To Exclude or Not to Exclude? Terrorism's Impact on Homeowners Insurance
Robert W. Cockerham1 |
John F. Mahon2 |
I. Introduction
Few “would consider the insurance industry to be an important [player] in the fight against terrorism.”3 “The industry possesses no police power to counter terrorism; it makes no claims of general expertise in the field of study; and it seldom discusses a terrorist event until after the fact.”4 Yet one should not lose sight of the fact that the insurance industry has a large role to play in the war on terrorism.5
The insurance industry employs “experts in the fields of risk control, disaster preparedness, and claims payment.”6 Disaster preparedness experts help allocate resources to deal with a catastrophic event.7 Claims rep-resentatives “measure damage[s] and make payments to insureds” according to the terms of insurance contracts.8 Rapid payment of claims can help victims return to their normal lives and continue to be productive members of the community after a loss.9
Many have questioned whether insurers should cover losses caused by terrorists. “Modern day weapons of mass destruction are sufficiently powerful to create damages so destructive that such damages might be analogous to destruction caused by war.”10 Damages from a terrorist attack have the potential to be far-reaching over an extended period of time. Most policies contain war exclusions because many insurers cannot underwrite for the exposure to the potentially monstrous damages that can be caused by war.11 Many insurance contracts now have similar exclusions applicable to acts of terrorism. This paper will examine the history of the war exclusion in a typical insurance contract and the emergence of a new exclusion for acts of terrorism. We will also explore the potential effects a future terrorist attack may have on the insurance industry with a particular emphasis on personal lines – specifically, homeowners insurance. This will include a discussion of several applicable policy exclusions and the question of whether stigma damages should be available for victims of a terrorist attack.
II. The War Exclusion
“In August 1996, [Osama] bin Ladin publicly issued a ‘Declaration of War’ against the United States.”12 “On September 12, 2001, President George W. Bush declared that the terrorist attacks in New York and Washington were ‘acts of war,’” and vowed that the United States “will use all our resources to conquer this enemy.”13 “Members of Congress reconvened on September 12th and virtually all agreed with President Bush’s assertion that the country was faced with ‘acts of war.’”14 However, the United States is not technically at war today despite the constant presence of public rhetoric concerning the “war on terror.” Only Congress has the authority to declare war and, thus far, it has not done so.15
After 9/11, insurance carriers made assurances “that they would not invoke [a] ‘war’ exclusion to deny coverage” for losses caused by the horrific events of that fateful day.16 In fact, the standard war exclusion does not specifically include acts of terrorism.17 The following is an example of a standard war exclusion clause.
SECTION 1 – EXCLUSIONS
A. We do not insure for loss caused directly or indirectly by any of the following. Such loss is excluded regardless of any other cause or event contributing concurrently or in any sequence to the loss. These exclusions apply whether or not the loss event results in widespread damage or affects a substantial area.
* * *
6. War
War includes the following and any consequence of any of the following:
a. Undeclared war, civil war, insurrection, rebellion or revolution;
b. Warlike act by a military force or military personnel; or
c. Destruction, seizure or use for a military purpose.
