ISO Develops New Commercial Policy Forms, Rating Information for Terror Backstop Law

November 26, 2002

Insurance Services Office, Inc. (ISO) will file commercial lines policy forms and rating information in response to the Terrorism Risk Insurance Act of 2002 passed by Congress.

The law provides financial backing by the federal government for insurance losses certified by the Secretary of the Treasury as “acts of terrorism.”

To be certified, an act of terrorism must result in more than $5 million in property and casualty losses, involve violence or danger to human life, property or infrastructure and be perpetrated by someone acting on behalf of a foreign person or interest.

“We are committed to providing insurers with necessary coverage and pricing tools to respond to this act as quickly as possible,” ISO chairman, president and CEO Frank Coyne said. “We recognize the urgency for insurers as they gear up to meet the needs of various business sectors – especially construction, real estate and related services. They and others have been forced to curtail or defer work without coverage against the catastrophic exposure of large-scale terrorism.”

With a federal backstop for up to $100 billion in insured losses, the federal program requires mandatory participation by commercial lines property and casualty insurers, and these insurers must make available terrorism coverage for certified acts of terrorism.

The law voids terrorism exclusions on in-force policies as well as state regulatory approvals for such exclusions to the extent those exclusions apply to losses covered by the act. However, the law does permit insurers to reinstate the preexisting terrorism exclusions, if policyholders provide written notice that declines terrorism coverage or do not pay the additional premium for terrorism coverage, if one is charged.

ISO filed insurance policy exclusions for terrorism for commercial property and liability following the Sept. 11 terrorist attacks at the World Trade Center, the Pentagon and in Pennsylvania. Estimates of insured losses from those attacks range from $30 billion to $50 billion. Warning they might not survive another blow of that magnitude, insurers sought terrorism exclusions freeing them to provide other coverages without being exposed to limitless terrorism losses.

ISO’s response to the new legislation, which is to be signed by President George W. Bush this week, includes development and filing of new policy forms for insurers to use on existing, new and renewal policies.

“These policy forms will provide insurers with the tools to implement the coverage aspects of the federal program in a timely manner and to manage the overall terrorism exposure,” Coyne commented.

ISO will also file rating information for the various terrorism coverage options. This information will incorporate analysis from the recently released Terrorism Loss Estimation Model developed by AIR Worldwide Corporation, a wholly owned ISO subsidiary. The rating information will include:

1. loss costs (projections of future claims) for commercial property policies,
2. percentage surcharges for general liability policies, and
3. a combination approach for businessowners policies.

ISO is also developing sample disclosure notices insurers can use to meet the act’s requirement to disclose the premium they may charge for insured losses covered by the act and the federal government’s share of compensation for those losses.

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