? The action would happen in federal court, which is fine. But there, the plaintiffs' families could only get compensatory damages, for losses such as the victims' lost future income.

Accordingly, the families of low-earning victims - think of the janitor, or an administrative assistant - would receive comparatively little. (Punitive damages can act to equalize, to some extent, awards to the families of high-earning and low-earning victims.) And every family would receive less than they would have in a non-terrorism related state court tort case in which the conduct that caused the injury was similarly egregious.

Meanwhile, the victims' pain and suffering would go uncompensated. And the owner's indifferent conduct would not be punished with a huge damage award. Indeed, the owner would be treated just the same as if the malfunction, rather than being the result of its employee's egregious conscious indifference, had been entirely outside of its control - caused, for instance, by some terrorist technology.

No differentiation would be made between the company whose employee checks the fire escape regularly (but perhaps is somewhat negligent as to how often), and the company whose employee callously ignores the fire escape's malfunction after being warned of the serious risk to human life.

That isn't right, and it shouldn't be the law.

The Bill Is Probably a Wedge to Open the Way to More Tort Reform

Moreover, recall that the Act envisions a program that could cost up to $100 billion. In light of this huge number, the additional burdens that punitive damages, joint and several liability for noneconomic damages, and collateral sources might add to the cost of insurance are relatively minor. These additional burdens - which are not new burdens, after all, but simply a reflection of the existing tort system with which insurers deal every day - cannot explain why this issue had held up the Act's passage since December.

Then why is the legislation stalled? I suspect that the Republicans view the Act as another opportunity to promote larger and completely separate tort-reform agenda. But that agenda should be debated on its merits at another time. It should not be imposed piecemeal on the American people, and, worse, imposed on the very people who should least bear its costs, terrorism victims.

The kind of damages and liability the Republicans want to cut off in suits by terrorism victims - punitive damages and joint and several liability for noneconomic ("pain and suffering") damages - are either right for all tort suits, or wrong for all tort suits. If they are wrong, the states should eliminate them, as some have already started to do. If they are right, Congress should not take them away from anyone, including terrorism victims. Indeed, terrorism victims are probably the last plaintiffs we should take punitive damages away from.

These large policy questions are wholly separate from the question of whether the government should subsidize terrorism insurance - a question on which there is now a bipartisan consensus that should be rapidly acted upon. The Republicans should not be allowed to use the Terrorism Risk Insurance Act of 2002 to pursue the separate and very controversial agenda of tort reform.

Finally, terrorism victims should not put forward as special guinea pigs for a tort reform proposal that we are not yet willing to apply to all tort victims. If more attacks do happen, they will have suffered enough without being singled out for an especially limited court remedy.

Anthony J. Sebok, a FindLaw columnist, is a Professor of Law at Brooklyn Law School, where he teaches Torts, among other subjects. Professor Sebok has written several other columns on September 11-related tort issues for FindLaw; they can be located in the archive of his columns on the site.

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