Earlier this year, when the New York State Department of Insurance rolled out its new Emergency Insurance Operation Center, no one could have known how soon and how severely the department would be tested.
The program was still in its infancy – only four months old – on the terrible morning of September 11. Yet hours after the terrorist attacks on the World Trade Center, the department had already swung into action, setting up a command center in Albany staffed by agency employees and representatives from 15 major insurance companies. From there, the department worked to oversee and coordinate the response of the insurance industry. It also installed a toll-free disaster hotline and Web site for victims to address their concerns and monitor whether claims are being paid.
Perhaps in part because of the department’s oversight, the insurance industry’s response thus far to the crisis has been exemplary. “Everybody has been fantastic,” said Joanna Rose, press officer for the state insurance department. “The industry has been extremely proactive and available to the public.” She added that to her knowledge, the department’s consumer services centers have yet to receive a complaint about an insurer’s treatment of a claim arising from the events of Sept. 11.
Insurance companies have taken out full-page ads in New York newspapers to announce toll-free numbers for claims. They have announced that they would not invoke any “act of war” or “terrorism exclusion” to avoid paying claims. They readily agreed to accept affidavits in lieu of the death certificate typically required to pay life insurance claims. And they are paying claims. As of a week ago, insurers had reported 12,000 claims to the state insurance department, to the tune of $2.6 billion in incurred and paid losses. Of that amount, more than $1 billion has already been handed over in initial payments.
But whether their initial largess will continue remains to be seen. Typically, it does not, say lawyers for policyholders.And the particular circumstances here, especially New York state law, they say, do not bode well for insureds. “In a disaster scenario, the first money is usually the easiest,” said Marvin Milton, a lawyer and president of Anderson Kill Loss Advisors, the Wellesley, Mass, insurance consulting arm of the law firm Anderson Kill & Olick. It is easy to advance, say, $25,000 of a $500,000 claim, he explained.”Later on, the differences emerge- whether to repair or replace damaged items, how to read the insurance policy,” he said. “That’s going to go on forever.” Insurers may soon begin to feel that they cannot afford to be generous. It is anticipated that the terrorist attacks will be the most costly single event in the history of the industry. Initial estimates in a report by the New York management consulting firm Tillinghast-Towers Perrin put the damage between $30 and $58 billion in insured loss, easily eclipsing the $20 billion property insurers paid for Hurricane Andrew in 1992.
The venerable Lloyd’s of London, which was involved in insuring the World Trade Center and the four hijacked plains used in the attacks, has been particularly hard hit; Standard & Poors downgraded its credit rating because of the disaster and said that its profit outlook for 2001 was “poor.” Although to a company, insurers have put a bright face on the state of their finances, privately they have expressed worry. “Some insurers and reinsurers will be surprised by the extent of their losses,” predicted Tillinghast-Towers Perrin. “A few may be overwhelmed.”
LIKELY AREAS FOR DISPUTES
Lawyers for policyholders flagged several likely areas in which they expected disputes to emerge, including notice and proof of loss requirements and the period covered on a business interruption claim. For the insurance companies, they predicted long, drawn out battles between the direct insurers and their reinsurers, who insure the direct insurers.
Notice is a potential problem “because of New York’s archaic notice rules,” said William G. Passanante, a partner with Anderson Kill & Olick in New York. Insurance policies typically require an insured to timely notify the insurer or risk forfeiture of the claim, the rationale being that insurers need the opportunity to investigate a claim while the evidence is still fresh. Unlike most “common sense” states, where the insurer has to show that it was prejudiced to defeat coverage on the grounds of late notice, in New York, if the court deems the notice to be late – even by one day – the insured could lose his claim, Mr. Passanante explained. “The cases that apply this kind of hypertechnical rule could fill a book,” he said.
Late notice is a concern especially because of the horrific nature of the events of September 11. “People are very traumatized,” said Jeannine Chanes, a partner at Fried & Epstein in New York who is counseling victims on insurance-related issues.”They don’t even remember whether or not they have insurance.”
Mr. Passanante is lobbying the state legislature to amend New York’s “draconian” late notice rule for World Trade Center-related losses. Kristina Baldwin, counsel to the state senate’s insurance committee, said they were considering Mr. Passanante’s proposal, but they were disinclined to act on it as long as insurers continue to pay claim. “We don’t want to put undue restrictions on the insurance industry,” she said. “They are taking a big hit.” Another looming issue is proof of loss. Most small businesses in the trade center towers lost all their paper records and computer data. Although missing policies were turning out “not to be as nearly a big a deal as one might expect,” since most small businesses deal with insurance brokers who have records, loss documentation is another story, Ms. Chanes said.
We concurred: “Insureds are going to be running into a corporate culture that is loathe to pay claims without independent verification of claims.” “Business owners could pursue several avenues to find evidence of property purchases. Computer records, if available, are one. Some software, such as Quicken, has records of vendors, check numbers, dates and amounts. Businesses can also contact vendors to get duplicate receipts or other records, but we caution that any such receipts should have “duplicate” written on them to avoid accusations of insurance fraud.” As a last resort, businesses can prepare an inventory along with estimated replacement cost figures and determine whether other people, such as employees, can attest to the destruction and value of the listed items.
BUSINESS INTERRUPTION
Lawyers also targeted claims for business interruption insurance, which covers profit losses in the event business is disrupted, as a future source of contention between insurers and their insureds.
Once a business reopens, even if it is doing only a fraction of its former business, “the insurance companies are going to say, ‘well, you’re open, so that’s the end of the period,’ said Ms. Chanes, of Fried & Epstein. Must business interruption policies provide coverage only until the physical assets of the business are restored, she explained.
Insurers are also going to argue that any downturn in business is at least in part due to the economy, said Mr. Milton, of Anderson Kill Loss Advisors. “Everybody sees a recession coming,” he said, adding that the process of trying to forecast business is dicey anyway, but further complicated here because of the difficulty in separating out the effect of the terrorist attacks from a general downturn in the economy.
For the industry itself, it needs to brace itself for battles between insurers and reinsurers, lawyers said. The Tillinghast-Towers Perrin report said such disputes are “likely.” Any pressure on direct insurers to pay claims generated by the media attention in the aftermath of the terrorist attacks will not be felt by the reinsurers “sitting in Europe or in some island down south,” said Anderson Kill’s Mr. Passanante.
For example, he said, if a direct insurer pays an arguably late claim, the reinsurer could turn around and say “hey, you had a late notice claim which you didn’t assert, which makes you a volunteer,” and then deny reinsurance coverage accordingly.
Lawyers say all these issues are only the tip of the iceberg, given the unprecedented impact and complexity of the issues presented by the terrorist attacks. “The odds are it’s going to start out touchy-feely and end in a bloodbath,”said Mr. Milton, of Anderson Kill Loss Advisors.
Evan S. Schwartz
Founder of Schwartz, Conroy & Hack
800-745-1755
ESS@schwartzlawpc.com