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Postwar terrorism triggers insurance dilemma.

Because the U.S. government took a major role in the Persian Gulf war, there is likely to be increasing terrorism against U.S. targets. Inevitably, areas of discontent or hot spots will arise that will require government and business to take decisive action.

According to the State Department, 456 acts of international terrorism occurred in 1990, 197 of which were directed against U.S. targets. These acts resulted in 211 deaths, including 10 Americans. In 1988 the number of worldwide incidents was 864, of which 193 were directed against U.S. targets. Deaths resulting from these incidents numbered 659, with American deaths rising to 192 due to the Lockerbie air disaster.

While these figures show a drop in the number of terrorist activities, terrorist acts against U.S. targets have remained constant. However, terrorism experts point out that, although it appears that international acts of terrorism have decreased, if one compares three-year, rather than one- or two-year, periods, then the number of terrorist activities will appear to have actually increased during the last 15 years.

One reason behind the rise in worldwide terrorist activities over the years is the fact that the news media feeds on terrorism, and terrorists know it. Experience has shown that television is a powerful tool, and terrorist acts are usually geared to take full advantage of the worldwide television appeal." Indeed, the images of Cable News Network reporter Peter Arnett covering the war from the Iraqi viewpoint must have been a compelling lesson for any terrorist commander seeking an audience for his cause.

As a result of the television coverage of the Persian Gulf war, terrorism is likely to spread even further. It could be argued that the massive destruction of the Iraqi army-the scenes of absolute carnage at the Mutla Gap and the overall rout of the world's fourth largest military power-has resulted in the humiliation of not only the Iraqi persona but the Arab persona as well. There is also likely to be a Muslim backlash, and it is unlikely that short-term solutions to the problem of Muslim fundamentalism can be found.

In addition, pan-Arabism has been gaining strength, with many pan-Arabists arguing that the boundaries imposed on their countries resulted from colonial rule. Therefore, they do not view the encroachment on boundaries in the same light as the United Nations. As a result, Arab terrorism is likely to become a major world problem, as there is no area so divided between those who have (the gulf states) and those who do not (other Arab countries).

Adding to the potential for terrorism is the recent reform in the Soviet bloc. One effect of liberalization in such a society is that, with the disappearance of a climate of fear and absence of a sophisticated police framework, terrorism and crime can run rampant. This area must be watched closely, particularly when free trade is introduced with Western partners.

Like it or not, the United States and its citizens, by becoming actively involved in the Middle East and with Soviet bloc businesses, have placed themselves on a political tightrope. Maintaining balance becomes increasingly difficult as issues and societies become more polarized. Unfortunately, the United States has positioned itself as a political buffer. As a result, the most likely terrorist target is any corporation with an American name or one that is branded in an American way Well-known U.S. industrial plants, regardless of where they are located, may be singled out for terrorism. Terrorists may also target employees of these firms, as well as their products.

U.S. risk managers must not only understand these risks but also the problems related to insuring against them. When purchasing insurance coverage for terrorist acts, a major problem is the absence of a universally accepted definition of terrorism. Most people agree that typical terrorist incidents include hijacking, kidnap/ hostage-taking, bombing, assassination and assorted threats. Yet the boundaries between terrorism, revolutionary violence and self-defense are difficult to define, except by subjective criteria; after all, one man's terrorist is another man's freedom fighter.

According to the State Department, terrorism involves "The citizens or territory of more than one country in premeditated, politically motivated violence perpetrated against noncombatants by subnational groups or clandestine state agents usually intended to influence an audience." However, not all governments agree with this definition. Furthermore, it is unlikely that they will reach an internationally accepted definition any time soon.

Most insurance policy wordings deliberately avoid using the word terrorism," as insurers have sought to skirt the issue around this gray area. Many insurers believe in the principle that if the State Department considers a particular act terrorism, it is a definitive ruling.

Threats Against People

Terrorists use people in three ways. First, they may wrongfully detain executives, with or without the connivance of a foreign government. For corporations involved in cleaning up and rebuilding the Gulf area, this can pose a major threat. Detention is often operated as an involuntary contract guarantee; for example, an executive is simply not allowed an exit visa unless the contract has been carried out to the client's satisfaction. Or, for political purposes, the detainee may be used as a pawn in other negotiations, as is the case with the hostages held in Beirut by the Islamic Jihad.

