02-03: Terrorism Exclusions in Commercial Lines & Personal Lines

To:           All Property and Casualty Insurers

From:      Scott B. Lakin, Director Missouri Department of Insurance

Re:          Terrorism Exclusions in Commercial Lines and Personal Lines

Date:       March 14, 2002

* This bulletin was repealed by 08-05

Since late last year, the Missouri Department of Insurance (the Department) has been working with its fellow state insurance departments through the NAIC to develop an approach to handling terrorism exclusions. Consensus has been reached among the NAIC membership with regard to the use of such exclusions in both commercial lines and personal lines of property and casualty insurance. The Department supported the position taken by the NAIC and has been working to implement that position as we review filings made with our office. This bulletin is intended to outline, for the property and casualty insurance industry, how we will be processing terrorism exclusion filings for both commercial lines and personal lines insurance. Please note that the Department is in no way endorsing or advocating the use of terrorism exclusions by issuing this bulletin.


The Department joins the NAIC in recognizing that insurers feel the need to limit their potential financial exposure in the wake of the events of September 11th. The Department also recognizes that Missouri businesses feel the need to be adequately insured in order to allow them to continue to perform their vital economic functions. The NAIC and its state insurance department members worked with Congress toward the creation of a federal "backstop" that would address the insurance industry's concerns and allow the continued availability of terrorism coverage to American businesses. Unfortunately, Congress was not able to enact such a backstop prior to the year-end renewal date for many business policies. As an interim measure pending Congressional action, the NAIC worked with the Insurance Services Office, Inc. (ISO) to develop a limited terrorism exclusion that would provide at least a modicum of coverage for losses due to terrorism.

The Department is in agreement with this approach. If a commercial lines insurer elects to use a terrorism exclusion in its policies, such an exclusion should provide at a minimum the amount of coverage afforded by the limited exclusions developed for commercial lines by the NAIC and ISO. Accordingly, the Department will raise no objections to commercial property and casualty exclusions relating to terrorism that are either (a) identical in substance to the following ISO commercial lines endorsements or (b) more advantageous to the policyholder than the following ISO commercial lines endorsements:

In an unprecedented move in recognition of the seriousness of the situation, ISO has indicated that it will permit the use of its copyrighted language by any insurer, including one that is not a current licensee of ISO for policy forms. Insurers that are current licensees of ISO for policy forms can use the new language pursuant to their current ISO agreements. If you are properly affiliated with ISO, and have given them authorization to file on your behalf, no further action is needed on your part.

Any insurer that does not have a license agreement in effect with ISO for policy forms is required to execute a short, limited license agreement that authorizes the use of new language. ISO has indicated that there will be no fee for this limited license. You may contact ISO's Customer Service Department directly for more information at 1-800-888-4ISO (4476) using option 2. You may also contact ISO at info@ISO.com. You will be responsible for assuring compliance with this state's filing requirements.

Any company filing a commercial lines form with a terrorism exclusion that does not meet the standard described above will be contacted by the Department's staff, advised that their filing does not conform to the accepted standard, and asked to withdraw the nonconforming filing and resubmit a conforming filing. If a company refuses or fails to act on the request, the Department will seek to take corrective action pursuant to ' 379.321.6(3), RSMo Supp 2001.

As indicated above, this bulletin does not constitute a recommendation by the Department that commercial property and casualty policies include terrorism exclusions. Insurers should individually assess the need for any such exclusion based on sound underwriting practices, financial solvency considerations and market conditions. Insurers should be aware, however, that continued acceptance of terrorism exclusions in commercial lines policies as outlined in this bulletin is contingent upon the absence of a federal backstop. Consistent with the NAIC's December 2001 resolution, the Department will reevaluate its position if the President signs into law a federal backstop to address insurance losses attributed to acts of terrorism.

(Note: Based on the questions already received by the Department on this matter, it is important to note a major exception, recognized by both regulators and the industry, to the above-stated consensus on commercial lines terrorism exclusions, that being in the area of workers' compensation insurance. As is the case in most states, the laws in Missouri do not exempt employers from their statutory responsibility to cover their workers' injuries just because those injuries have been caused by acts of terrorism. Because an act of terrorism would not absolve an employer's liability under the workers' compensation law for injury or death while an employee is on the job, the workers' compensation insurance provided to that employer cannot exclude the risk of terrorism from the coverage provided. As a result, terrorism exclusions for workers' compensation insurance will not be approved in Missouri.)


The situation with regard to terrorism exclusions in personal lines of property and casualty insurance is different. The Department joins the NAIC in its belief "that terrorism exclusions are generally not necessary in personal lines property and casualty products to maintain a competitive market." Accordingly, the Department will generally not accept a personal lines terrorism exclusion except in very limited instances involving unique company circumstances.

Any company filing a personal lines form with a terrorism exclusion will be contacted by Department staff, advised of the unacceptability of the filing, and asked to either withdraw the filing or provide sufficient evidence to demonstrate that (a) the company is unable to secure necessary reinsurance without a terrorism exclusion and (b) the inability to exclude the risk of terrorism will adversely affect the company's solvency. If a company refuses or fails to act on the request, the Department will initiate proceedings to disapprove the filing.

Please contact the Department's Property and Casualty Section at (573) 751-3365 should you have any questions regarding this bulletin.