Federally guaranteed terrorism insurance needed

The electric power and light industry is under silent siege; there is a need to review and assess security priorities, review public policy options, and re-think internal policies. Foresight is the watchword, and there are policy implications that attend that word. Protecting the nation’s energy infrastructure is a rising priority, especially electric power plants. Understanding that fact should lead to a cascade of action items. National reaction to the terrorist attacks of last September will continue to come in waves. The latest wave should be an assessment of the need for real, Federally guaranteed terrorism insurance in industries that are extraordinarily sensitive to future attack, and which insurers are therefore reluctant to cover. The chief industry, beyond transportation, which now has a Federal security force of its own, is the energy sector. In particular, America’s electric power and light utilities need help.

Review the facts. Losses to the insurance industry from the 9/11 World Trade Center attack range up to $35 billion. So far, a total of more than $14.5 billion in claims have been paid. The claims would be higher if the death toll had been higher. How high the claims will go is still a guessing game. The full effects of the attacks are not yet felt because “long-tailed” insurance claims such as workers compensation, general liability and business interruption claims take time to be filed and may not be resolved for years if they go to court.(1) The losses in the energy sector could be as large, or larger.

Shortly after the 9/11 attack the insurance industry approached the Federal government to seek a new government supported insurance program to provide coverage for future terrorist attacks. They recognized that future losses from terrorism were now more likely and largely incalculable, likely to be massive if they had to be covered privately. The industry did not know how to price terrorism insurance and, therefore, they could not provide traditional insurance against terrorism.

Persuasively, the field argued that only the Federal government has the size and financial resources to back-stop real terrorism coverage, much as Superfund resources backstop catastrophic environmental damage.

In addition, the field has recently – and predictably — gone to State governments and asked that commercial and personal insurance such as homeowners have terrorism exclusions.

Not surprisingly, critics of this approach argue that any attempt to assist the industry to cover off incalculable damages is nevertheless little more than “corporate welfare” and that the free market will eventually devise a means to deal with spreading the risk. Critics argue that there are other means of spreading risk such as equity and debt mutual funds, real estate investment trusts (REITs) and the use of broad-based debt pools. There are also non-financial methods of reducing loss such as making buildings, businesses, infrastructure and cities less vulnerable to terrorism. (2)

Both sides may have a point, but the larger issues are ones of common interest. These common interests suggest a need for a wholly new approach to thinking through terrorism coverage and the Federal role in assuring community safety. Legally, for example, terrorist strikes on businesses are now “foreseeable.” (3) “Foreseeability” determines legal liability and if harm is foreseeable, actions must be taken to reduce the risk of harm. (4) It is not reasonable to wait until a threat is specific, credible, and cannot be countered. Businesses have a duty to protect the public from harm and a duty to employees, surviving relatives, and former employees when there is a terrorist attack. Businesses also have a duty to contracting entities and customers. Accordingly, businesses need insurance protection.

Under such circumstances, how do we get there from here? One method of reducing insurance costs is a government and private enterprise partnership to reduce liability by promoting risk reduction programs. Legislation can grant a discount on insurance premium rates or provide for favorable deductibles and also limit liability for eligible businesses that establish a terrorism loss prevention program (TLPP). As all parties search for answers, this may be the key to progress.

Notably, this model has been successfully used in several states for businesses that set up drug-free workplace programs. The businesses qualify for discounts in insurance premiums and/or protection from liability if they create drug-free workplace programs according to government standards that are set by law.(5) Similarly, this model can be used for reduction of insurance premiums or deductibles for terrorism. Businesses can establish TLPPs according to government requirements and then receive a premium discount and/or reduction in liability. Of course, there could be different program levels, but the sliding discount scale for a business implementing a TLPP would be based on the level of risk reduction they embrace and seriousness of the program they provide.

To receive a discount or reduced deductibles for implementing and operating a TLPP, businesses should consider implementing, at a minimum, the following program components:

First, there should be a serious-minded and credible terrorism risk assessment, coupled with a plan for dealing with that risk must be implemented. “Risk assessment,” for the record, is the determination of vulnerabilities after the analysis of the likelihood of loss due to a particular threat against a specific asset in relation to any safeguards.

Risk assessments might evaluate a panoply of issues, ranging from the possible agents of the terrorism (foreign, domestic, disgruntled employees) and possible events that can take place to the class of the threat and probabilities based on everything from past practices and business-type to geography. They would also consider potential impacts and consequences on personnel, the public, operations, customers, business loss and physical assets.

Of course, prevention can include measures for protection of employees and the public, physical assets, operations and management, perimeter protection/intrusion detection, and systems backup. Issues such as employee electronic privacy, personnel records and job applicant background checks and media relations must also be considered.

Second, the embrace of a TLPP program should include a written policy and procedures statement, which, at a minimum, would consist of certain up-front, no-nonsense provisions. Specifically, the TLPP would want to consider listing all elements of TLPP program that the business is undertaking, including a visible senior management leadership that promotes the belief that terrorism prevention is an organizational value worth pursuing.

