Unfolding the layers: Terror expenses may follow the Y2K path, with most insureds likely to accept terror prevention as a cost of doing business. (Property/Casualty).

In the movie "Shrek," the ogre explains the complications of his circumstances by saying that "ogres have layers." I've started to apply the ogre's philosophy to the insurance issues arising from terrorism.

Although all terrorism layers are bad, the layers concept provides a useful framework for explaining terror-related insurance complications. The issues fall into three general layers: Sept. 11 liabilities; Sept. 11 insurance coverage; and future insurance coverage.

In many disasters, suits are filed before the fires are extinguished. Some lawsuits relating to the events of Sept. 11 have been filed, but lawyers have paused before filing. The delay is attributable to several factors.

The magnitude of Sept. 11 caused plaintiffs' lawyers to be discreet. They worried about perceptions of profiteering from tragedy. In fact, some even have begun to criticize plaintiffs' lawyers for moving too slowly.

Filings also have been delayed by uncertainty in the relationship between litigated awards and other relief. Some relief programs are tied to other recoveries. The terms of other relief programs are not yet set. With relief programs and litigation intertwined and uncertain, lawyers must proceed carefully with litigation.

Lawyers are skittish about trials on this issue. The terrorist attacks involve a confluence of conflicting emotions. In most plaintiffs' suits, the defendants are demonized. Here, it is difficult to demonize someone other than the terrorists. Many prospective defendants are themselves victims. Under these circumstances, it is difficult to predict juror reaction. Although plaintiffs' lawyers are reluctant to publicly acknowledge this point, they are concerned about moving to trial.

The single-biggest insurance coverage issue arising from the attacks on the World Trade Center is the number of occurrences. Litigation is already pending. As I've said in previous columns, this issue will control both per-occurrence deductibles and per-occurrence limits.

Another issue is coverage for protective measures. Sept. 11 led many companies to spend large amounts of money to protect against various possible terrorist attacks. Will insureds file claims for these protective measures?

Similar circumstances arose when insureds prepared for Y2K. The terrorism threat may be more real than the hyperbolic forecasts for Y2K, but the coverage issues are analogous.

Most insurance policies cover insureds' legal obligations to pay damages. Just as supermarkets clean spills to avoid accidents, other businesses take steps to avoid various problems--whether they are caused by technology or by terror. These expenses are not damages that an insured is legally obligated to pay.

Although a few insureds litigated the point, most insureds recognized that their Y2K preparations were not covered. In fact, there were fewer claims than predicted.

Terror expenses are likely to follow the Y2K path. Although some insureds seek to pass every expense through their insurance, most are likely to accept terror prevention as a cost of doing business.

As Joel Wood, senior vice president of governmental affairs for the Council of Insurance Agents and Brokers, told the Vermont Captive Insurance Association: "No terrorism coverage, no insurance, no loans, no economy." Quite true.

After Sept. 11, we saw a clear example of this with the airline industry. Much as lenders require us to maintain insurance on our homes and cars, commercial bankers require airlines to maintain insurance on their planes. As insurers started pulling back from the airline industry, people were forecasting a devastating impact on the economy Congress acted to preserve airline insurance, travel and the economy.

Insurance for other aspects of the economy remains uncertain. In the days after Sept. 11, some insurers withdrew products. Some changed their marketing and Web sites literally overnight. In late January, the Wall Street Journal reported that major real-estate deals were being delayed because insurance coverage was difficult to obtain or too expensive.

This issue is being addressed state by state. New York Superintendent of Insurance Gregory Serio has become a national leader on this issue. Not only was his state a major target, but he has been a volunteer firefighter. (See "New York Insurance Chief Wears Two Hats in Terror Aftermath," Best's Review, December 2001.)

Seri has rejected terror exclusions. His position is understandable: New York's commercial activities must be insured. But insurers' concerns are also understandable: It is difficult to predict, quantify and price terrorism risks.

This issue is still evolving. Some feel that governments will become the ultimate insurers of terrorism risks. Others believe that insurers will have to find a way to price the problem. The risk is clear, but the solution is not yet apparent.

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