California State insurance regulators announced that insurance companies must offer terrorism coverage even though Congress has failed to provide an essential backstop for insurers in the event of future terrorism acts.
“The National Association of Independent Insurers (NAII) is disappointed that California will not join the more than 35 other states that have made the sensible decision to approve terrorism exclusions in order to protect insurer solvency,” said Sam Sorich, vice president and western regional manager at NAII.
As a result, California insurers now may decide to cancel or not issue some new commercial lines policies and may non-renew policies for certain risks, added Don Griffin, assistant vice president of business and personal lines at NAII.
“The Department of Insurance’s decision could create a coverage continuity nightmare for businesses with multistate operations since California is an anomaly — the only state so far that will not accept terrorism exclusions,” Griffin said.
Most other state insurance departments have adopted suggested policy language developed by the Insurance Services Office (ISO), providing consistency on the treatment of exclusions. States adopting the ISO language allow terrorism exclusions under the following circumstances: total property damage from an incident of terrorism exceeds $25 million; an incident involving biological, chemical or radioactive materials; and, for liability lines only, more than 50 people sustain serious bodily injury.
New York is the only other major state that has not yet approved the terrorism exclusion.
The NAII disagrees with California regulators’ reasons for not allowing terrorism exclusions-that ISO’s language could be interpreted too broadly and could give insurers the ability to not cover hate crimes.
“The ISO language is specific in scope,” Griffin said. “The definition of terrorism contained in the ISO exclusion language would not enable companies to eliminate coverage for hate crimes. How many hate crimes exceed $25 million or seriously injure or kill more than 50 people?”
Congress failed to approve House and Senate legislation that would have established a federal terrorism insurance backstop for future terrorist attacks. Reinsurance for terrorist risks is extremely limited as a result of the huge losses from Sept. 11, leaving primary insurers virtually no choice but to exclude such risks from most commercial line policies in 2002.
“We hope the California DOI will continue to work with ISO, NAII and other industry representatives in crafting an acceptable exclusion from terrorism coverage,” Sorich said. “Failure to take action on this issue could jeopardize important segments of California’s economy-such as sales and management, oil and gas refineries, power plants, banking and general business with multi-state operations.”
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