Discharge of a nuclear weapon will be deemed a warlike act even if accidental. 18
The few cases that have dealt with this issue have declined to apply the war exclusion to exclude coverage for damage caused by acts of terrorism.19 Congress’ position is clear on this issue: “Any attempt to evade coverage obligations by either primary insurers or reinsurers based on such legal maneuvering would not only be unsupportable and unpatriotic — it would tear at the faith of the American people in the insurance industry.”20
More than “14,000 international terrorist attacks have taken place worldwide since 1968,” but the United States had not been the target of a serious terrorist act before the 1993 bombing of the World Trade Center. 21 In the last 20 years, however, the incidence of domestic terrorism has risen – “examples include the bombing of the Oklahoma City Federal Building in April 1995 and the bombing of Centennial Olympic Park in Atlanta, Georgia during the 1996 Olympic Games.”22
“War is defined as a ‘hostile contention by means of armed forces, carried on between nations, states or rulers, or between citizens in the same nation or state.’”23 “Terrorism, on the other hand, is defined as ‘the unlawful use of force and violence against persons or property to intimidate or coerce a government, the civilian population, or any segment thereof, in furtherance of political or social objectives.’”24 The standard war exclusion precludes coverage for losses caused by war, warlike action, insurrection or similar unrest, but not for terrorism.25
A. Early Case Law Applying the War Exclusion
Massachusetts courts addressed the war exclusion in Stankus v. New York Life Ins. Co.26 and Gagliormella v. Metropolitan Life Ins. Co.27 In Stankus, Seaman Anthony Stankus was killed when his ship, the U.S.S. Reuben James, was sunk by the Germans in October 1941.28 His family sought to recover an accidental death benefit from his life insurance policy, but the policy precluded recovery if death resulted “from war or any act incident thereto.”29 Even though there was no formal declaration of war, the Supreme Judicial Court of Massachusetts held that the policy’s war exclusion still applied.30 The court’s opinion cited President Roosevelt’s declarations in 1939 and 1940 that a state of war existed at that time and the fact that the Reuben James was torpedoed while on operations in support of Great Britain’s war effort.31
In Gagliormella, Anthony Gagliormella, a private in the U.S. Marine Corps, was killed in action in Korea.32 As in Stankus, Private Gagliormella’s family sought to recover an accidental death benefit under his two life insurance policies.33 The policies also contained war exclusions. The family argued that because the U.S. Congress had not formally declared war on North Korea, the war exclusion should not apply. The Massachusetts court disagreed, finding that the Korean conflict was in fact a war for purposes of the exclusionary language in the policies.34
B. Acts of Terrorism and the War Exclusion
1. Pan American World Airways, Inc. v. Aetna Casualty & Surety Co.
The leading case on war-risk exclusions under all-risk policies is Pan American World Airways v. Aetna Casualty & Surety.35 The Popular Front for the Liberation of Palestine (PFLP) hijacked Pan Am Flight 083 in the sky over London on September 6, 1970 and flew the aircraft to Egypt.36 The PFLP destroyed the plane in Cairo shortly after landing.37
Pan American purchased war risk coverage from the United States government to cover losses specifically excluded by its all risk coverage.38 The war risk policy issued by the United States government “covered loss or damage ‘resulting from’ the following perils: ‘War, invasion, acts of foreign enemies, hostilities (whether war be declared or not), civil war, rebellion, revolution or insurrection, military or usurped power
. . . by any government or public or local authority or by any independent unit or individual engaged in irregular warfare.’”39
The two insurers fought over which policy should provide coverage for the loss.40 The all-risk insurers hoped to avoid coverage by characterizing the hijacking as a warlike act, thus triggering the war-risk exclusion. They introduced evidence that the PFLP operated as a quasi-government in parts of Jordan independent of King Hussein’s authority and, therefore, constituted a “military . . . or usurped power.”41 They also introduced evidence that the “PFLP intended ‘to overthrow King Hussein’” in order “to establish that the loss of the [aircraft] was caused by an ‘insurrection.’”42 The all-risk insurers also offered evidence that the PFLP was widely known to engage in “guerilla warfare,” and the loss was the result of a guerilla war between the PFLP and Israel and the United States.43 “War can exist between quasi-sovereign entities and undeclared de facto wars may exist between sovereign states.”44
The war risk insurers attempted to characterize the hijacking as being a mere terrorist act rather than a byproduct of an all-out war. They argued that the hijacking over London was not linked in any way to the conflict taking place in the Middle East.45 The district court granted judgment for Pan American against the all-risk insurers.46 The trial court concluded that the PFLP was a small isolated group with its own objectives whose activities did not constitute acts of war within the war exclusion.47 On appeal, the circuit court affirmed the trial court’s decision.48
The Pan Am trial court decided that the long history of unrest in the Middle East did not cause the hijacking and subsequent destruction of the aircraft.49 The PFLP was not “a military or usurped power” because it did not “control a substantial territory with trappings of state sufficient to constitute a ‘de facto government[,]’” and therefore it did not exercise the force of even a quasi-governmental authority.50 The loss of the plane itself was not the result of any war between recognized states.51 The court in Pan Am noted that, on the date of the hijacking, “there was no official ‘war’ in the Middle East,” and a cease fire was being observed at that time.52
However, the Pan Am court determined that guerilla groups must display some indicia of sovereignty before their clandestine actions can be considered acts of war.53 “The hijackers did not wear insignia. They did not openly carry arms. Their acts had criminal rather than military overtones. They were the agents of a radical political group, rather than a sovereign government.”54 The court found that rather than trying to overthrow King Hussein of Jordan, the PFLP was actually fighting for its own survival.55
