Defining Terrorism for Policies Not a Simple Task After Boston Tragedy

April 25, 2013

There are a number of issues involved in determining whether the Boston bombings tragedy would be considered a terrorist act for insurance purposes such as determining the applicability of terrorism exclusions and terrorism coverage.

The matter is not clear-cut and it may depend on how terrorist acts are defined in various policies, according to an insurance attorney.

“For those who would qualify for coverage under their policies, there are a lot of factors that go into that, whether the policies have terrorism exclusions or not, how terrorism is defined, whether it mirrors the Terrorism Risk Insurance Act (TRIA) definition, or whether it has a different definition,” said Steven Nassi, a partner at insurance law firm Nelson Levine de Luca & Hamilton. Based in New York, Nassi represents domestic and international insurers in complex coverage, risk management and extra-contractual claims issues.

While the tragedy so far does not appear to be a significant insurance event, various coverages could still be implicated for affected businesses and policyholders.

“There are commercial policies, business interruption, civil authority, general liability policies — but before you even get into whether someone for example qualifies for civil authority or event closure coverage, or business interruption coverage or anything else, you first have to get past whether there is a terrorism exclusion and whether it applies,” Nassi said.

“I am not aware of any carriers that don’t offer terrorism coverage if the policyholder wants to purchase it. It depends on whether the policyholder purchased some form of terrorism coverage or whether they have not opted for that coverage and left their policy subject to the terrorism exclusion.”

And if the business policy includes a terrorism exclusion, it most often applies to any causes of loss or any claims under the multi-coverage policy, he said.

“So even if you have a multi-coverage policy that applies to liability, business interruption, event cancellation, whatever else you have, the terrorism exclusion would apply to any losses that would otherwise be covered under those parts — unless if you buy out some exceptions.”

“Maybe you don’t want terrorism coverage for all of the coverages — maybe you would select to purchase terrorism coverage for property damage but not select to purchase it for business interruption, for example. Then what you would have is a terrorism exclusion with an exception,” the attorney said.

Definitions of Terrorism

The definitions of terrorism under various insurance policies — for the purposes of deciding whether the terrorism exclusion applies or not — can vary and are not uniform, according to the attorney.

“You have the ISO form. A lot of carriers use that. Some don’t have to, depending on the state and the state in which the policies are issued,” the attorney said.

“Some have more leeway to fiddle with the definition. And then once you get into the surplus lines market, they are free to define terrorism however they wish. And as you can imagine, in those circumstances in the surplus lines market, the definition of terrorism can be far broader than what you would generally find in insurance policies.”

And for those policies that define terrorism in the same way that TRIA does, the issue may still be unsettled.

It’s helpful that President Obama has called it an act of terror but that is not necessarily dispositive for insurance purposes, the attorney said: “Under TRIA and under some policies that have adopted the TRIA definition of terrorism, you need the U.S. Treasury secretary and you need U.S. attorney general and the secretary of state to label an incident an act of terrorism. So this will be one of the few circumstances where President Obama’s word is not as good as Treasury secretary’s.”

And according to Brian Green and Jack Dearie, attorneys at law firm Edwards Wildman Palmer LLP’s insurance and reinsurance department in New York, the attack has so far satisfied several prongs of the TRIA definition of a terrorist act — it was a violent act and resulted in damage in the United States. But some requirements have not yet been met, the lawyers added.

The Treasury Secretary, Secretary of State and the Attorney General all must certify it as an act of terrorism, which has not yet happened, and can only happen if there is $5 million of aggregate property and casualty losses, the lawyers said. Additionally, under the TRIA definition, the act must be committed by an individual or individuals as part of “an effort to coerce the U.S. population or influence the policy or affect the U.S. government by coercion.”

Another complex issue that could arise for businesses is calculating the cost of the business interruption.

Nassi, a partner at Nelson Levine de Luca & Hamilton, added: “When trying to calculate the business interruption losses, even if this event falls within the scope of coverage that’s afforded to a policyholder to a business, you’d probably have to factor in whether that business was going to be closed anyway for the Patriots’ Day that day.”

In Massachusetts, a lot of businesses close on the Patriots’ Day, so that may factor into the calculation, the attorney said.

“And let’s assume they were going to be open anyway and they had to close early, and they had to stay closed as a result of this event,” he said. “You would also have to consider in order to determine whether they qualify for coverage and the amount of coverage, whether they chose to close and remain closed — whether they did it as a matter of their own discretion.”

The attorney said that under many policies, carriers may have available to them certain defenses; whether the closure of business was done largely at the insured’s own discretion as opposed to a forced closure. These issues could also apply to the civil authority coverage: if the order of closure by civil or military authority was more of an advisory being issued and was more of a strong suggestion, it might not meet all the elements needed to qualify for civil authority coverage.

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