Attack on America: The Insurance Coverage Issues
Robin Olson | September 1, 2001
Part 1 of this article demonstrated why we at IRMI believe that standard and most nonstandard war risk exclusions would not operate to deny coverage under property and casualty insurance policies for claims arising from the terrorist attacks on September 11, 2001. In this second part, we examine other policy provisions or, in the case of workers compensation insurance, regulations that will define the extent to which coverage applies under many types of insurance. Once again, our analysis focuses on standard policy language because it is so pervasive for these lines of insurance; the language of nonstandard forms would need to be compared to the standard forms to determine if these conclusions apply.
Commercial Property and Inland Marine Policies
Commercial property insurance policies are designed to cover direct loss to insured property, such as buildings and their contents. Inland marine policies provide similar coverage for special types of property, such as computer equipment, construction equipment, and the like. Commercial property policies may be endorsed to insure "indirect losses," such as the interruption of a business's income stream following the loss of its premises.
The first prerequisite to coverage under a property insurance policy is that damage result from a covered peril. These polices may apply on an "all-risk" basis, in which case they cover any cause of loss not specifically excluded, or on a named-peril basis, where only those causes of loss listed in the policy are covered.
Terrorism can be viewed as a form of vandalism, which is a covered cause of loss under virtually all commercial property policies. In addition, the damage arising from the terrorist attacks in New York and Washington, D.C., was the result of two other causes of loss that are covered under virtually all commercial policies, whether named peril or all risk: damage by "aircraft or vehicles" and ensuing "fire." Therefore, most direct damage property claims by businesses whose property was damaged or destroyed by the terrorist attacks are covered.
Business Income and Extra Expense Losses
Resulting income losses suffered by businesses in locations damaged or destroyed by the terrorist attacks are also covered, provided the policy in question includes business income coverage. Under most business income coverage forms, coverage would apply to resulting income loss suffered at any of the insured's locations, provided the location where the direct damage occurred is listed as a covered location under the applicable policy.
Extra expenses incurred by these businesses to continue operations on a makeshift basis are also covered. However, if the policy does not provide full extra expense coverage, these expenditures may be covered only to the extent that they reduce the business income loss.
If the policy does not contain a business income waiting period deductible, coverage applies to income and expense loss incurred between the date of the direct damage and the date when the property is repaired or replaced, or when the insured has resumed operations at a new permanent location. Under most forms, coverage would also apply to income loss suffered in the first 30 days after operations have been resumed. If a waiting period deductible applies, there is no coverage for the portion of the income loss suffered during the stated waiting period (typically 72 hours after the time of the direct damage).
Business Income Civil Authority Coverage Extension
Businesses that suffer income losses because authorities prohibited access to their facilities as a result of the damage from the terrorist acts can collect under the civil authority coverage extension found in most business income coverage forms. This extension grants coverage for business income loss:
caused by action of civil authority that prohibits access to the described premises due to direct physical loss of or damage to property, other than at the described premises, caused by or resulting from any covered cause of loss.
Under most forms, the civil authority coverage extension applies to loss suffered in the first 3 weeks after the date of the civil authority order (or, if a waiting period applies, to loss suffered in the first 3 weeks after the expiration of the waiting period). The lifting of the civil authority order does not curtail the coverage period.
The civil authority coverage extension clearly applies to income losses suffered by businesses with facilities in the cordoned-off areas of New York City and Washington, D.C. It is indisputable that access to these business premises has been prohibited by order of civil authority.
But what about businesses in distant states that suffer income losses because of the government-ordered airport closures? Does the civil authority coverage extension apply to their income losses? The action of civil authority to close airports certainly was due to direct physical damage to property, and the damage certainly was the result of a covered cause. Furthermore, there is no requirement that the damage be to neighboring property.
This means that the business income loss suffered by, say, a hotel in New Orleans as a result of damage to property in New York City certainly could be covered. However, the extension applies to loss from "action of civil authority that prohibits access to the described premises…" (Emphasis added.) The insured hotel could make a good argument that the closing of airports around the nation effectively prohibited access to the hotel. On the other hand, the insurer might argue, with some justification, that the civil authority order did not literally prohibit access to any New Orleans hotel or, for that matter, to any particular place outside of the cordoned-off areas in New York City and Washington, D.C.