2. Holiday Inns v. Aetna Insurance Co.
A few cases involving war exclusions have arisen since Pan Am and have generally followed the same reasoning.56 In Holiday Inns v. Aetna Insurance Co., Holiday Inns brought a declaratory judgment action to recover losses from damage to a Holiday Inn in Beirut, Lebanon, from October 1975 to April 1976.57 Aetna’s all-risk policy excluded coverage for: “War, invasion, act of foreign enemy, hostilities or warlike operations (whether war be declared or not), civil war, mutiny, insurrection, revolution, conspiracy, military or usurped power.”58 Aetna argued “that the damage to the Holiday Inn in Beirut was caused by… insurrection, civil war, and war.”59
Aetna’s position was that the conflict in Lebanon involved quasi-sovereign states. These entities were (1) Syria, (2) the Palestinian Liberation Organization (PLO), and (3) the Lebanese rightists who considered themselves defenders of the Lebanese state.60 “[T]he term ‘war’ had been defined almost always as the employment of force between governments or entities essentially like governments, at least de facto.”61
Although Syria sent its military into Lebanon, the purpose was not for war but for a “peacekeeping” mission, specifically directed toward preserving the existing Lebanese government.62 Aetna argued that because Syrian forces ultimately came into combat with Palestinians, a war existed between Syria and the PLO, a quasi-sovereign entity.63 The court in Holiday Inns rejected this argument because the PLO had not demonstrated the required attributes of sovereignty, and it received permission from the Lebanese government to maintain a presence in that country.64
Aetna attempted to prove that the damage to the hotel was the result of an ‘“insurrection,’ ‘civil war,’ or ‘war,’” as defined by the insurance policy.65 However, the court concluded that the Holiday Inn was actually damaged by a series of “civil commotions” rather than a war. Therefore, the court found coverage for the loss.66 The Holiday Inns decision, along with Pan Am, demonstrates the strong desire of the courts to find coverage for damages resulting from any act of terrorism.
3. Terrorist Attacks on September 11, 2001
“Despite the proclamations of national leaders equating the acts of September 11 with acts of war, to date the United States has generally treated persons accused of terrorism as criminal suspects rather than prisoners of war.”67 “[T]he perpetrators of the first attack on the World Trade Center” were treated as criminals, not soldiers.68 “Timothy McVeigh’s attack on the Alfred P. Murrah Federal Building in Oklahoma City, Oklahoma” serves as another example of this trend.69 Richard Reid was recently convicted “for the attempted destruction of an American Airlines flight over the Atlantic Ocean.”70 “Chief District Court Judge William Young told Reid: ‘You are not an enemy combatant. You are a terrorist. You are not a soldier in any war. You are a terrorist.’”71 The only notable exception to the United States treating terror suspects as criminals rather than prisoners of war is Jose Padilla, the American citizen who is suspected of conspiring with members of Al-Qaida to detonate a “dirty bomb” and has been labeled an “enemy combatant” and detained for more than two years without being charged.72 “Even John Walker Lindh, who was captured while fighting [with the Taliban] in Afghanistan, was subjected to the normal criminal process.”73
One commentator has described the “war on terrorism” as being “more akin to the ‘war on drugs’ and the ‘war on poverty.’”74
On one hand, it is easy to imagine personal injury, including loss of life and property damage, arising from drug interdiction operations or in providing broad-based services to pursue the eradication of poverty. However, it is difficult to imagine that a court would find that war-risk exclusions were triggered by the activities pursued in these efforts.75
In other words, the issue is one of semantics. The mere use of the word “war” does not itself trigger the war exclusion in an insurance contract.
