In a letter sent to all state insurance commissioners, J. Robert Hunter, director of insurance for the Washington-based CFA, said insurers have not made a case for the exclusions. Moreover, he charged, ISO and the insurance industry “appear to be playing politics with this request.”

He noted that Congress is now determining whether to renew the Terrorism Risk Insurance Act, which provides a federal reinsurance backstop for commercial losses caused by acts of terrorism. Without an extension, TRIA will sunset on Dec. 31, 2005. “By requesting these broad exclusions, ISO and the insurance industry are undoubtedly attempting to frighten Congress into renewing TRIA by raising the specter of absolutely no terrorism coverage if the law expires,” he said.

Christopher Guidette, assistant vice president of corporate communications with the Jersey City, N.J.-based ISO, responded that the requested conditional exclusions are “eminently responsible and necessary.” For one, he said, the threat of terrorism is as strong today as ever, and there is a real risk that a catastrophic loss could exceed the ability of insurers to pay claims. Without a backstop, he said, insurers would have to reevaluate their ability to cover terrorism.

Moreover, he said, the period when insurers will be writing policies that continue beyond TRIA's current sunset date is fast approaching. He cited as an example a policy that takes effect on Feb. 28, 2005 and continues until Feb. 28, 2006. While terrorism coverage would be in effect for most of the policy term, Mr. Guidette said, the insurer could be exposed for the last two months.

The conditional exclusion, he said, gives insurers the option of not covering terrorism if there is no federal backstop. He added that this is entirely contingent on TRIA expiring if TRIA is extended, the exclusion would not apply.

The conditional exclusions, he said, address the uncertainty in the market while Congress considers TRIA extension.

However, in his letter, Mr. Hunter called the request “outrageous.” Whether or not TRIA is renewed, Congress will undoubtedly attempt to encourage private sector coverage, he said. “This preemptive exclusion would thwart such public policy decisions, even before they are made and analyzed by the regulators,” he said. “This, in turn, makes limiting taxpayer liability under TRIA much more difficult.”

The conditional exclusions proposed by ISO would give insurers the option to exclude all losses resulting from acts of terrorism; exclude losses resulting from nuclear, biological or chemical terrorism; or cover terrorism losses for an amount less than the full policy limit. The exclusions would take effect if TRIA expires or if it is extended but increases insurers' share of losses from terrorist attacks.

Reproduced from National Underwriter Edition, May 28, 2004. Copyright 2004 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.