Contingent Business Interruption Losses
Some businesses will probably suffer income losses because of their dependence on one of the businesses whose facilities were destroyed by the terrorist actions in New York. These income losses are probably not covered, unless the insured has purchased what is commonly known as "contingent business income coverage." This coverage applies to income loss suffered by the insured as a result of damage to the property of another business on which the insured depends to supply or purchase its products, or to attract customers.
Contingent business income coverage can be added to a commercial property policy by endorsement. The two ISO endorsements that provide this coverage are the business income from dependent properties—broad form endorsement (CP 15 08) and the business income from dependent properties—limited form endorsement (CP 15 09).
A few years ago, some insurers were reportedly writing unscheduled contingent business income coverage subject to high blanket limits. Nowadays, however, this coverage is carefully underwritten and usually applies only to locations that are scheduled in the policy as covered locations.
Commercial General Liability Insurance
With respect to general liability claims that may result from the terrorist attack, the war exclusion is even less an issue than are the war exclusions of property policies. The scope of the standard commercial general liability (CGL) insurance war exclusion is quite narrow, since it applies only to contractually assumed liability. Thus, even if the events of September 11 could be made to fit a legally binding definition of "war," the CGL war exclusion would eliminate coverage only for liability imposed on the insured by the terms of a contract.
For example, the exclusion would affect coverage of hold harmless agreements in circumstances where the indemnitee could be held liable for injury or damage stemming from war. A contractor holding its project owner harmless, or a tenant agreeing in a lease to indemnify its landlord, might find itself without general liability coverage for those contractual exposures if the project owner or landlord were found to have negligently contributed to injury or damage from war.
But since there is no solid basis for applying a war exclusion to the terrorist attacks, there is no need to sort out the applicability of the contractual exception to that exclusion.
It is not clear at this point what premises liability claims, if any, could be brought against building owners or tenants of the World Trade Center. (Premises claims arising from the attack on the Pentagon would presumably be against agencies of the Federal government, a self-insurer.) But there is nothing in the CGL policy, other than workers compensation and employers liability exclusions, that would interfere with coverage of potential claims for bodily injury.
Likewise, claims for damage to personal property in the World Trade Center, or for damage to neighboring premises, would be subject to the CGL property damage exclusions. Aside from "care, custody, or control" limitations, there is coverage in the policy for a wide range of such property damage claims.
There has already been some public discussion of possible asbestos exposure in the aftermath of the World Trade Center collapse. Given the date of the buildings' construction (the early 1970s), it seems likely that asbestos may have been used to insulate parts of the steel superstructure, and perhaps in other parts of the buildings as well. Any subsequent abatement work would probably have been by encapsulation, which leaves the asbestos in the building but keeps it (ordinarily) from becoming airborne.
If claims of asbestos-related injury were to be made against the building owner or contractor, coverage would depend on the provisions of any pollution or asbestos exclusions in the applicable policies. The standard CGL exclusion eliminates coverage for an insured building owner from whose premises asbestos is released. The standard exclusion would not affect completed-operations coverage for the contractor that installed the asbestos, although a total pollution exclusion endorsed on the policy would.
Commercial Auto Forms
If the owner of a commercial auto purchases insurance to pay for damage to that auto, in most cases the coverage is provided under the physical damage section of one of the ISO commercial auto coverage forms (the business auto coverage form, the motor carrier coverage form, or the garage coverage form). There are three types of auto physical damage coverage:
- collision
- comprehensive
- specified causes of loss for losses other than collision
Damage to vehicles arising from the events of September 11 are likely covered under one of the two latter coverages. However, it is also possible that some claims will be insured under the collision coverage.
When purchasing physical damage coverage under commercial auto insurance, the insured chooses between comprehensive and specified causes of loss coverage. Comprehensive coverage pays for loss to the covered auto or its equipment when the loss is caused by any reason other than collision or overturn. Comprehensive coverage is analogous to all-risk property insurance—it covers damage from any loss not excluded. Comprehensive coverage would clearly apply to damage or destruction of vehicles from the terrorist attacks as long as the war exclusion is inapplicable.
