Attack on America: The Insurance Coverage Issues

Industry Leaders Respond

Whenever disaster strikes, insurers must determine how to apply coverage under their policies. This may seem a simple case of following the terms and conditions contained in the policies, however, substantial public policy and public relations implications can come into play, particularly following a major disaster.

In the wake of the attacks, it was obvious that any denial of claims based on the war risk exclusion would come with a hefty public relations price tag. Plus, there existed the possibility that governmental mandates would override such a decision in any case. At best, such a claim denial would be viewed as un-American. But the financial implications of accepting what may ultimately amount to $40+ billion in covered insurance claims could force some insurers to take that chance and deny coverage.

Fearing this, Representative Michael Oxley, chairman of the Financial Services Committee of the US House of Representatives, sent a letter to the National Association of Insurance Commissioners (NAIC) on September 17 asking the insurance industry to confirm that it would not invoke war risk exclusions to deny coverage for pending claims. In pertinent part, the letter stated as follows.

…there has been some concern that companies may deny coverage to victims of this tragedy based on exclusions for "acts of war." While news releases from individual companies lead us to believe that this is unlikely, it would be completely unacceptable if it were to occur. Any attempt to evade coverage obligations by either primary insurers or reinsurers based on such legal maneuvering would not only be unsupportable and unpatriotic—it would tear at the faith of the American people in the insurance industry.

As mentioned in Chairman Oxley's letter, a number of insurance industry leaders had already taken a definitive pro-coverage position on the issue. Douglass W. Leatherdale of the St. Paul Companies may have said it best, "But our task now, as a part of the insurance industry, is to help our clients recover from this horrific event... We are not going to hide behind the war exclusion for these acts of terrorism." Other industry leaders, such as AIG's chairman, Maurice Greenberg, also took this position in the financial press.

Then, on September 19, two major insurer trade associations affirmed the industry's position. In a press release, the National Association of Independent Insurers (NAII) stated, "In reference to concerns expressed in Chairman Oxley's letter, NAII wishes to confirm that insurers have strongly indicated that they do not intend to invoke the 'act of war' exclusion. This is a non-issue and all insurers we have heard from are treating the losses as covered claims."

Similarly, the National Association of Mutual Insurance Companies (NAMIC) made a statement of its own "that its member companies will honor their contracts and will proceed to adjust and pay claims in a responsible manner just as they have done when other disasters have struck this country."

Our analysis shows that these insurers are not just doing the right thing from a public policy perspective. Most of the policies they write probably obligate them to respond in any case.

Pertinent Case Law

When considering insurance coverage for the events of September 11, by far the most important question is the applicability of war exclusions in the various property and liability policies that might be called on to respond. Most insurance contracts contain war exclusions. Although the language varies from one standard form to another—and may vary even more among nonstandard contracts—many of the same terms occur again and again.

• War (declared or undeclared)
• Civil war
• Military action
• Insurrection
• Rebellion
• Revolution
• Usurped power
• Governmental action to hinder or defend against a military attack

Not surprisingly, the interpretation of insurance policy war exclusions has not been extensively litigated. But the terms employed in such exclusions have acquired more or less settled meanings over the years. An instructive exercise in establishing the meaning of war exclusion language—especially as it applies to the World Trade Center and Pentagon attacks—is the decision by the US Second Circuit Court of Appeals in Pan American World Airways v. Aetna Cas.& Surety Co., 505 F2d 989 (1974).

The case involved a dispute between an aircraft hull insurer and a war risk insurer over coverage for the hijacking and destruction of a commercial aircraft. If the actions of the hijackers (members of the Popular Front for the Liberation of Palestine or PFLP) were considered acts of "war" or "insurrection," then the war risk insurer would pay. If not, then the hull insurer could not invoke its policy's war exclusion and would have to pay the loss.

While the insurance at the center of Pan American v. Aetna was a property policy, the language of the exclusion being invoked is mirrored in other lines as well: property and liability, commercial and personal.

The hull insurer's argument presented the war exclusion language as an attempt to rule out coverage for an entire spectrum of concerted violent acts. Given the nature of the hijacking and destruction of the plane, the insurer maintained that such an act had to fall somewhere along the spectrum that began with "riot and civil commotion [also excluded in the policy]," moved on to "insurrection" and "warlike operations," and ending with "war." The circuit court rejected this argument.

Each of the exclusionary terms has dimensions besides the level of violence. For example, for there to be a "riot" three or more actors must gather in the same place; for there to be an "insurrection" there must be an intent to overthrow a lawfully constituted regime; for there to be a "war" a sovereign or quasi-sovereign must engage in hostilities.

One by one, the Second Circuit rejected the applicability of the war exclusion terms to a terrorist attack. It pointed out that

English and American cases dealing with the insurance meaning of "war" have defined it in accordance with the ancient international law definition: war refers to and includes only hostilities carried on by entities that constitute governments at least de facto in character.

The court similarly declined to follow the insurer's argument that terrorist acts constitute a kind of "guerrilla war" that falls in practical terms within the language of the exclusion.

The [insurer's] alternate theory that the loss resulted from a guerrilla war between the PFLP and the United States is wholly untenable. The only evidence that the PFLP and the United States were at war consists of the PFLP's self-serving propaganda, propaganda claiming that the PFLP was effectively at war with the entire Western World. Such radical rhetoric cannot affect the outcome of this insurance case.