Although “the Taliban controlled ninety percent of Afghanistan” on September 11, 2001, only Pakistan and Saudi Arabia officially recognized the Taliban on that day. Therefore, Al-Qaida did not acquire “de facto government status through its affiliation with the Taliban.”76 Just as in Pan Am, “the loss of the aircraft on September 11 [was not] proximately caused by any ‘war’ being waged by or between recognized states.”77 Al-Qaida is best described as a guerilla group rather than a sovereign entity.78
Just as “the court in Pan Am concluded that the loss of the Boeing 747 was not caused by a [warlike] act,” “the September 11 hijackings do not constitute a warlike act” for insurance purposes.79 The Al-Qaida hijackers did not wear insignia or openly carry arms because they were the agents of a radical political group, rather than a sovereign government.80 There is simply not enough evidence that “Al-Qaida controlled a substantial territory within Afghanistan” that would make them a “de facto government.”81
III. The Terrorism Exclusion
Before the attacks of September 11, 2001, terrorism in the United States was not nearly as widely publicized in the media as it is today. “Accordingly, insurers gave little thought to coverage for terrorism,” and “[f]ew policies contained express terrorism exclusions.”82 Nearly 3,000 people died in the September 11 attack, and losses to property are estimated between $35 billion and $75 billion.83 Although insurers have not denied coverage under existing policies based on the war-risk exclusion discussed in detail above,84 the insurance industry quickly added “an express terrorism exclusion to new” and renewed policies after the events of September 11, 2001.85
Insurance Services Office, Inc. (“ISO”) drafted such an exclusion, which defines a terrorist act as follows:
[t]errorism means activities against persons, organizations or property of any nature:
(1) that involve the following or preparation for the following:
• use or threat of force or violence; or
• commission or threat of a dangerous act; or
• commission or threat of an act that interferes with or disrupts an electronic, communication, information or mechanical system; and
(2) when one or both of the following applies:
• the effect is to intimidate or coerce a government or the civilian population or any segment thereof, or to disrupt any segment of the economy; or
• it appears that the intent is to intimidate or coerce a government, or to further political, ideological, religious, social or economic objectives or to express (or express opposition to) a philosophy or ideology.86
“ISO subsequently…establish[ed] a $25 million damage threshold for the exclusion to take effect.”87 Terrorist attacks using nuclear, chemical, or biological materials are entirely excluded from coverage.88 “By February 22, 2002, 45 states, plus the District of Columbia and Puerto Rico, had approved the new terrorism exclusion.”89
A. The Terrorism Risk Insurance Act
In the wake of the terrorist attacks of September 11, 2001, many insurance companies have decided not to provide terrorism risk insurance.90 “[T]he federal government sought to reduce the economic risks and consequences associated with terrorism” for the insurance industry.91 Thus, Congress passed a bill that allows the federal government to share the risk of loss from future terrorist attacks.92 “As a result, on November 26, 2002, President Bush signed into law the Terrorism Risk Insurance Act of 2002 (TRIA). The act is intended to create a terrorism insurance market that will serve the needs of the insured while managing the risk to the insurance industry.”93 The act lays out certain deductible and coinsurance features and provides a federal backstop for certain acts of terrorism through a program whereby the federal government “will share the risk of loss from future terrorist attacks with the insurance industry.”94 However, the act “is limited to insured commercial property and casualty [physical] losses arising from acts of terrorism” while “private policies, such as home or auto, are excluded.”95
The TRIA essentially voids all “terrorism exclusions and requires all property and casualty insurers to offer terrorism insurance” through December 31, 2005.96 However, the TRIA covers only acts of foreign terrorism, which does not include domestic acts such as the bombing of the Oklahoma City federal building.97 In order for an incident to be considered a terrorist act, the following criteria must be met:
(1) The commission of “a violent act or an act that is dangerous to…human life[,]… property[,] or … infrastructure;”
(2) The act must “have resulted in damage”
(a) “within the United States,”
(b) “outside of the United States in case[s]” of aircraft or vessels, or
(c) to a United States diplomatic mission; and
(3) The act must “have been committed by an individual or individuals acting on behalf of any foreign person or foreign interest, as part of an effort to coerce the civilian population of the United States or to influence the policy or affect the conduct of the United States government by coercion.”98
“Losses from the event must exceed $5 million,” and “the insurer must pay a deductible.”99 Finally, the “TRIA makes a federal cause of action the exclusive remedy for claims arising out of a single act of terrorism. The law of the state in which the act of terrorism occurred will govern the substantive law of the case[,]” and punitive damages are not available.100
B. The TRIA Extension Act
