Unanswered questions on terrorism coverage

Unanswered questions on terrorism coverage

The recent introduction of terrorism insurance has created a backlog of unanswered inquiries from virtually everyone in the transportation industry. I wish I had the answers to literally hundreds of questions that we receive each month. Should this newly identified exposure be self-insured? Should this risk be transferred to an insurer? Will financial institutions insist upon the purchase of terrorism coverage as a condition of granting loans or increasing credit lines? Who is responsible for loss or damage to goods in transit if damage is the direct consequence of inspection and repacking procedures?

Terrorism insurance is not new. Its genesis is at least 50 years old. While terrorism coverage is invariably associated with the Sept. 11 tragedy, insurers and the courts have been deciding upon the subtle distinction between terrorist acts and acts of war for years. Nothing of the magnitude of Sept. 11 was foreseen by risk managers - or anyone else. The enormity of the loss, nearly $50 billion at last estimate, caused an already-beleaguered insurance industry to exclude all future terrorism claims from coverage. Federal legislation quickly followed. Coverage for terrorist acts is now available; the mental gymnastics are limited to the buyers' decision about whether it should be purchased or self-insured.

Initially at least, I was unconvinced that the rating of terrorism coverage was actuarially sound. I'm still not convinced that it is. Nevertheless, I do see a softening in the insurance market, which is offering the coverage at somewhat reduced rates. Trophy subjects of potential loss, such as the Statute of Liberty or the Alamo, will continue to represent risks for which seemingly exorbitant rates will apply. America has seen but one major terrorism loss, however calamitous it was. Properties and exposures near metropolitan urban centers will bear most of the higher costs for terrorism coverage, but they may have little or no choice as many lenders insist upon the purchase of insurance. This leaves the borrower with little choice in the matter.

As a general rule, transporters are especially vulnerable to loss, since it is always difficult to identify those points or places where a terrorist attack may occur. If goods are purchased free-on-board in Europe, the owner surely can't control the risk to goods while stored on a pier in Italy or Denmark. Neither can cargo owners review security measures taken by ocean carriers, or by forwarders of finished products sent to airports for export overseas. We are recommending the purchase of terrorism coverage for losses that may occur to property that we own or must replace after a loss.

We are not recommending that forwarders and carriers, particularly those who operate under released value limitations, purchase terrorism coverage. The large majority of their coverage provides defense for claims arising out of loss or damage to customers' goods.

Mandatory inspections by a variety of federal agencies for goods in transit cause us ongoing concern. We anticipate litigation over claims filed by the owners of goods that are damaged when inspectors compromise the integrity of a container or open the crate in which the goods are shipped.

Insurers are taking the position that inspection costs, and the losses that may result as a consequence of these inspections, are the owners' responsibility.

Considerable discussion of this issue with several insurers has produced little more than polite yawns.

The questions, however, won't go away. Who will pay for the re-crating of machinery inspected by various agencies? In these cases, the exposure to shipped machinery could be enormous. The cost to repack and re-crate could run into thousands of dollars. If the original packer doesn't have the opportunity to repack the goods in precisely the same fashion, is he relieved of liability for subsequent loss? If the goods are crated in Los Angeles but unpacked and inspected in Galveston, who will pay for the expense to transport the crater's employees, and the rental of substitute equipment necessary to recrate the goods?

I can tell you, unequivocally, that your insurer almost certainly will not assume these additional expenses. The insurance industry is likely to offer a Packaging Expense Reimbursement cover, at an additional premium, and subject always to a deductible provision, for the benefit of their policyholders. A few marine insurers are attempting to introduce this critically important extension of coverage. Be sure to discuss these exposures thoroughly with your insurance broker.

Thomas A. Laffey is chairman of Polaris Risk Managers Inc., a transportation insurance consulting firm. He may be reached at (973) 882-3100, or via e-mail at polarisins@aol.com. On Insurance is a monthly column.