CRITICAL ISSUE REPORT

TERRORISM BACKUP LEGISLATION RAISES MANY QUESTIONS

Agents should work with their companies
on role concerning disclosure requirements

By Phil Zinkewicz

It is possible that independent insurance agents will be swept up in what appear to be insurance company obligations as insurers look to their agency forces to provide required disclosure information to insureds. Here the situation could get dicey.

Almost immediately after the horrific events of September 11, Congressional representatives moved to establish some sort of federal terrorism backup program to provide assistance to the insurance industry should the United States suffer future terrorist attacks from foreign adversaries. The need for this type of program was clear to almost all federal and state legislators and regulators, as well as to President Bush. Both here and abroad, the terrorist attacks resulted in unprecedented insurance industry losses in virtually all lines of business--life, aviation, property, liability, workers compensation and business interruption insurance. Insured losses from that fateful day are expected eventually to reach between $60 billion and $70 billion.

Nevertheless, although there was strong support for a federal backup program coming from members of Congress (both Democrats and Republicans), efforts to establish a federal terrorist backup plan were stalled time and again during the year following September 11. The insurance industry pushed hard to convince Congress that special interests should be put aside and a terrorism backup program should be passed.

Well, the insurance industry finally got its federal backup plan, but at a price. The law is so complex that it raises serious questions as to how insurers will be able to comply with rate setting requirements and form filings on a state-by-state basis, especially with the Treasury Department having the final say should regulatory disputes arise. Moreover, ratings agencies, such as Standard & Poor's and Fitch are now saying that the structure of the new law could put insurers in a more precarious position than they were in prior to the passage of the law. The reason for this is that, during the time when Congress was laboriously trying to dot its "i's" and cross its "t's," insurers managed to obtain terrorist "exclusions" in most of the 50 states. The new law immediately rescinded those exclusions and the insurance industry was thrown back into the terrorism business before it was able to price the product. In addition, the new law calls for very specific "disclosure" requirements. Within three months from the date the law was signed by President Bush (November 26, 2002), insurers have to notify their insureds about passage of the law, the fact that insurers are now mandated to write terrorism insurance and how the terrorist product will be priced. Insurers also must inform insureds that they can "opt out," either in writing or by not responding to their insurers within a 30-day period.

Because it is reasonable to assume that insureds in vulnerable areas--i.e., those located in specific terrorist target cities or in high-profile locations--will be anxious to purchase the terrorist coverage, while those in less vulnerable spots will not, there could be a problem with adverse selection.

But where does the independent agent stand under the new terrorism law? On the face of it, the new law places no burdens on the independent agent. The law addresses only what insurers are responsible for. However, in the area of "disclosure," it is possible that independent insurance agents will be swept up in what appear to be insurance company obligations. For independent agency companies, the agent is the primary contact with the insured. It stands to reason, therefore, that insurers may look to their agency forces to provide the information to insureds that the new disclosure laws require. Here the situation could get dicey.

The Independent Insurance Agents and Brokers of America (IIABA) and the National Association of Professional Insurance Agents (PIA National) have both embarked upon information programs via their individual Web sites to alert their members about the new law and the potential pitfalls that might put agents into compromising situations.

"The new law does not place any responsibilities on independent agents," says Jeff Myers, vice president for communications for the IIABA. "However, some insurers, because of their contractual relationships with their producers, might attempt to have their agents take on disclosure responsibilities. I don't think many insurers will do that, but some might. Agents can work in conjunction with insurers to communicate the insurer's disclosure information, but agents must realize that if they take on these disclosure responsibilities, without clear and concise written instructions from the insurers they represent, they could be letting themselves in for errors and omissions lawsuits. We urge any of our members who find themselves in this situation to visit our Web site where detailed information is provided or to call us at the national office with any questions they need addressed."

Pat Borowski, senior vice president for PIA National, said that, on the plus side, the association is "very pleased" with the "close working relationship" that has developed between Treasury and the National Association of Insurance Commissioners (NAIC) in such a short time since the bill was signed. "Treasury managed to get the tentative initial guidelines out quickly, and the NAIC managed to get its model out there quickly as well," she said. "Now, agents and carriers have to work closely together to fulfill the law's disclosure requirements. While it is true that agents are not being held responsible for anything under the terrorism law, there is no question that agents will have a role to play because they are the direct contact with the insured. Carriers have to provide our agent members, ASAP, with copies of company notices to customers, including all the information that the carriers want to disseminate--an explanation of the new law, how the coverage will be offered, how pricing will be determined, etc. We are suggesting that carriers create their own Web sites so that agents can log on and find out what each individual carrier they represent wants to communicate to insureds. Carriers cannot act in a manner that transfers all responsibilities to their agents. Our members, on average, represent five to seven plus different carriers. They cannot speak for all of them; nor should they," said Borowski.

What is clear here is that the new terrorism law, although much heralded and doubtlessly much needed, has raised many questions that will take time to answer. As Borowski put it: "We're all in a pressure cooker, here."

Basically, what Myers and Borowski are advising their members to do is to cooperate with carriers who want their help in disclosing terrorism law information to insureds, but not assume any responsibility for communicating that information on their own. Also, they strongly advise that agents get the insured notices and any other communication with carriers in writing. *

The author

Phil Zinkewicz is an insurance journalist with some 25 years' experience covering the international insurance and reinsurance arenas. He was the insurance editor of the Journal of Commerce for a number of years, handling all their domestic and international supplements. In addition, he regularly writes for a number of London publications.