Specified causes of loss coverage is more restrictive and applies when loss is caused by one or more of a specified list of hazards (fire, lightning or explosion; theft; windstorm, hail or earthquake; flood; mischief or vandalism; or the sinking, burning, collision, or derailment of a conveyance transporting the auto). This list of hazards may vary to some extent but, even at its most restrictive, would include fire, lightning, or explosion. Most damage or loss to autos resulting from the attacks would arguably be from fire or explosion. However, an insurer may have room to content that some vehicles were damaged from other perils—from collapse or falling objects, for example—that are not covered.
If damage from collapse or falling objects is not covered under the specified causes of loss, it would likely be covered under the policy's collision coverage, if purchased. The "glass breakage—hitting a bird or animal—falling objects or missiles" provision of the policy offers some direction. It states that these types of losses are covered under the comprehensive coverage, if such coverage applies. However, the insured has the option of having glass breakage caused by the auto's collision or overturn considered a loss under collision coverage.
Although there is no specific reference to loss caused by falling objects as being a collision loss, the policy's reference to collision as being a loss caused by the covered auto's "collision with another object" certainly leaves room for argument as to a collision between the falling object and the auto.
Personal Insurance Coverage
Hundreds, if not thousands, of individuals and families suffered personal property losses due to the tragic events of September 11, 2001. The coverage issues under personal auto and homeowners insurance are reviewed below.
Many personal automobiles were damaged or destroyed in New York and Washington D.C. The ISO personal auto policy (PAP) contains fairly standard physical damage language, and most insurer forms are patterned off this language. The other-than-collision (often referred to as comprehensive) coverage specifically identifies various covered perils, including explosion, missiles, falling objects, and fire. Most types of physical damage to vehicles would be attributable to one or more of these perils.
The explosions and ensuing fire from the airplane crashes might be considered primary causes of the losses. Additionally, it could be argued that the aircraft were in fact missiles or falling objects. After the explosion, falling objects from the buildings rained down on people and property alike. When the structures collapsed, the building materials became falling objects.
A number of residences, particularly apartments and cooperatives, were also affected by these events. The ISO Homeowners 4—Contents Broad Form (HO 4) policy, used to insure the contents of these premises, specifies 16 named perils against which the personal property of a tenant is covered, including fire, explosion, aircraft, smoke, and falling objects.
In addition to covering direct damage, the ISO homeowners policy provides loss of use coverage, including additional living expenses. This coverage applies in situations where a civil authority prohibits the use of the residence, such as has occurred in lower Manhattan. Thus, homeowner insureds (even those who live in apartments and buy only contents coverage) who incur hotel bills because they are not allowed access to their homes or apartments would be entitled to reimbursement from their insurers; however, this coverage is limited to a 2-week period.
Workers Compensation
Workers compensation insurance provides benefits to workers who are injured on the job. This insurance is unique in that the laws of the various jurisdictions govern what benefits an injured employee is due rather than the terms of the insurance policy. For this reason, the standard workers compensation policy used in virtually all states, including New York, contains few exclusions, and it does not contain a war risk exclusion.
Since it is conceivable that benefits for injured workers could be dictated by any one of 51 jurisdictions or the federal government (for federal employees), it is beyond the scope of this article to attempt to analyze how every claim arising from the events on September 11 will be ultimately settled. [For summaries of the provisions of individual state workers compensation laws dealing with the issues in this article, see IRMI Workers Comp, A Complete Guide to Coverage, Laws and Cost Containment.]
The issue of compensability will vary from jurisdiction to jurisdiction and will hinge on terminology in the applicable workers compensation Act and the interpretation of that terminology by the state workers compensation agency and the state's judicial system. Key areas to be scrutinized include the definitions of "compensable" injury, the requirement that it "arise out of and in the course of employment," and the manner and place where the injury occurred. Since the largest loss of life occurred in New York City and at the Pentagon, this discussion focuses on the New York Workers Compensation Act and the Federal Employees' Compensation Act.
