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A tangle of insurance claims follows terrorist attacks

With industry estimates of the terrorist attacks' financial damage to the insurance industry ranging from $10 billion to $45 billion, there seems to be only one thing industry analysts can agree on: sorting out the insurance claims after the terrorist attacks on the Pentagon and World Trade Center will be neither easy nor quick.

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Even normally simple definitions will be more complex than Webster's can handle. Insurance companies will have to struggle over questions about what constitutes an act of war (damage from which may be excluded under some policies), if the hijackings should be considered one event or four separate occurrences, and what, if any, exclusions will apply, says A.M. Best, an insurance ratings company.

"Because of the complexity of the insured coverage, developing estimates on even the most straightforward exposures is a huge challenge."

Sax Riley, chairman of Lloyd's of London, said that the attacks had "generated the most complex set of insurance liabilities and interdependencies the industry has ever seen."

According to Moody's Investor Services, it may take not weeks but years to get a full picture of the financial impact on insurers of the terrorist attacks. It will probably take "on the order of two to six months to get 90 percent of the way there" to even establish reliable estimates of insurance losses, says Moody's.

"Because of the complexity of the insured coverage, developing estimates on even the most straightforward exposures (e.g. commercial property) is a huge challenge," says Moody's. "Other sources of exposure (e.g. business interruption and third party liability) are nearly impossible to estimate accurately."

Furthermore, says Moody's, because some of the largest commercial insurance policies are written on a case-by-case basis, each contract could have different definitions of what constitutes an "event" or whether exclusions would apply.

Contributing to the confusion is the complexity of reinsurance coverage. Insurers will typically spread their risk by purchasing insurance for their policies from reinsurance companies, and Moody's warns that there could be a spiral of reinsurance claims coming out of the Sept. 11 catastrophes.

Most of the insurance loss estimates from the attacks have assumed that reinsurance policies will pay out fully, but this may be a dangerous assumption, says J. Robert Hunter, director of insurance for the Consumer Federation of America and former Texas Insurance Commissioner.

Many insurers are working to avoid a situation that would involve complex legal battles.

According to Hunter, reinsurance policies are typically issued under the terms of the original, or primary, insurance policy. Even if the primary insurance company decides not to invoke an act-of-war or terrorism exclusion to avoid paying out on an insurance policy, reinsurance companies might not be so generous.

"Reinsurance companies could simply say to the insurers, 'You made the wrong decision by paying these claims,'" says Hunter.

Although Congress and the National Association of Insurance Commissioners have called on insurers and reinsurance companies to pay claims quickly, there are still concerns that overseas reinsurers, including some based in Bermuda, may attempt to avoid payments by invoking specific contract terms.

Adding to these concerns about exclusions, and the arbitration and litigation that would certainly follow any claims denials, are concerns about which insurance company or policy should pay. In cases where there is potentially overlapping insurance coverage, commercial property insurance on the World Trade Center and third party liability insurance for the airlines for example, generally one of the insurers involved will step forward as the primary payer and then attempt to recover some of its losses from the other insurers through a process known as subrogation.

According to A.M. Best, many insurers are working to avoid a situation that would involve complex legal battles over exclusions and subrogation.

Any time you have multiple policies that may cover the same loss you need to disentangle them, and this is fertile ground for disputes to develop, says Moody's.

"It's not going to be easy to recover quickly," says Ted Collins, the managing director of property/casualty for Moody's.

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