Without Terrorism Exclusions, Surplus Lines Insurers Hold Out Lifeline to Calif., N.Y. Businesses

January 14, 2002

AccordingSurplus lines insurers may offer hope for businesses to remain insured in those states, like California and New York, that are refusing to allow insurers to exclude terrorism risks in commercial insurance policies.

“No responsible business would dream of operating without insurance coverage whatsoever,” said Michael Koziol, National Association of Independent Insurers (NAII) senior director and counsel. “But likewise, no responsible insurer can afford to issue an insurance policy on a risk that is uninsurable, which is what the threat of terrorist acts has become. If a commercial property or liability policy must also cover terrorism, licensed insurers without reinsurance for terrorism may choose to reject the application or cancel the policy.”

If that occurs, non-admitted surplus lines insurers that are not restricted by state insurance regulations may provide an alternative so their businesses can continue their coverage.

When Congress failed to enact legislation establishing a federal terrorism insurance backstop for future terrorist attacks, most states adopted suggested policy language developed by the Insurance Services Office (ISO) allowing terrorism exclusions under certain conditions. California and New York decided not to follow suit, throwing businesses in those states into a precarious position. A bill is pending in New York that could prevent surplus lines insurers from issuing terrorism exclusions. NAII will oppose that bill.

“It is imperative for the economic health of businesses in California and New York that the traditional freedom to operate for surplus lines carriers in those states not be impinged,” Koziol asserted. “Otherwise, consumers may be faced with fewer insurers to choose from and market dislocation may ensue.

“For example, businesses in California and New York that wanted to build or expand their operation might consider scaling back their plans or relocating to another state instead because insurance may be unavailable or too costly. However, because both California and New York allow surpulus lines companies to operate freely, they can insure the facility, either with a terrorism exclusion or an appropriate deductible for a terrorist act, and expansion could proceed, resulting in new jobs for residents there.”

Surplus lines insurance generally is placed pursuant to specific provisions of each state’s law, which usually requires the customer to first seek to obtain insurance from at least three licensed companies, referred to as performing “due diligence.” Then, via a surplus lines broker who is licensed in and fully subject to that state’s law and regulations, the business may be “exported” to an out-of-state surplus lines company. That company usually is “whitelisted” (or approved), but not licensed in the state and not subject to the state’s rate and form requirements.

“Regardless of the terrorism issue,” Koziol said, “surplus lines insurers will be critically needed over the coming months as a relief valve during this time of a hardening market.”

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