Second, terrorists may inflict spectacular death or mistreatment on people to gain publicity for their cause, as was the case during the 1985 Achille Lauro incident. Finally, people may be kidnapped and ransomed to gain funds for "the cause." While instances of kidnap and ransom are on the rise, the trend is for those kidnapped to be locals rather than expatriates.

in the past few years, kidnapping has become a problem in the Muslim world. Pakistan is the leader in kidnap cases, with 333 reported in 1990, followed closely by Colombia, with 300; Brazil, with 65; and the United States, with 52, according to Control Risks Group, a London-based security consulting company Experience has shown that nonWesterners who abduct and wrongfully detain people often view time differently than Westerners. They do not necessarily believe that two or three years spent in captivity is a long time.

Insurance will typically cover 150 percent of the individual's basic salary, as well as legal expenses and other reasonable costs incurred to obtain his or her release. Usually, however, there is a franchise period, the time before a claim becomes payable under a policy. In some policies the limit is expressed in time, but in other cases there may be a financial limit, with the result that payments could continue for up to a specified time. Sometimes, it is not clear whether or not a person who was abducted is still alive. In these cases the policy can pay for up to 24 months from the last date on which there was proof that the individual was alive.

To be prepared for other terrorist activity, personal accident insurance is needed. It should include coverage for malicious acts, riots, strikes, civil disturbances and passive war risks, in which the insured is not directly involved in the hostilities. Also, make sure these risks are covered under workers' compensation, emergency evacuation, medical expense and political repatriation policies.

Kidnap and ransom insurance usually offers coverage against a wide range of other associated losses. These include loss in transit of the ransom or extortion monies, reward, salary, forensic work, medical attention and possibly recuperation expenses of the victim. Other costs, such as personal accident insurance for malicious acts of violence in the United States or any act of worldwide terrorism, may be added to provide a comprehensive executive protection package against terrorism.

Threats Against Products

While people have been used and abused by terrorists for years, exploiting consumer products is a relatively new phenomenon. To date, there has been comparatively little use of malicious product tampering to destroy corporations or extort terrorist funds. Considering that this is one of the easiest crimes for a terrorist to perpetrate, together with bomb hoaxes, product tampering might yet pose the next major terrorist threat to business.

Statistics showing incidences of product tampering and extortion are often understated. For example, Control Risks Group lists only incidents that have received significant press coverage. It reported 106 cases of product tamper in 1990, with the United States at the top of the list with 61 incidents and the United Kingdom second with 31. In the case of product extortion, Control Risks reported 41 incidents last year, with the most cases, 18, attributed to Germany and 15 to the United Kingdom.

Yet despite the low incidence of product tampering and extortion, even one such case can have devastating financial effects on a company. Indeed, risk managers are well aware of how important it is to maintain a positive image for their companies' products, especially those with well-known brand names. In fact, many firms list brand names on their balance sheets as physical assets, as they are a guarantee of future cash flow and the ticket to a company's long-term profitability.

Certain products are at greater risk to tampering than others. They include food, beverages, tobacco, cosmetics, pharmaceuticals and even electrical products. One of the most recent tampering cases occurred in March when two people died and another person was injured after ingesting 12-hour Sudafed cold capsules laced with cyanide in Washington state, prompting the manufacturer, Burroughs Wellcome Co., to announce a nationwide recall. Similarly, a few years ago Johnson & Johnson Corp.'s Tylenol painkiller became the target of product tampering, which cost the company some $400 million.

Capacity is growing within the market to provide adequate coverage for tampering of an insured product. A policy responds whether the tampering is actual or threatened, and coverage is provided for the cost of recalling, destroying and replacing the contaminated goods. Loss of net profit is also covered.

In addition, there is coverage for rehabilitation costs, such as the advertising campaign needed to restore sales. Typically, the indemnity limit for rehabilitation costs are 25 percent of the overall sum insured. The fees and expenses of specialist consultants may also be included. While ransom or extortion demands do not form part of malicious product tamper policy, such coverage can be bought, usually at a substantial discount if malicious product tampering insurance is being arranged at the same time. One idea being considered in the market is to expand coverage from malicious contamination to a more comprehensive product protection policy covering not only recall, but rehabilitation and loss of profits for contamination regardless of how it occurred.

Threats Against Property

The Gulf war introduced several uncertainties regarding property insurance when Iraqi President Saddam Hussein threatened to broaden the conflict beyond the war zone. That move raised the question of whether, in view of the war exclusion clause, subsequent terrorist acts inspired by his call would be covered by existing property policies.