The requirement that the injury be suffered "in the course of employment" is generally interpreted to mean that, for an injury to be compensable, the injury must occur when the employee is at work, during the hours in which he or she is expected to be there, and while he or she is engaged in the work he or she is employed to do. "Arising out of employment" is generally interpreted to mean that the injury must also arise out of a risk that is reasonably related to the employment.
Further, virtually every state workers compensation Act defines "injury" and "employment" in an attempt to tighten the parameters around what is considered compensable so that compensation is truly limited to those injuries resulting from workplace exposures. For example, the New York Workers Compensation Act defines "injury" as " only accidental injuries arising out of and in the course of employment and such disease and or infection as may naturally and unavoidably result therefrom" (Article 1, Section 2(7)). "Employment" is defined in the Act as "employment in a trade, business, or occupation carried on by the employer for pecuniary gain, or in connection therewith…" (Article 1, Section 2 (5)).
Unfortunately, the New York Workers Compensation Board is all too familiar with death and injuries resulting from terrorism and other disasters, having had 6 death claims from the first bombing of the World Trade Center in 1993, and the 300+ death claims caused by the crash of Trans World Airlines (TWA) Flight 800 in 1996. The Board has advised that individuals injured or killed in the course of employment in the World Trade Center disaster will be considered compensable cases.
The Board's decision about compensability for the World Trade Center disaster has its roots in a 1922 court decision Roberts v Newcomb & Co., 234 NY 553, 138 NE 443 at 444 (1922), where injuries caused by a bombing were held to be compensable. The volunteer fire and ambulance workers are afforded coverage for injuries and deaths resulting from the disaster via separate Acts also administered by the Board.
A couple of compensation issues in New York that we expect to see in the weeks and months ahead are mental stress claims and claims for injury and death that occurred in the vicinity of the World Trade Center. Mental stress claims are those where the employee asserts that they have become mentally and/or physically incapacitated because of work-related stress. Most state workers compensation Acts specifically address the compensability of injuries of this nature, with about half of those requiring that the mental injury must have a physical manifestation.
The New York Act excludes:
an injury which is solely mental and is based on work-related stress if such mental injury is a direct consequence of a lawful personnel decision involving a disciplinary action, work evaluation, job transfer, demotion, or termination taken in good faith by the employer. [Article 1, Section 2(7).]
The Board has advised that any claims filed in New York will be dealt with on a case-by case review of the facts surrounding the claims unless the Board as a group makes an overriding ruling.
For employees not actually in the World Trade Center at their place of business, such as those injured traveling to and from work, the question is not so clear-cut. Most states—through their workers compensation Acts or administrative/judicial interpretations—have denied coverage for employees injured traveling to and from work, in essence declaring that injuries sustained during such this travel do not "arise out of and in the course of employment." It is unclear at this point how New York will deal with this issue, but they have advised that the issues surrounding compensability are likely to be loosely interpreted.
The Federal Employees' Compensation Act (FECA) stipulates workers compensation benefits to civilian employees of the Federal government and is administered by the Office of Workers Compensation Programs (OWCP). Medical and benefits for military personnel injured or killed in the line of duty are provided through programs administered by the Department of Defense.
The FECA Act specifically affords coverage for disability or death of employees caused by a war-risk hazard. The definition of "war-risk hazard' in the Act is sufficiently broad enough to provide coverage for the events of September 11, regardless of whether the actions were those of terrorism or war.
Conclusion
Stepping up to the plate to cover most claims emanating from the terrible attack on America is not only the patriotic thing to do, it is exactly what most insurance contracts require insurers to do. While the insurance industry is sometimes criticized for good reason, it usually responds very effectively to disasters. Thus far, it appears that is also the case with this one. Insurers seem to be working diligently to streamline the claims process and help their customers recover from the terrible events of September 11.
To return to Part 1, see Attack on America: The Insurance Coverage Issues, Part 1.
Opinions expressed in Expert Commentary articles are those of the author and are not necessarily held by the author's employer or IRMI. Expert Commentary articles and other IRMI Online content do not purport to provide legal, accounting, or other professional advice or opinion. If such advice is needed, consult with your attorney, accountant, or other qualified adviser.
