Protecting the protectors: a new federal law is designed to encourage businesses to produce anti-terrorism technology by limiting their potential liability.

Liability insurers stand to gain a new niche market and reap the benefits of tort reform tinder a new federal law that protects businesses involved in the fight against terrorism.

The Support Anti-terrorism by Fostering Effective Technology Act, or SAFETY Act, was signed into law last November as part of the Homeland Security Act of 2002.The act is intended to limit specific companies' overall liability to encourage them to come forward with technology that could help prevent or enhance recovery from terrorist attacks.

The SAFETY Act could give insurers "a tremendous marketing tool," said Kevin Kalinich, director of Aon FSG, Technology and Professional Risks. "It is another reason technology product and services companies should buy insurance. It also limits insurers' exposure."

Travelers, one company actively writing liability insurance for the technology market, said the act is likely to help increase the size of the technology insurance market. David Woodworth, national director of product management for Travelers, said the SAFETY Act "would appear to create an opportunity for insurance carriers. The coverage should become more available because carriers won't be as reluctant to offer coverage."

For Travelers, the act provides protections that "may increase our appetite," said Ronald D. Hall Jr., national director of Travelers' advanced technology program. "We like what we see, although it's still pretty new and untested."

The Department of Homeland Security issued proposed regulations to implement the act July 11, and accepted comments on the regulations for the next month.

"We know too well in this country that the threat of litigation stifles innovation," said Robert Hartwig, chief economist for the Insurance Information Institute. "It was foresighted that this piece of legislation was included in the Homeland Security Act."

Hartwig said no matter how good a machine is, no piece of equipment is foolproof. "All equipment has an error rate, a failure rate. If a company did its best to develop bomb-detecting equipment, and it fails and a plane is crashed or highjacked, that could potentially put them on the hook for billions of dollars of liability. The only way to unleash the entrepreneurial instincts of companies worldwide is to provide them with some limited protection for lawsuits."

Limits Liability

The SAFETY Act uses several tort reform provisions and liability protections to encourage companies to continue to create anti-terrorism technology for use by both governmental entities and the general public. Only companies whose products or services have been reviewed and approved by the Department of Homeland Security would be protected by the act.

Without the SAFETY Act, experts said, many companies wouldn't want to market anti-terrorism technology because of the looming threat of liability should the product or service fail.

"After 9/11, many insurers excluded terrorism coverage, and with that absence of coverage, companies were nervous ranging to fearful about offering their solutions without some sort of protection," said Alan Chvotkin, senior vice president and counsel for the Professional Services Council, a trade association representing professional and technical services companies that do business with the federal government. "It's not that they didn't think their products would work, but after seeing the litigation that arose out of 9/11, they had a great deal of concerns."

The SAFETY Act offers companies an opportunity to apply with the Department of Homeland Security to become a "qualified anti-terrorism technology," a designation that would grant them the liability protections. None has been approved so far. Thousands of companies are expected to apply, and the DHS began reviewing applications Sept. 1.

Once granted qualified status by the DHS, companies would be required to buy a certain amount of liability insurance, and their ultimate liability would be capped at the limit of liability insurance they purchased. The DHS will determine what that amount is, but has said the insurance should be reasonably available from private sources at prices and terms that will not "unreasonably distort" the price of the technology providers' product or service.

"There's a lot of head scratching over the insurance aspect of the SAFETY Act," said Joe Tasker, general counsel for the Information Technology Association of America, a trade group representing the IT industry. "Insurance can increase the price of the technology, but not distort?"

He said if insurers don't make the coverage available at any price, then "the department should have the wherewithal to say the liability is $0 because there is no insurance available in the market."

Insurers and brokers, however, believe the insurance is available.

Kalinich of Aon agreed that the department's insurance requirements are nebulous at best, but said the department is likely to base the requirements on such factors as the particular technology and what liability insurance is available in the world market, as well as the amount of liability the company maintained before application, the amount maintained by producers of other technologies and the amount typically maintained by similar producers.

"We're putting together benchmarking materials on behalf of insureds to demonstrate what a "reasonable number' should be," Kalinich said.

Technology companies generally have the same exposures that other businesses have, and need typical commercial coverages, such as general liability and auto liability. In addition, one of the key coverages offered by carriers that insure technology risk is errors and omissions. This coverage protects insureds from the financial losses associated with their wrongful acts that do not result in bodily injury or property damage. The policy most likely to come into play in a terrorism-related lawsuit, however, is not errors and omissions, but the general liability policy, said Hall of Travelers.

