Taking Cover

One act or four? War or terrorism? These are the questions insurers are asking after 11 September. Sheila Simison and Denis Whelan ask whether the industry will ever be the same again

The attack on the World Trade Center was the worst terrorist assault on US soil, producing the biggest insurance losses in history, and it has changed, perhaps lastingly, perceptions of risk in the insurance industry.
Change came quickly. Immediately after 11 September, cover against terrorist acts became the risk that few wanted to insure. Insurers increased airlines' premiums and cut their cover for third-party war and terrorism liability (other than for passengers) to a maximum of $50m (£35.44m), prompting the real threat that airlines around the world would be grounded at midnight on 24 September 2001. National governments were forced to step in to cover aviation liability risks no longer being covered by the commercial market. On the evening of Friday 21 September, the UK Treasury confirmed that the Government would become the insurer of last resort. Insurers, brokers and their advisers worked through the ensuing weekend, putting together the necessary agreements to establish Troika Insurance Company, a Government-backed vehicle which covers aviation liability risks. It was in operation the following Monday.
It is now clear that these emergency measures were just the beginning. One of the issues that has already arisen is exactly how many events took place on 11 September. The Al-Qaeda terrorist network, led by Osama Bin Laden, appears to have planned the whole attack, so was there just one event? Was the World Trade Center one building or two? (Apparently, the towers were joined underground.) Is there cover in respect of each aeroplane involved (four) or each airline involved (two)? For insurers, these matters are of critical importance, since insurance and reinsurance is nearly always structured on the basis that there is a certain amount of cover per 'event' or 'occurrence'. The implications are obvious: the more events there were, the greater the possible recovery. Swiss Re has already sought a declaratory judgment in the New York courts that the attacks on the World Trade Center amounted to just one event. Silverstein Properties, the leaseholder on the buildings, insists that there were two events.
Similar issues have come before UK tribunals on a number of previous occasions. In Dawson's Field (1972), Sir Michael Kerr held that the destruction of three hijacked aircraft by Palestinian terrorists was a single “occurrence”. The three aircraft were blown up on the ground within a few minutes of each other, all at the same location. More recently, in Mann Lexington Insurance Co (2000), the Court of Appeal held that riots in Indonesia, taking place over two days and in different parts of Jakarta and the surrounding area, constituted several different losses. This increased substantially the insurer's exposure.

“The insurance market is already amending wordings and restructuring risk profiles in the light of 11 September”

Perhaps the clearest elucidation of the general principles in this area was laid down by Lord Justice Rix in the Kuwait Airways case (1996). “The matter must be scrutinised from the point of view of an informed observer placed in the position of the insured,” he said. “In assessing the degree of unity, regard must be had to such factors as cause, locality and time and the intentions of the human agents. An occurrence is not the same thing as a peril, but in considering the viewpoint or focus of the scrutineer, one may properly have regard to the context of the perils insured against”.
In the current circumstances, attention has also naturally focused on the meaning and effect of various exclusion clauses, in particular war and terrorist exclusions. Soon after the attacks, President Bush stated: “The deliberate and deadly attacks which were carried out against our country were more than acts of terror, they were acts of war.” This led some insurers to seek advice on whether war exclusion clauses could be invoked.
As a matter of general law, the key elements of a war exclusion clause will normally include the requirements that there be hostile or warlike actions taken by a government or sovereign power (de jure or de facto) or their agents. There need not be a declaration of war, and in this context the courts give 'war' its ordinary and natural meaning, not its technical meaning under public international law. In Pan American Aetna (1975), the US Court of Appeals for the Federal Circuit held that the hijacking and subsequent destruction of a domestic aircraft by two members of the Popular Front for the Liberation of Palestine (PFLP) did not fall within a war risks exclusion clause. It held that a guerrilla group such as the PFLP had to have at least some incidents of sovereignty before its activities could properly be styled 'war'.
It is likely to be difficult to show that the Al-Qaeda network has sufficient incidents of sovereignty to fall within this definition. The issue may be different if it can be established that Iraq, Afghanistan or the Taliban were actively assisting or controlling the Al-Qaeda network. Even then, it would still need to be established that the events of 11 September were 'warlike'. This may also be difficult, since the acts of Al-Qaeda had criminal rather than military overtones. The terrorists, it seems, were the agents of a radical political group rather than a sovereign government.
Even if the events of 11 September cannot be characterised properly as war, losses arising in the aftermath of 11 September might still be caught by a war exclusion. Mobilisation of the US and UK military took place very soon after 11 September; and within days, if not hours, it was clear the that the allies were gearing up for a major campaign against the Taliban. Subsequent claims, which have arisen as a result of the build-up to war or the threat of war, are more likely to fall within a war exclusion clause. The argument for insurers may be strengthened if the exclusion covers 'threatened war', as is sometimes the case.
All of these issues may well come before the courts in the months and years ahead. These events may indeed appear very different when analysed with the benefit of hindsight. However, the insurance market is already amending wordings and restructuring risk profiles in the light of 11 September. All-risk covers are likely to become less common, with several insurers already having indicated an intention to move towards providing cover for a more limited range of defined perils. War risks and terrorist cover are likely to be provided only as additional bolt-ons, available only at a high price. Rates have hardened and are set to continue in that vein; recent indications are that following 11 September, premiums are up by an average of around 30 per cent. Capacity in the market is also likely to contract, which could improve significantly the outlook for those insurers and reinsurers best able to cope with 11 September. The companies that will do the best are likely to be those able to weather the cashflow difficulties of paying claims before collecting from their own reinsurers. Good reserves and solvent reinsurers are obviously essential.
Initial declarations by some members of the market that all claims arising out of 11 September would be met automatically now look somewhat premature. Insurers will pay claims that are properly due, but if defences are available, they are bound to be looked at. The potential losses are too great to do otherwise.
Sheila Simison is a partner and Denis Whelan an assistant solicitor in the reinsurance and international risk team at Barlow Lyde & Gilbert