The federal terrorism insurance backstop provided by the TRIA had a “hard ending” set for December 31, 2005. In early 2005, members of Congress introduced bills to extend the TRIA for fear of the potentially adverse effect on the economy that a sudden removal of the TRIA protections would cause.101 After numerous “studies and hearings, Congress passed the Terrorism Risk Insurance Act of 2005 (the TRIA Extension Act) in mid-December, and President Bush signed the new act into law on Dec. 22, 2005, thereby extending the TRIA through Dec. 31, 2007,” with significant changes in the direction of less government involvement.102 For example, the TRIA Extension Act requires insurance companies to pay “deductibles of 17.5% for 2006 and 20 percent for 2007” in the event of a terrorist attack, which is a significant increase upon the 10 percent from 2004 and 15 percent from 2005.103 In addition, the TRIA Extension Act increases the “trigger for government involvement” in any terrorist act causing property and casualty losses from the $5 million aggregate set forth in the TRIA to an aggregate of $50 million “for terrorist acts occurring in 2006 and to at least $100 million in aggregate damage for terrorist acts occurring in 2007.”104 Therefore, the insurance industry will have to bear the entire burden of a terrorist attack on a relatively smaller scale.105
C. The Future of the TRIA
“Insurance Services Office, Inc. (ISO)…asked state regulators to approve conditional commercial policy contract language to address terrorism coverage should Congress” decide to “extend, modify or renew the federal backstop.”106
The endorsements provide participating ISO insurers several options, including:
• a total exclusion of losses from acts of terrorism;
• an exclusion for losses resulting from acts involving nuclear, biological or chemical terrorism; and
• a means to cover terrorism losses not otherwise excluded up to a sublimit (a lesser amount than the full policy limit).107
The TRIA Extension Act does not address these issues and in fact only provides for a greater burden to be shifted to the insurance industry in the event of a terrorist attack.
Alabama, Alaska, Arkansas, Connecticut, the District of Columbia, Indiana, Iowa, Nebraska, Nevada, New Hampshire, New Jersey, North Carolina, Ohio, Oregon, Rhode Island and Utah have stated their intent to act in a manner consistent with a National Association of Insurance Commissioners (NAIC) recommendation granting conditional approval to commercial lines that exclude coverage for terrorist acts.108 Other states have approved terrorism exclusions, but only while placing their own express conditions upon the exclusions.109 However, the passage of the TRIA Extension Act essentially invalidates any such exclusions in the event of a terrorist attack.
IV. Terrorism’s Impact on Homeowners Insurance
While the TRIA and the TRIA Extension Act only apply to commercial insurance and do not address the use of terrorism exclusions in personal lines of property and casualty insurance, small personal lines insurers have still been severely impacted by the events of September 11.110 Capacity in the reinsurance market has dried up, and many small companies that depend on reinsurance are facing an increase in rates.111 The increased cost of reinsurance has brought about a rise in premiums for homeowners insurance policies.112 However, major insurance companies, including State Farm and Allstate, have not excluded terrorism from coverage in homeowners, auto or other personal lines of insurance.113
In the absence of federal regulation of personal lines of insurance, policy-making has been left to the states. In 2002, members of the NAIC met to discuss how to handle filings for terrorism exclusions on personal lines of insurance and made the following statement:
It is the sense of the NAIC membership that terrorism exclusions are generally not necessary in personal lines property and casualty products to maintain a competitive market, and they may violate state law. However, we recognize that state laws vary in their authority and discretion. Further, there may be unique company circumstances that need to be considered in individual cases. We expect these cases to be limited.114
One survey found that terrorism exclusions for traditional personal insurance coverage are banned in Alabama, Florida, Iowa, Kentucky, Louisiana, Massachusetts, Mississippi, Montana, New Jersey, New York, North Dakota, Ohio, Oregon, Pennsylvania and Texas.115 In addition, Arizona, Colorado and Michigan do not have such a ban, but insurers in those states do not seem to be including any exclusions for terrorism in their policies.116
The Missouri Department of Insurance (MDI) “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 the [MDI] staff” and “will be asked to withdraw the filing unless the company can provide sufficient evidence to demonstrate (a) that the company is unable to secure necessary reinsurance without a terrorism exclusion, and (b) that the inability to exclude the risk of terrorism will adversely affect the company’s solvency. Should a company refuse or fail to act on this request, the Department will initiate proceedings to disapprove the filing.”117
A. Power Failure
A terrorist attack on a utility service has the potential to affect literally thousands of homes in the surrounding area with a loss of power. However, property insurance policies insure against risks of direct physical loss or damage to property insured under the policy.