Over the years, in countries with few terrorist incidents, insurance for this risk has been readily available often by non-exclusion, with little or no premium specifically attributable to it. Otherwise, coverage has been available by endorsement. When, for instance, property insurance excludes war risks or fraud, a terrorist act resulting in an explosion would be met under the terms for explosion.

In high-risk countries, losses arising from terrorism are likely to be excluded. In some countries, coverage for terrorism can be bought in the insurance market, and governments specifically offer reimbursement for certain types of terrorist damage. Generally, however, such compensation operates on an indemnity basis, so the commercial market must be used to buy insurance protection for the difference between indemnity, or replacement cost, and the current market value, as well as for business interruption. When coverage for terrorism must be bought separately, it makes sense to use the same insurers that have underwritten the main property policy. This avoids problems when there is doubt as to whether or not damage was caused by a terrorist incident.

In countries in which terrorism is covered as a matter of course, but war is excluded, the problem boils down to whether certain types of terrorism are considered war risks and are therefore excluded. This would apply not only to commercial property and business interruption policies, but to a variety of other coverages as well.

The Gulf war has called attention to the uncertainty that could exist with the war risk exclusion. Lloyd's of London felt that a greater degree of certainty should be available and acted swiftly to provide explicit coverage for malicious damage and sabotage to property. American International Group Inc. appears to be the only other insurer to have taken this position. Such insurance provides coverage for "physical loss of or damage to the property described in the schedule where such loss or damage is caused by terrorists, saboteurs, vandals or other persons acting maliciously or by way of protest."

A recent legal ruling under a Lloyds' marine cargo policy further underlines the need to clear up this ill-defined area. In the National Oil Co. of Zimbabwe Ltd. v. Sturge case heard in February in a London courtroom, the judge ruled that even though a risk may be covered for acts of terrorism, this may still be insufficient grounds for a claim. The claim resulted from incidents in 1982 when supporters of the Mozambique National Resistance blew up a pipeline in their country five times. The policy included a clause stating that it covered loss or damage caused by "any terrorist or any person acting for a political motive." It also stated that "In no case shall this insurance cover ... loss ... caused by war, civil war, revolution, insurrection or civil strife.

The court ruled that for insurance purposes an "Insurrection is an organized and violent internal uprising within a country, the main purpose of which is to overthrow or supplant that country's government," and accordingly, a policy that excludes loss arising from "insurrection" excludes sabotage by an internal resistance force seeking to overthrow a government. This case points out that it is essential for risk managers to seek advice from brokers who know the pitfalls that can occur in this technical policy area.

Disaster Planning

Planning for terrorism involves not only assessing the need for insurance protection and making efforts to avoid a damaging attack, it also requires accepting the fact that despite great efforts, such problems do arise. In addition, it must be realized that in the "New World Order," which casts the United States as the only superpower, Americans and their property, wherever they happen to be, are likely to be subjected to more terrorist activity than in the past.

While every company has a disaster recovery plan for its computer system, most lack a plan for emergency evacuation and repatriation. Unless satisfactory arrangements are in place to handle certain eventualities, a situation may arise that could be held as negligent, increasing the likelihood of claims against directors and officers. Thus, there is a significant need for a protection and response program as part of a corporation's overall risk management plan. As with any other risk management program, a disaster planning program requires firm commitment from senior management, as well as security management, law enforcement agencies and insurance brokers. It also requires a comprehensive review of the potential exposures assets and personnel may have to terrorist operations.

The insurance industry has begun compiling its own terrorist statistics, apart from its close contacts with specialist security companies such as Control Risks Group. There is, therefore, a growing pool of knowledge about how to mitigate risk.

This expertise can provide a company with practical guidance in connection with any aspect of terrorism. Indeed, terrorist experts are available today who specialize in disaster planning. They can recommend ways to avoid kidnap or product contamination. They can also help handle a kidnap or extortion incident once it has occurred by utilizing their negotiation skills.

Consultants can also handle important, albeit mundane, aspects of a product contamination incident, such as providing telephone lines and suitably briefed operators to field inquires. Not only will their fees be met by any insurance in force, but so will the fees of public relations consultants experienced in tackling unwanted publicity. Certainly, most insurers writing these special types of coverage have recognized that those who specialize in risk planning and disaster management can provide a useful, costeffective service for both insurer and insured.
COPYRIGHT 1991 Risk Management Society Publishing, Inc.
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1991 Gale, Cengage Learning. All rights reserved.

Article Details
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Author:Dobbs, Peter
Publication:Risk Management
Date:Jun 1, 1991
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