Terrorism propels change: The world trade center catastrophe could lead to further limits or restrictions on existing insurance products. (Property/Casualty).

I had been intent on writing a column unrelated to the World Trade Center catastrophe. Having seen the disaster happen outside my office window, I find it uncomfortable to put this human tragedy within a business framework. But just as the Twin Towers had dwarfed other buildings, this disaster dwarfs other insurance issues.

In early November, I spoke at an insurance conference in London. The conference was about Internet issues, but most of the questions posed to me concerned life in New York. This tragedy has overshadowed everything. That said, with sympathy and sensitivity to everyone who lost loved ones in this terrible event--including hundreds of casualties in the insurance industry--let me outline the critical insurance issues arising from the World Trade Center disaster.

Coverage Issues

A coverage action already is pending involving the individual who had leased the World Trade Center. The critical issue in that action will be how many occurrences took place: one, meaning the disaster was simply one occurrence attributable to a common cause; two, meaning each plane hitting each building was a separate occurrence; or perhaps more than two occurrences, because the disaster represented a multitude of occurrences.

Courts generally determine the number of occurrences with one of two tests: "cause" or "effect." Most courts applying the "cause" test focus on the number of causes. Courts applying the "effect" test focus on the effects of loss. On the surface, these tests seem discrete. But in practice, the decisions on this issue have sometimes seemed result-oriented, with analyses that are not entirely clear. This issue, however, is pivotal. This determination will affect the application of retentions and limits.

The "war risk" exclusion within policies also may be litigated. Most insurance policies are subject to an exclusion for losses arising from a war. The question here would be whether the attacks on the World Trade Center constituted a war. Several insurers almost immediately stated that they would not be asserting this provision. On the other hand, there were reports that the Bahrain-based Arab Insurance Group was citing President Bush's use of the word "war" to indicate that it might assert this exclusion. While there are precedents concerning war-risk exclusion, the World Trade Center incident is without precedence. Both insurers and insureds will be able to distinguish the present situation as unique. Moreover, any insurer that asserts this provision can expect a great deal of resistance and pressure from many areas.

Reinsurance, Reserves and Regulation

As of late October, estimates for the total insured loss for the Sept. 11 terrorist attacks ranged from $40 billion to $70 billion. Some were predicting that Sept. 11 would be the largest-ever loss in the insurance industry. The total sum remains uncertain, but it certainly will be enormous. A series of conflicting reports have been published concerning the insurance funds available to respond to World Trade Center losses. Some questioned the adequacy of the available funds. Others spoke of governmental activity ranging from relaxing regulatory restrictions to cope with the crisis to imposing liability caps and possibly even passing federal legislation to aid the insurance industry.

The losses arising from the WorldTrade Center catastrophe will strain insurance resources, If resources prove to be inadequate, regulatory activity can be expected both to resolve the crisis and to avert future crises. At the time this column was written, these issues had not been resolved.

Pricing and Products

Before Sept. 11, the insurance market already was hardening. The disaster reinforced that trend. Higher insurance rates have been reported in a variety of areas.

The catastrophe will affect products as well as prices. Products existing before Sept. 11 may become further limited or restricted. Exclusions and other restrictions may be added or bolstered. Many insurers have added terrorism exclusions. Concern about terrorism also may lead other insurers to create new products expressly designed to respond to terrorism. One carrier has added a new form of insurance for airlines. In fact, an altogether new insurance and reinsurance company was formed because of the new demands following the attacks.

Many call Sept. 11 the day the world changed. Everything did change, including the world of insurance. Many of these changes are in nascent stages. As we watch and work though these changes, I hope that the many people hurt by this day will soon enjoy better times.

Alan S. Rutkin, a Best's Review columnist, is a partner in Rivkin Radler LLP, Uniondale, N.Y.