Insurers in State Must Provide Terror Coverage

California will continue to require insurance companies to provide terrorism coverage even though 20 other states have approved exceptions limiting insurers’ risk, state officials said.

California regulators worry that the terrorism exclusion language adopted by other states, which was drafted by the insurance industry, could be interpreted too broadly and allow insurers to disallow coverage for hate crimes, said state Department of Insurance Deputy Commissioner Scott Edelen.

“If somebody burns down a church, we want to be sure it’s covered,” Edelen said.

States began adopting the exclusion language late last year after Congress failed to act on legislation that would have limited insurers’ liability for terrorism-related damage.

Insurers have said they can pay the expected $40-billion-to-$70-billion cost of the Sept. 11 attacks, but might not be able to pay for damage from future terrorist acts.

Insurers pressed lawmakers to act after major reinsurers--the companies that essentially help insurers share their risk--announced they would drop terrorism coverage when their contracts with insurers expired Dec. 31. Most insurance companies want to drop such coverage as well, but state law prevented many from doing so.

Insurance Services Office Inc., which designs insurance policy wording, crafted language that state regulators could use to allow insurers to exclude terrorism coverage from their commercial lines. Personal lines, such as homeowners and auto coverage, are not affected.

The language was subsequently approved by the National Assn. of Insurance Commissioners, which represents state regulators.

Illinois, Maryland, Massachusetts, New Jersey and Arizona are among the 20 states that have allowed insurers to drop terrorism coverage for commercial property insurance and other commercial lines. Other states have either taken no action or said they would wait to see if Congress comes up with a solution.

The U.S. Senate is expected to take up the issue again this month, and California regulators hope legislation can be crafted that makes state action unnecessary, Edelen said.

Regulators and insurance brokers said California’s refusal to adopt the exclusion has not disrupted insurance markets here, although prices for commercial property insurance in general, and terrorism coverage in particular, have risen sharply. Some businesses are choosing to do without terrorism coverage rather than pay the higher costs, brokers said.

“There may very well be an impact down the line” if Congress fails to act and California doesn’t adopt the exclusions, said Stephen Young, general counsel for the Insurance Brokers and Agents of the West, a trade group.