Monday, Jan. 21, 2002 | 10:30 a.m.
A series of exclusions approved by Nevada regulators would free most insurance companies operating in the state from paying commercial claims that stem from large-scale terrorist attacks.
But personal insurance coverage, including homeowners' insurance, is unaffected by the changes.
State Insurance Commissioner Alice A. Molasky-Arman released commercial property insurance providers from any liability for claims that stem from acts of terrorism and result in industry-wide losses of more than $25 million for related incidents occurring within a 72-hour period. The same criteria apply to commercial liability claims, with the added exclusion for attacks that result in the death or serious injury of 50 or more people. If either threshold is exceeded, the exclusions would be invoked and the policy would not provide coverage for losses of any amount.
Incidents of terrorism that use nuclear, chemical or biological materials, as well as domestic-sponsored attacks (such as the 1995 bombing in Oklahoma City), are also excluded from coverage, regardless of the damage totals.
Nevada's commercial limits were recommended by the National Association of Insurance Commissioners (NAIC), which represents state regulators, along with input from industry data supplier Insurance Services Office (ISO), which designs policy wording. Molasky-Arman participated in a series of conference calls during recent weeks to help shape the policy.
"I believe this to be the best course of action," Molasky-Arman said. "It balances the need of insurers to have some certainty related to solvency concerns with the business consumers' concerns that their businesses not be subjected to uninsured events."
Similar steps have been adopted by 43 states, the District of Columbia and Puerto Rico, said David Dasgupta, a spokesman for the ISO. California and New York are among the remaining holdouts, he added.
The Los Angeles Times reported California Department of Insurance Commissioner Harry Low formally rejected exclusions in terrorism coverage, ruling the monetary thresholds were unreasonably low and overly broad in definition.
Pamela Pressley, staff attorney for the Santa Monica, Calif.,-based Foundation for Taxpayers and Consumer Rights, said her organization is also opposed to terrorism exclusions.
"After every major catastrophic event, the insurance companies find something new to exclude from your policy," Pressley said. "These types of catastrophes are the reason we buy insurance.
"(Insurance companies) have to follow through with what they're supposed to be providing to consumers and commercial policyholders."
Don Griffin, an assistant vice president with an Illinois-based insurance industry trade group called the National Association of Independent Insurers, countered that caps are necessary to preserve competition and financial viability among insurers.
Because most reinsurance providers -- companies that help insurers share their risk -- have said they would no longer underwrite terrorism coverage following the recent attacks, Griffin said insurers operating in non-capped states like California are forced to shoulder terrorism-related risks on their own or discontinue such coverage altogether. That all-or-nothing attitude benefits no one, he said.
"(Having no limits) puts the financial well-being of those (insurance) companies at risk because they can't transfer that risk to a reinsurer," Griffin said. "The caps give Nevada businesses some protection up to $25 million while still allowing the market to work for insurers to do business in the state."
NAII members write approximately 36 percent of the property and casualty insurance policies in Nevada, Griffin said.
Nevada's new caps would not prevent businesses operating in the state from contracting with so-called "non-admitted' insurance companies for special terrorism policies, although obtaining such policies can be difficult and expensive, said Cliff King, chief insurance examiner for the property and casualty section of the Nevada State Division of Insurance.
King said non-admitted providers -- which include recognizable names such as Lloyd's of London and subsidiaries of American International Group -- can provide insurance for any terrorism loss. Before such coverage can be obtained, however, three admitted carriers must turn down requests for similar coverage, King said.
King said his past experience as an employee of a private insurance company leads him to believe that many casino operators work with non-admitted carriers or elect to self-fund their insurance coverage.
"Casinos are (usually) self-insured or carry non-admitted policies with a high deductible, sometimes as much as $1 million," King said.
Park Place Entertainment Corp. of Las Vegas confirmed its use of non-admitted insurance providers, although a spokeswoman for the gaming conglomerate said the company did not need to add specialized terrorism coverage to its existing insurance package.
"We have policies in effect now that do not exclude terrorism," said Debbie Munch, Park Place spokeswoman. "If that were to become limited or an add-on in the future, we'll consider the cost versus the benefit (of such coverage) to protect our shareholders' interests."
While provisions against some commercial claims are already in place, King said Nevada has not approved exclusions that would limit coverage on personal lines of insurance, including homeowners, automobile or boat insurance policies. He would not rule out their future implementation, however.
"We have not approved any personal lines terrorist exclusions," said King. "The (NAIC) is considering it, but in all honesty we don't see they same kind of exposure in Nevada that they would have in a place like Los Angeles, so it's hard to say whether or not we will move at this time.
"We are trying to determine how a terrorist attack could affect personal lines before we approve any exclusions."
The non-profit Consumer Federation of America, which represents more than 285 consumer protection agencies across the nation, has lobbied against exclusions to personal and small business coverage. Still, at least two states have implemented policies limiting such coverage following terrorist attacks, the ISO said.
Limits in terrorism coverage stem from the heavy losses the insurance industry incurred following the Sept. 11 terror attacks. The Insurance Information Institute has estimated losses between $30 billion to $70 billion, making it the largest insured single-event loss in history.
By comparison, 1992's Hurricane Andrew resulted in damages of $20 billion (adjusted for inflation). The 1994 earthquake in Northridge, Calif. tagged insurers for $16 billion.
Following the attacks, many insurance carriers dropped terrorism coverage for commercial properties. Those that have offered the coverage have increased their premiums anywhere from 10 percent to 300 percent, Griffin said.
"Most insurance companies have indicated they will pay claims from Sept. 11 but it will be a financial disaster for the insurance industry if there were another attack of that magnitude and there was no help from the federal government," Dasgupta said. "The financial viability of the insurance industry itself would be at stake."
Insurers had expected some form of Congressional bailout prior to the close of 2001. Despite fielding cries for such an action from industries as diverse as the National Football League and the Food Marketing Institute, Congress adjourned without adopting a plan to assist insurers.
That inaction on Capitol Hill led the NAIC and ISO to develop contingency plans to protect the industry until a federal bailout plan is implemented. Wording of those plans was initially presented to state regulators in early November, and each state subsequently adopted or denied the recommendations.
Insurance regulators from many states and industry experts met in Washington on Thursday to discuss various proposals for federal and state-sponsored assistance for the insurance industry, the New York Times reported Friday.
The Times reported the Bush administration favors a plan that would hold insurers responsible for the first $10 billion in losses. Others close to the situation have called for state regulators to create a pool of about $25 billion to $50 billion in private money to cover such losses, but a consensus has not been reached.
King said the new Nevada exclusions would expire within 15 days after President Bush's adoption of a federal "backstop" plan.
"The whole idea of creating a federal backstop is to have something that would allow the companies to pay all the losses over the next three years," King said. "By that time the insurance industry should have come up with some kind of pooling mechanism of its own."
Paul Brown is the local director of the Progressive Leadership Alliance of Nevada, a statewide coalition that advocates on issues such as insurance, labor and campaign finance. Rather than limit coverage, Brown said he would prefer the establishment of a federal back-up fund to protect the insurance industry from excess terrorism claims, just as the government covers damage claims resulting from floods or other natural disasters.
"Insurance companies offer a legitimate service and I don't want to see them have to jack up the charges for that service so high that I can't afford it or businesses like MGM MIRAGE can't afford it," Brown said. "The government might have to become the insurer of last resort."
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