A defining issue: insurers and governments worldwide are struggling to define terrorism. (Briefing).

As the insurance industry and governments worldwide struggle with the thorny problem of providing economic assurance against the cost of future terrorist attacks, a fundamental question has been humming in the background: How, exactly, should insurers define terrorism?

It's a critical question for an industry that operates on contract language and hangs its hat on clear definitions of risk, responsibility and limits. "Never before has the need for a coordinated coverage definition been so great," said Thomas A. Player Jr., chairman of the insurance practice at the law firm Morris, Manning & Martin in Atlanta.

Player, who recently presented a paper titled "A Global Definition of Terrorism" at the annual conference of the AsiaPacific Risk and Insurance Association in Shanghai, China, said insurers and reinsurers will need a single, clear definition of terrorism if they are to stabilize the market for coverage and give commercial customers something to count on. Player co-authored the paper with Harold Skipper, chairman of the Department of Risk Management at Georgia State University, and attorney Janet Lambert of the London firm Barlow Lyde & Gilbert.

"When I started looking at this, I had no idea it's such a dynamic area," Player said. Organizations such as Britain's Pool Re--a government-backed mutual that covers terrorism risk; the Organization for Economic Cooperation and Development; the United Nations; the Hong Kong government; and the U.S. Congress all are attempting to define or redefine terrorism, he said.

"Pool Re just amended their definition of terrorism to include biological, nuclear and nonviolent forms of terrorism," he said. "The discussion is ongoing. The thought is that with state funds popping up worldwide--and the United States will probably get its own in place soon--then you focus on what is the definition. You find that there's just a patchwork of definitions worldwide."

Player--an expert on insurance, reinsurance and regulatory issues--said he believes there will not be a global definition of terrorism unless some body, such as the OECD or the United Nations, focuses on it. "I think the insurance community probably can't get together on it," he said. But the world's political bodies also may have problems agreeing on a definition. The 10-member Association of Southeast Asian Nations, for example, took a stab at it in May, but it could not reach a consensus.

State-backed reinsurance pools are operating in the United Kingdom, Ireland, France, Spain, Israel and South Africa, among other countries, and are being created in Germany, Hong Kong and the United States. All have variations in their definitions of terrorism and terms of coverage.

In their paper, Player and his co-authors offer the following as a proposed definition of terrorism for insurance purposes:

"An act including, but not limited to, the use of force or violence, committed by any person or persons acting on behalf of or in connection with any organization creating serious violence against a person or serious damage to property or a serious risk to the health or safety of the public undertaken to influence a government for the purpose of advancing a political, religious or ideological cause. Such an act shall be certified as an 'Act of Terrorism' by the senior judicial or administrative official designated by the adopting government and shall not be subject to appeal."

If the insurance industry were to agree on a definition of terrorism for insurance purposes on a worldwide basis, it could drive government action through the state-backed funds such as Pool Re. "I think it would certainly get the attention of the state funds," said Player. "Most state funds require, or at least encourage, the industry to cover the portion of a loss below the attachment point for the state funds. So the question becomes, 'What's the definition for attachment?' And, 'Is the definition consistent?'"

It is desirable that state-provided cover for terrorism be consistent in how it is defined, said Georgia State's Skipper. "Otherwise, insurers and multinational corporations would have inconsistencies in whatever underlying coverage may exist from the state." While it would also be desirable for insurers to agree on a common definition, Skipper said the urgency for insurers to agree is not as great as for governments and insurers of last resort.

Robert Hartwig, chief economist for the Insurance Information Institute, said a global definition of terrorism would be a good thing, but practically speaking, it isn't likely. "Many insurance contracts are global in breadth," he said. "On the other hand, what one country might view as a terrorist act, another might not."

"Also, there are not a lot of examples of global definitions of anything in the insurance industry that are accepted throughout the world," he said. Even within the European Union, where there has been a drive toward legal harmonization, insurance-related definitions still vary widely, Hartwig said.

Player said he isn't sure whether insurance trade groups would drive the effort to define terrorism globally. The Association of British Insurers did work with the U.K. Financial Services Authority to redefine Pool Re's mission, and trade groups in Washington, D.C., are lobbying Congress for a terrorism backstop bill. "Those insurance groups are generally focused with the Insurance Services Office Inc. in terms of policy language," he said.

Skipper added that insurers are focused on getting a "reasonable definition" of terrorism placed within U.S. law, rather than trying to harmonize a definition globally. "They're just trying to get something into place in the U.S. right now," he said.

"The ISO has published a terrorism exclusion, but I am not sure they published insurance language, because the insurance industry generally has not reached a conclusion that they want a policy that covers terrorism, at least in the United States" said Player. "But if that comes about, I think the ISO is the organization to tackle it."

ISO produced model language for a definition of terrorism for the purposes of exclusion in U.S. policies, but the model was rejected by several key states.

ISO spokesman Mike Donnelly said the firm's model language for terrorism exclusions has become "pretty standard" in the United States, with the exception of the above-mentioned states. At this point, he said, he is not aware of any ISO effort to define terrorism on a global basis.

Hartwig said that while most states accepted ISO's definition of terrorism, insurers are modifying it based on their unique expenences, expectations and types of business. Some insurers want certain nonviolent acts to fall under the definition of terrorism, such as hacker attacks on computer systems or disruptions in communications systems.