Strategy

Acts of God and Monsters No Longer Covered

Insurers say future policies will definitely exclude terrorist attacks.
Tim ReasonNovember 19, 2001

Berkshire Hathaway Inc. used an act-of-war clause to pull out of a $500 million bond deal. Conference organizers used similar clauses to cancel hotel contracts. And in the wake of the September 11 attacks, the insurance industry — whose standardized forms consistently include act-of-war policy exclusions — pledged to pay up. “We are not going to hide behind the war exclusion for these acts of terrorism,” announced Douglas W. Leatherdale, chairman of The St. Paul Cos.

Don’t expect such understanding in the future, however. Two weeks after the attacks, Chubb CEO Dean O’Hare testified before Congress that “when current reinsurance agreements expire, they will be renewed only with the terrorism exclusion, and therefore it will be impossible to provide our customers with terrorism coverage.”

Such retrenching isn’t unprecedented. In 1992, after a wave of bombing attacks in London by the Irish Republican Army, the Association of British Insurers advised its member companies to exclude terrorist bombings from their policies. “The Acts of Terrorism exclusion has been maintained across the [U.K.] market since 1992, and will no doubt continue,” notes Cheryl Ronaldson, an attorney and insurance specialist with the London-based law firm Norton Rose. In response, Parliament passed the Reinsurance (Acts of Terrorism) Act 1993, establishing Pool Re, a reinsurance company jointly owned and funded by major U.K. insurers and backed by the U.K. government, which acts as “an insurer of the last resort.”

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Hare believes “that’s a model Congress should consider.” Legislators are currently debating how to establish a federally backed reinsurance pool for terrorism coverage. The White House, however, hadn’t made a decision on the proposal.

Meanwhile, not all U.S. insurance companies are waiting for existing agreements to expire. One CFO, speaking on condition of anonymity, notes, “Our corporate jets had a certain type of insurance that ordinarily covers the aircraft for terrorist acts, but that coverage can be revoked at will.” Immediately after September 11, it was.