There is no warrant in the general understanding of English, in history, or in precedent for reading the phrase "warlike operations" to encompass (1) the infliction of intentional violence by political groups (neither employed by nor representing governments) (2) upon civilian citizens of non-belligerent powers and their property (3) at places far removed from the locale or the subject of any warfare. (4) This conclusion is merely reinforced when the evident and avowed purpose of the destructive action is not coercion or conquest in any sense, but the striking of spectacular blows for propaganda effects.

The circuit court justices also pointed out that language specifically excluding acts of terrorism, in general, or hijacking, in particular, have been employed in insurance policies for some time. Since such specific and unambiguous language was available to the insurer, the court said, the insurer should bear the burden of failing to use it.

Not only does it appear from the record that various clauses which would have excluded the present loss were in common use, but it appears that the General Policy Committee of the USAIG, which supplied the forms for the present all risk insurance, realized by May, 1970, that "current war risk exclusions do not appear to be effective against intentional damage such as might be caused by hijackings, by bombs placed in aircraft by political activists, by riotous acts, etc." See 368 F Supp at 1119. When the all risk insurers failed to exclude "political risks in words descriptive of today's world events," they acted at their own peril.

In summary, the Second Circuit justices upheld the judgment of the federal district court that the policy's war risk exclusion did "not describe a violent and senseless intercontinental hijacking carried out by an isolated band of political terrorists." That judgment seems equally relevant to the death and destruction inflicted by another band of political terrorists on September 11, 2001.

The Standard Policy War Risk Exclusions

The remainder of this article examines the issues involved with the various property and casualty insurance policies that are likely to be called on to cover losses stemming from the recent terrorist attacks. These include:

• Commercial property insurance policies
• Commercial general liability insurance policies
• Commercial auto insurance policies
• Personal auto insurance policies
• Homeowners insurance policies
• Workers compensation insurance policies

Many of these policies are either written on standard policy forms drafted for industry use by industry rating organizations—such as Insurance Services Office, Inc. (ISO), or National Council on Compensation Insurance (NCCI)—or on nonstandard forms that are patterned after the standard forms. This analysis focuses on the standard language since it is so prevalent. Nonstandard language would require specific analysis to determine how it differs from the standard language. In particular, the analyst would need to look for specific inclusion of "acts of terrorism" or similar language within the list of excluded perils of a war exclusion.

All the standard policies listed above contain war risk exclusions except for the NCCI workers compensation policy. While the exclusions in the various forms vary slightly from each other, they are extremely similar.

One important commonality they contain, along with most nonstandard forms, is that they do not specifically exclude damage or loss resulting from terrorist acts. Instead, they exclude only loss or damage from perils like war, warlike action, and insurrection—the same perils considered in Pan American v. Aetna. This makes any such war risk exclusion inapplicable to damage resulting from terrorism for the same reasons enumerated in Pan American v. Aetna.

To illustrate, consider the war exclusion found in the three ISO commercial property causes of loss forms.

The first thing to note about the ISO commercial property form war exclusion is the conspicuous absence of any mention of terrorism or terrorist acts. The question then becomes, "Would such acts be contemplated within the plain meaning of the language that is used?"

The exclusion is made up of three parts.

• Item (1) is simply an exclusion of damage by war. Terrorism is clearly not war in the conventional sense, in that it is not carried out by large groups of armed military personnel who are being directed by a governing authority.
• Item (2) excludes damage caused by "warlike action by a military force...." Terrorism would not qualify under this portion of the exclusion either. Terrorism involves isolated destructive actions taken by a relative few individuals, rather than a military attack by an army.
• Item (3) is an exclusion of damage in connection with rebellion, revolution, or civil war. These are actions taken by armed groups of citizens in order to take control of the government away from those currently in power. This portion of the exclusion, too, is clearly inapplicable to terrorist action. While terrorists acts can be committed by a nation's own citizens, they are committed by a few individuals, rather than by a large armed force. The usual aim of these destructive acts is to frighten or discourage, and perhaps to influence public opinion for a given cause, rather than to gain control of the government.

The structure of the exclusions contained in the standard ISO commercial auto, commercial general liability, homeowners, and personal auto policies varies slightly from the commercial property form exclusion shown above, but they are so similar that a detailed analysis of the provisions yields the same conclusion. These war risk exclusions cannot be reasonably applied to preclude coverage for claims arising from the events of September 11. We also examined a handful of war exclusions in nonstandard forms and came to the same conclusion.

Conclusion

In the vast majority of cases, there is no war risk or terrorist act exclusion in property and casualty insurance policies that would apply to deny coverage for claims arising from the recent terrorist attacks. In the aftermath of this tragedy, the question is whether, in the future, insurers will modify their insurance policies to specifically exclude or limit coverage for loss arising from terrorist acts. Given the public policy and public relations implications of such a move, however, this may be difficult to achieve or enforce. Time will tell.

While determining that the war risk exclusion does not apply is a major step toward finding coverage in any policy, other policy provisions must also be considered. In Attack on America: The Insurance Coverage Issues, Part 2, we examine some of these other coverage issues.