Fallout from the WTC attack impacts previously predictable field
By Phil Zinkewicz
Business interruption losses at the World Trade Center were much more significant than insurers thought they could ever be, and that fact could alter the way insurers write business interruption in the future.
The terrorist attacks on the World Trade Center produced the single largest insurance loss in world history, spanning many lines of coverage including property, life, liability, aviation and workers compensation. But the settlement of the business interruption (BI) coverage losses will be the most challenging and have the greatest impact on total claim payments, comprising more than 30% of all the September 11 insurance claims, according to PricewaterhouseCoopers. The consulting firm says that the calculation of BI losses will be extremely complex because claims will span well beyond Lower Manhattan, comprise much more than physical damage, and need to be measured in light of economic conditions that may or may not have resulted from the September 11 attacks.
Daniel T. Torpey and Jeffrey M. Phillips of Ernst & Young, writing for the International Risk Management Institute (IRMI), agree. "A company filing property or business interruption claims arising from the September 11, 2001, terrorist attacks will be faced with several challenges in pursuing its claims. Obstacles will range from technical insurance coverage issues to typical challenges faced with any complex business interruption claim. Also, many of the companies affected are financial services companies that typically do not experience property and business interruption claims. The nuances of these losses, combined with the history that most business interruption policies are written to address manufacturing or retail type losses, will create a challenging claims adjustment process," they say.
Torpey and Phillips describe some of the complexities in dealing with a BI claim. They point to the issue of "multiple occurrences and deductibles" and give as a much-publicized example the Silverstein WTC Properties LLC (Silverstein) case, where Silverstein contends the two hijacked airplanes that crashed into the towers constitute two occurrences for the purpose of insurance. The insurers involved are contesting this, saying that the occurrence was one event. The difference between the two adversaries is $3.5 billion. Torpey and Phillips say that the question of civil authority has come up, i.e., whether losses are covered when businesses are closed because of civil authority rather than actual damage to property.
Many people mistakenly believe that all the September 11 business interruption losses were incurred by large businesses and financial institutions. But the World Trade Center twin towers housed a considerable number of small businesses--restaurants, book shops and boutiques, for example. These businesses sustained business interruption losses as well. In addition, small commercial interests in the areas surrounding the World Trade Center suffered BI losses, many of which were not due to damage to property. When all the losses are sorted out--and this could take some time considering the complexities of the BI claims involved--the PricewaterhouseCoopers' estimate of 30% of total losses could, and probably will, increase considerably. That could have a major impact on the BI market in general.
"It's too soon to tell, but the World Trade Center business interruption losses could spill over into the smaller insurers market, and that might have a negative effect on smaller BOP markets," says Bernie Heinze, executive director of the American Association of Managing General Agents (AAMGA). "Both BI and contingent BI might see some restrictions, not directly as the result of September 11 but as the result of a combination of that horrific event and a general hardening which is currently taking place in the property/casualty insurance arena. We'll have to see what the January reinsurance renewals bring to make a determination as to how the smaller commercial lines market
is affected."
Rita Nowak, an assistant vice president at the Alliance of American Insurers believes that there might be some changes in the small and medium-sized business interruption market as the result of September 11. "There were quite a number of small risks within the World Trade Center and there were quite a number of small commercial interests outside that perimeter" she says. "How many of those claims will be resolved remains to be seen. Remember, business interruption traditionally kicks in only when there is some kind of property damage. Many small businesses did not sustain property damage but needed to remain closed for a long period of time. Many claims payments will depend upon policy wording and other variables."
Nowak says that the business interruption losses at the World Trade Center were much more significant than insurers thought they could ever be, and that fact could alter the way insurers write business interruption in the future. "In the smaller commercial market, many insurers just roll business interruption into the traditional BOP policy," she says. "Some small businesses don't even know they have it. Because of what happened at the World Trade Center, some insurers might decide to offer business interruption as a separate coverage. They may change the wording in their contracts. As for price increases, insurance premiums are on the rise because of the hardening market overall in the property and casualty insurance arena. It's difficult to tell how much of an effect business interruption losses at the World Trade Center will have on the current upward trend in pricing. However, it is logical to assume that a small commercial establishment in a densely populated area, with close proximity to a high profile building or center will pay more for business interruption than a small commercial establishment in a strip mall in South Dakota."
Nowak says that as well as challenges, the developments at the World Trade Center could present opportunities for independent agents and insurers. As far as opportunity is concerned, she says, the public has become more aware of the need for business interruption insurance as the result of September 11. Insurers could find a growing market for BI and, if it is priced properly, could generate profits, she says. "However, the challenges that both insurers and agents face is explaining the complexities of business interruption insurance to potential buyers and determining what type of business interruption is appropriate for individual risks."
Rough Notes asked The Hartford for its perspective on today's small and middle-sized commercial business interruption insurance market. Sue Honeyman, a spokesperson for the insurer said: "Prices for all property insurance coverages--including business interruption--have been increasing across the board. We're not singling out business interruption for price increases, nor are we cutting back on it. It is included in our package policy, SPECTRUM, for small businesses and is usually purchased on an optional basis by middle market policies. Availability remains good, at least from our perspective," she said.
She added, however, that one area of the business interruption market that has been affected by the World Trade Center disaster is in the area of blanket business interruptions insurance. "We are now more stringent when underwriting blanket business interruption coverage for the middle market. Blanket insurance is where we'll put multiple locations under a single limit so that any one location could trigger the entire amount. We want to be able to control our exposures in each location as well as the aggregate exposures," she said.
For all of these reasons, the business interruption insurance market may be undergoing drastic changes in the next couple of years. The terrorist acts of September 11 have taken a line of insurance that was relatively predictable and turned it into a line that needs rethinking from the insurance company's point of view and better understanding from the agent's and consumer's points of view. *