In the same vein, the TLPP program would want to identify and empower a TLPP program administrator, facilitating serious reform of security procedures through a partnership with experts on the outside, bringing new meaning to a robust set of clear and well-articulated responsibilities with regard to the TLPP program

Another element of the TLPP program that would lower rates and provide stronger government confidence – as well as community confidence – would be to communicate the TLPP program and policy through initial presentation to all employees prior to the program implementation and/or on a repetitive basis annually through employee education sessions. The more the merrier, and the more training that occurs, the higher the prevention effort and lower the risk.

As a third element, the program should insist on employee involvement and recognition that affords employees the opportunity to participate in the TLPP process, and to become advocates for it and its goals. This could range broadly, but could reach as far as early return-to-work strategies to help injured or ill workers return to work, regular communications on terrorism prevention issues to keep all employees informed and to solicit feedback, and promulgating terrorism prevention work practices so that employees have a clear understanding of how to accomplish their job requirements.

To work best with insurers and the Government, accountability is critical. Accordingly, strong internal program verification to assess the success of the terrorism loss prevention program, to include audits, surveys, and record analysis is advisable.

If all this sounds like apple pie and motherhood, the next question is all the more important. As businesses come forward to prevent bad acts in the future, what incentives are there to spur their continued, conscientious participation? Or to participate in the first place? The sweeteners are identifiable, beginning with limitations on future liability. The following limitations on liability could be available to businesses that submit an approved plan.

Consider the realm of negligence. If a business has established a TLPP under the law, a person could not bring an action for negligence against the business for actions arising from a terrorist attack unless the business knew or clearly should have known the TLPP was reckless. There would be a rebuttable presumption that the TLPP was valid if the business complied with the provisions of the law.

Likewise, think of the impact that a TLPP program could have on the bottom line in another way. Upon a claim against a business, a person could be required to institute a civil action in a court of competent jurisdiction within one (1) year of the alleged violation or to exhaust any administrative remedies available to the person, or be barred from obtaining relief. In sum, shorter statutes of limitations could become defensible. Not only would this help reduce lawsuits, but it would also make risk more assessable, since the because the long tail claims would have their tails cut.

Again, as an attraction to participation, various forms of immunity or limitations of liability could also be granted to businesses which comply with the program. Another option to reduce lawsuits would be to insist, in the case of terrorism recovery attempts, on recourse to an established grievance procedure or arbitration.

A pause on the day-to-day side is worth mention. How would this work practically? Simple. If, for example, an employee felt his privacy was violated by some aspect of the approved TLPP program the employee would be forced to arbitrate the claim. If a member of the public suffered a business loss because an electric utility who had a TLPP was attacked and could not deliver power, the claim would have to be arbitrated. The assumption being that the company had done all it could to assess risk and to prevent it under the TLPP.

So, let’s call a spade a spade. Use of a TLPP system is hardly corporate welfare; it is the best way to protect communities, companies – and especially utilities — and the Government itself from the specter of future, incalculable terrorism losses or events. Welfare is when you get something without the extension of effort to perform a serious and redeeming service. The use of TLPPs openly forces businesses to think through and implement effective programs that will reduce losses and thus reduce costs to insurance. Businesses implementing TLPPs are provided incentives for taking preventative actions. The outcome, if Congress will step up to the plate and begin the process, is a partnership between government and free enterprise that will protect our nation and reduce the likelihood of terrorism events, not to mention the losses they produce.

David G. Evans, Esq., Senior Legal Advisor to ATOG, Inc. of Duluth, Ga., www.ATOG.com, is author of the upcoming book “Workplace Security Law” published by the West Group; Don Buzzelli is CEO of ATOG Inc.


1. “World Trade Center losses lower than originally expected”, Brendan McKenna, www.insure.com

2. “The Terrorism Threat to Insurance Markets”, Francis J. Menton, Jr., 2001, The Federalist Society

3. Melinda L. Reynolds, Landowner Liability for Terrorist Acts, 47 Case W. L. Rev. 155 (1996); Kimberly A. Trotter, Compensating Victims of Terrorism: The Current Framework in the United States, 22 Tex. Int’l L.J. 383, 392 (1997).

4. Uri Kaufman, When Crime Pays: Business Landlords’ Duty to Protect Customers From Criminal Acts Committed on the Premises, 31 S. Tex. L. Rev. 89, 103 (109990); William H. Hardie, Jr., Foreseeability: A Murky Crystal Ball for Predicting Liability, 23 Cumb. L. Rev. 349, 364 n. 61 (1992).

5. Those states are: AL, AK, AZ, AK, FL, GA, ID, MS, OH, SC, TN, VA, WA, Evans, David G., Drug Testing Law, Technology and Practice, The West Group (Rochester, NY).

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