In the statement from the National Association of Independent Insurers in Des Plaines, Ill., Michael Koziol, senior director and counsel, said last week that "no responsible business would dream of operating without insurance coverage whatsoever."

"But likewise, no responsible insurer can afford to issue an insurance policy on a risk that is uninsurable, which is what the threat of terrorist acts has become," he said.

He went on to suggest that insurers caught in the squeeze?of having to cover terrorism on commercial property or liability policies while not being able to get reinsurance for terrorism?would be forced to reject applications or cancel policies.

Non-admitted surplus lines insurers that are not restricted by state insurance regulations may provide an alternative, NAII suggested.

"I don't get a sense that anyone in the surplus lines market is eagerly awaiting decisions by New York and California saying they won't allow the exclusions," said Rob Giles, president-elect of the American Association of Managing General Agents based in Kansas City, Mo.

"I don't know if there's that much capacity in the surplus lines market," said Mr. Giles, who is president and chief operating officer R.W. Scobie Inc., a managing general agency in Eau Claire, Wis.

"Enough business is coming in" to the surplus lines market already because of escalating non-terrorist losses and tighter insurance underwriting considerations in the standard market, he said.

In its statement, NAII said that it opposed a bill pending in the New York legislature that would prevent surplus lines insurers from issuing terrorism exclusions. Legislative sources told National Underwriter the measure has virtually no chance of success and is not backed by the administration of Republican Gov. George Pataki.

"It is imperative for the economic health of businesses in California and New York that the traditional freedom to operate for surplus lines carriers in those states not be impinged," Mr. Koziol said.

"For example, businesses in California and New York that wanted to build or expand their operation [s] might consider scaling back their plans or relocating to another state instead because insurance may be unavailable or too costly," he said."

He added that if California and New York "continue to allow surplus lines companies to operate freely, they can insure the facility, either with a terrorism exclusion or an appropriate deductible for a terrorist act, and expansion could proceed, resulting in new jobs for residents there."

State laws regarding surplus lines insurance usually contain a "due diligence" requirement, which requires the customer to first seek to obtain insurance from at least three licensed companies. If three declinations are obtained, then, via a surplus lines broker who is licensed in and fully subject to that state's law and regulations, the business may be "exported" to an out-of-state surplus lines company.

In a phone interview, Mr. Koziol agreed that the possibility of putting terror exclusions on surplus lines forms has existed for months?well before the National Association of Insurance Commissioners said regulators would consider exclusions and before the Jersey City, N.J.-based Insurance Services Office developed language for exclusions.

"The situation has not changed for surplus lines insurers," he said. But he also said that he had not seen or heard any evidence to suggest that business was going to the surplus lines market for the express purpose of getting policies written with terrorism exclusions before regulators began approving the ISO language.

He speculated that businesses may have been shopping up to last minute or standard market carriers were willing to offer coverage for a few months on a limited basis.

While Mr. Giles said that surplus lines market participants were talking about drawing up exclusions before, many, he believes, decided to sit back and see what federal government would come up with and what reinsurers would do on Jan. 1.

"The only market that we have that has been requiring us to put on a terrorist exclusion is the London market," Mr. Giles said. He added that one large domestic surplus lines insurer recently started to require an exclusion and that he had also met with several other domestic markets last week that are considering adopting the ISO language.

"It's a lot easier for surplus lines companies to use ISO forms that have been approved," he said. And "everybody would be more comfortable," if the exclusions got approved in New York, he said.

Len LoVullo, president of LoVullo Associates, a managing general agency and surplus lines broker based in Buffalo, N.Y., said he has seen a couple of companies using forms approved in other states that attempt to limit terrorism coverage.

"It's too new" to comment on whether a lot of policies for New York businesses, however, will get written on such forms, he said.

"We're years away from those provisions being tested," he added. Expressing his personal opinion, he said, "I don't think the public's going to allow" insurers to rely on such exclusions.

As an example of the type of event that should fall outside of exclusions, Mr. LoVullo described a hypothetical case involving a restaurant just outside of Niagara Falls situated near a power plant that gets taken out in a terrorist act.

If an insurer is going to say that the fire that happens as a result of that (which destroys the restaurant) is excluded, "then I don't agree with that," he said.