"Most of your general liability coverages respond to bodily injury and property damage and things that are tangible," said Travelers' Woodworth. "Most of the time, technology firms are involved in breach of contract situations or where there are errors and omissions ... which would not be covered by general liability. What makes technology unique is the need to fill the gap [left by the general liability policy]."

Both general liability and errors mad omissions policies can have premiums ranging from $2,500 to six figures annually, depending on the exposures, the size of the client and the retention level. The premium is usually developed based on revenue, Hall said.

General liability coverage is typically written on a guaranteed cost basis, but carriers may offer coverage for these kinds of exposures subject to a per occurrence deductible, or with a self-insured retention. The premium is usually developed based on revenue, Hall said.

The companies that could apply for protection trader the act include those that create bomb detection devices; anthrax and other biological detection devices; security systems, including those that rely on biometrics--fingerprints, retinal or face scans; X-ray machines; and software that protects systems or helps to track potential terrorists.

Tort Reforms

Experts are cheering the SAFETY Act for introducing several key tort reform provisions. If a terrorist attack occurred and a company with a qualified anti-terrorism technology was sued, the case would have to be heard in federal, not state, court. The plaintiffs would be barred from seeking punitive damages, which could have been a major driver of liability loss costs. Also under the act, only the seller of the qualified anti-terrorism technology could be held liable, not any subcontractors, distributors or purchasers.

The act also has another protection for companies that go through an additional screening process by the DHS to receive "certification." Once certified, the company's technology will be placed on an "approved products list" and the seller will receive a certificate of conformance. Then, if the company is faced with any terrorism-related liability lawsuits, it can move to dismiss the case entirely on the basis of the government contractor defense--even if the technology was used by the private sector.

"The purpose of that was to make sure all of the sectors, whether private or public, have equal access to homeland securities technology. That is one of the beautiful things about the SAFETY Act," said Raymond B. Biagini, a partner with the Washington law firm McKenna Long & Aldridge and one of the act's authors. "Many of our clients are homeland security-type contractors who recognized that not only did federal institutions need homeland security products, not only did state and local governments need great anti-terrorism technologies, but the private sector is in need of enhanced anti-terrorism products."

The companies that qualify as a certified technology will still have to purchase liability insurance, Biagini said, because governmental immunity is not an absolute defense. In case the government contractor defense isn't successful, the company's liability would stir be capped at its insurance limits, which would have been approved by the DHS.

"It's important that the act include the tort reform provisions because the potential liability from a terrorist attack could be huge," Biagini said, noting New York City had $16 billion in losses from Sept. 11th after insurance and federal money.

The act is expected to apply to businesses ranging in size from one or two employees to billion-dollar defense contractors, Kalinich said. The act could help companies that are already defense contractors, plus consultants for recovery and prevention, and even smaller technology start-ups.

"What kind of coverage will insurers make available? Will this become a speciality market for companies?" Chvotkin of the Professional Services Council said. "This is a fairly new market and a new area of risk assessment. We have no experience on which the insurance companies can assess their own risk."

Even without vast claims experience, the litigation management caps in the SAFETY Act will help entice insurers to cover these companies, Chvotkin said. "There's a great deal of hope by the members of our organization. We haven't seen any approvals yet, but the mere existence of the law helps bring some reassurance to the market. We really encourage the insurance industry to communicate actively with the policymakers with their views of the SAFETY Act," he said.

Hartwig said insurers are already adept at insuring machines and technology. "We can provide coverage at a more affordable price if the liability is capped. It will be more affordable and more available than it would be otherwise. [Without the SAFETY Act] the liability is essentially unlimited."

Terrorism insurance ranges from 0% of premium to 15% of premium for large contractors, to an average of about 7.5% for technology companies, Kalinich said. While insurers are required to offer terrorism insurance under the Terrorism Risk Insurance Act of 2002, the take-up rate has been somewhat anemic, in the 20% range, experts said. The SAFETY Act could help change that, at least in the technology arena.

"Policyholders say it's too expensive, and they are concerned about whether it would cover a nuclear, biological or chemical attack," Biagini said. "The insurance market for terrorism covet" is in disequilibrium. The insurance industry really needs to pay attention to the SAFETY Act and the impact that it will offer. It should help the insurance industry make terrorism insurance available at reasonable prices."