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   The High Price of "In" Security

COMMENTARY:

The High Price of "In" Security

Hamilton has become a haven for musicians to showcase original music and poetry.

By Russell Tyldesley

It’s not just health insurance rates that will be giving us double digit annual increases. 9/11 and recent cases of massive corporate fraud have caused the insurance industry to tighten definitions and rewrite policy language.
It is sometimes difficult to discern the truth in the fog of propaganda, PR, intentional distortions, and just plain old ignorance. One wonders where to look for information that is reliable, and produced by unbiased recorders whose business it is to get the details right. Believe it or not, a hard-nosed form of truth is likely to be found in the claims adjusting function of the staid insurance industry.

The property-casualty insurance industry took a big hit on 9/11/01. Though there is still a range of potential losses from the World Trade Center disaster, a variety of insurance industry sources indicate that the losses will total around $40 billion. Of course, there is much litigation yet to work its way through the courts, and the true number will not be known for decades.

Although the WTC claims, in total dollars, will be more than double the next two largest insurance disasters in history, it is interesting to note that 700,000 claims were filed in the aftermath of Hurricane Andrew, and 51,000 so far for the WTC.

One of the big issues in litigation is whether the WTC insured loss was caused by one or two occurrences. Although our government was quick to identify the perpetrators, and to see a conspiracy, the issue between the insurers and the leaseholders (principally Silverstein Properties, Inc.) is far from clear-cut. It seem that the policy on the two buildings, in the amount of $3.5 billion, had not been issued and was only “bound.” The binder did not include policy language containing a definition of “occurrence.”

We can trust the plaintiffs’ attorneys and the insurance industry to get it right–they are the countervailing power to corporate chicanery that we cannot expect from legislators and regulators drenched in campaign contributions.

The insurers say that the insured is only entitled to one loss of $3.5 billion; the insured is claiming $7 billion, arguing that the losses were caused by two separate and distinct occurrences.

Further complicating the issue is the fact that most policies have automatic reinstatement of policy limits upon the occurrence of a loss. In other words, the WTC policy limits are not exhausted.

A number of court cases have dealt with the issue of what constitutes an “occurrence,” but there is no general agreement on what it means. The Independent Agents and Brokers of America have issued a paper on “One vs. Multiple Occurrences.” The paper concluded that there were two occurrences on 9/11 at the WTC. They reasoned that the losses were caused by two separate planes, controlled by two separate groups, that struck two separate buildings.They stated, “Even if the WTC losses arose out of a single plan of attack, the originators of the plan are too remote for this to be considered a single occurrence.” Another reason they gave was “the exact cause and perpetrators may not be known for years, if ever.” Additionally, they stated, “the al Qaeda terrorist cells apparently were unaware of each other’s plans, indicating that the immediate perpetrators of the losses acted independently.” Robert Felton, a professor of insurance for 25 years at Louisiana State University, agrees with the conclusion of the paper, as does the editor of the FC&S Bulletins, published by the National Underwriter company.

But Was 9/11 an “Act of War”?
The import of all this is that President Bush was, perhaps, too quick to call the WTC event a “terrorist attack” and an “act of war.” If it were an act of war, almost every insurance policy written would exclude coverage.

The insurance industry is now in the process of placing terrorism exclusions on all of its policies, if that peril wasn’t already excluded. Congress has yet to conclude that they will create a government funded reinsurance pool of last resort to back stop the commercial insurance industry for the worst losses from terrorism—maybe next term.

Insurance premiums are, indeed, in part a hidden tax that we dare not ignore, if we care about our real security and that of our children.

The fact is, there is still no universally accepted definition of terrorism, as far as the insurance industry is concerned. I guess our President, and perhaps the average man in the street, would say, “I’ll know it when I see it.” Well, that’s just not good enough for an industry that depends on the precise use of language.

Well, we went to war anyway, even without the kind of evidence that insurers require to adjust claims and, no doubt, without evidence that would hold up in a court of law. Perhaps that is why military tribunals will be used to determine guilt or innocence, although no adjudications appear to have been attempted yet—10 months and counting.

Corporate Corruption: Another Huge Risk Factor
While we wait for US and foreign insurance companies to underwrite against the hazards of US foreign policy and assess the effectiveness of our homeland security apparatus, we have a much better example of how insurance underwriters deal with the risks of catastrophic potential, and that is the corruption of the corporate executive class that has brought so much devastation to employees’ 401Ks, and shareholders’ portfolio values. The numerous lawsuits, including class action suits against the perpetrators and their collaborators, will, no doubt, also take several years to work their way through the legal system.

One of the consequences of the loose form of corporate governance by board members (who very often have obvious conflicts of loyalties) is that insurers are experiencing unprecedented claims against Directors and Officers Liability (D&O ) policies. Rates have jumped precipitously, and insurers are asking a lot of questions they never asked before about the way the directors and officers interact. Long questionnaires are being fashioned, and if answers are not complete and honest, officers and directors could have claims against them denied by the insurer on the grounds of misrepresentation.

Perhaps Congress and the SEC were a little hasty in drawing up new rules and regulations before the insurance industry had conducted its own “audit” of corporate behavior. The recent rate increases are a good barometer of the degree of change needed in the boardrooms of the United States.

We can trust the plaintiffs’ attorneys and the insurance industry to get it right–they are the countervailing power to corporate chicanery that we cannot expect from legislators and regulators drenched in campaign contributions.

It’s not just health insurance rates that will be giving us double digit annual increases. In a way, it is all a part of the same wake-up call. As a society we can pay attention to the details by being a good citizen and questioning the corporations and the government officials that rule our lives to a greater and greater degree each year. If we are apathetic and sloppy and take an attitude that someone else can defend our democracy, then we will continue to pay a hefty price to clean up the mess we have allowed to happen.

The piece of our taxes that goes to homeland security, toxic waste cleanups, bailouts for banks and pension plans, asbestos and lead liabilities, and corporate dishonesty is getting bigger and bigger. And these are just the obvious examples. Corporations that are oligopolies can easily pass the costs of their perfidy along to the consumer. Were the tobacco companies hurt by the tobacco litigation? Most corporate welfare is hidden.

We don’t really know what a fair tax system should look like. Insurance premiums are, indeed, in part a hidden tax that we dare not ignore, if we care about our real security and that of our children.

Spoilsports raise cost issues
Just as I completed this article, I heard on the radio a slick ad for the F22 fighter bomber. A comforting baritone voice intoned that “ homeland security begins at 50,000 feet.” Now that Congress and the U.N. have apparently been won over to support our long-telegraphed pre-emptive strike against Iraq, some spoilsport raised the issue of the cost. There is no argument from the administration that it could run to $200 billion, and that’s before we figure out how to govern Iraq after Saddam.

Imagine what $200 billion in foreign aid would mean to the 50% of the world living in poverty. The hate level against America might dissipate perforce as swords are converted to plowshares. But, for this vision to take hold, ordinary citizens will have to speak truth to power—the military, industrial, congressional, executive complex.

We have been warned not to take our democracy for granted. We ignore that warning at our peril.


J. Russell Tyldesley writes from Catonsville, MD.

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This story was published on October 2, 2002.
  
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