Rita Nowak, assistant vice president for the Alliance of American Insurers in Downers Grove, Ill., called the California decision “basically outrageous” and said “the department is truly impacting commercial risk within the state.”

In rejecting the language from Jersey City, N.J.-based ISO on Jan. 8, Mr. Low called the damage threshold unreasonably low. Previously Mr. Serio had said that limit would exclude virtually every building in lower Manhattan, and he was not willing to tell insurers that “you can walk away from this exposure.”

Mr. Low said he also had concerns about vagueness in ISO terrorism definitions, which, he contends, could encompass everything from hate crimes to vandalism. “Our goal is to assure that policy language narrowly defines terrorism to eliminate any possible confusion between insurers and policyholders, especially in personal homeowners coverage,” he said in a statement.

In addition, a total exclusion for biological and chemical incidents might be “overly broad and unreasonable,” the California department said. The department also commented that a proposed exclusion if more than 50 people are killed or injured in a terrorism event might be an “unreasonably low and arbitrary” number, and said the ISO proposal might have anti-competitive effects.

Also at issue is language that would have multiple incidents of terrorism considered one event when they occur within a 72-hour period, and appear to be carried out in concert or to have a related purpose or common leadership. This could be arbitrary and/or unfair, according to the California department.

The department said ISO can request a hearing, accept the decision or modify its application. ISO said it was studying Mr. Low's action.

The departments 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,” said Don Griffin, assistant vice president of business and personal lines for the National Association of Independent Insurers in Des Plaines, Ill.

California insurers now might decide to cancel or not issue some new commercial lines policies and might non-renew policies for certain risks, Mr. Griffin added.

“The ISO language is specific in scope,” Mr. 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?”

NAII said that after the Sept. 11 World Trade Center attack, reinsurance for terrorism risks is extremely limited, leaving primary insurers with virtually no choice but to exclude such risks from most commercial lines policies in 2002.

Sam Sorich, NAII vice president, predicted that “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 multistate operations.”

Meanwhile, New Yorks hesitance to approve policies with terrorism exclusions could create problems in that states commercial insurance market as well, according to the American Insurance Association in Washington. “Without a federal backstop in place, terrorism risk has become uninsurable. An insurer that takes on that risk without adequate reinsurance may jeopardize its solvency,” said Michael Murphy, AIA assistant vice president for the Northeast region.

AIA said that without the exclusion, because terrorism is uninsurable, individual insurance and reinsurance companies are reluctant to either renew risks or take on new exposures where terrorism coverage is concerned. Instead, AIA said, individual underwriters are taking a defensive posture to preserve their own solvency and ability to pay other pending and future claims unrelated to terrorism.

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, January 14, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.

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