SECTION I – PERILS INSURED AGAINST
“A. Coverage A – Dwelling And Coverage B – Other Structures
1. We insure against risk of direct physical loss to property described in Coverages A and B.”118
The direct physical loss or damage requirement means that there must be some physical change to the property’s condition or structure; economic loss alone is not enough.
The following cases illustrate this point. For example, in Pirie v. Federal Insurance Co., there was no coverage for the removal of lead paint from a 154-year-old home because “an internal defect in a building (e.g., bad title, bad paint, etc.) does not rise to the level of a physical loss.”119 Similarly, in Glens Falls Insurance Co. v. Covert, there was no coverage for safety stabilizers that fell to the floor of an insured’s auto supply store where there was no evidence of any physical damage to them.120 Courts have also held “that the loss of electronically stored data alone does not constitute physical loss or damage.”121 In America Online, Inc. v. St. Paul Mercury Insurance Co., a court used “the plain meaning of the word ‘physical’” in determining that “the loss of computer use” was not “physical damage” within the meaning of the insurance policy.122
In the following food spoilage cases, the courts found coverage because a direct physical loss resulted from a power failure. In Lipshultz v. General Insurance Co. of America, the court found coverage where a strong windstorm caused a two-day power outage to the insured’s grocery store, and food spoiled.123 The wind caused a break in the power company’s supply lines located about one-half mile from the insured’s store. The policy covered direct loss by windstorm, and the court held that the spoilage loss was a covered loss.124 Similarly, in Fred Meyer, Inc. v. Central Mutual Insurance Co., a windstorm knocked out power lines supplying the insured’s refrigeration facilities, spoiling food stored therein.125 Using the analysis in Lipshultz, the court found that the windstorm caused a direct loss despite the fact that the winds did not physically strike the insured’s property.126
“In sum, and as a threshold matter, there must first be direct physical loss or damage to the insured’s property before there can be any coverage for losses caused by a power outage. In other words, the power outage must cause some physical change to the insured property . . . .”127
1. Exclusion for Power Failure
Coverage still may not exist even in situations where a direct physical loss results from a power failure because many policies specifically exclude coverage for losses caused by power outages resulting from off-premises damage, except for a covered loss.
SECTION I – EXCLUSIONS
A. We do not insure for loss caused directly or indirectly by any of the following. Such loss is excluded regardless of any other cause or event contributing concurrently or in any sequence to the loss. These exclusions apply whether or not the loss event results in widespread damage or affects a substantial area.
* * *
4. Power Failure
Power Failure means the failure of power or other utility service if the failure takes place off the “residence premises”. But if the failure results in a loss, from a Peril Insured Against on the “residence premises”, we will pay for the loss caused by that peril.128
This exclusion applies to property damage caused by a loss of utilities originating off-premises and operates regardless of the cause of the power failure.129 Thus, if a terrorist attack away from the insured premises causes a power failure at the premises, the consequential property damage is not covered.130 The policies in the food spoilage cases discussed supra did not have an exclusion for power failure.131 However, if the power failure causes a covered peril – fire, for example – there may be coverage for any fire damage.132
B. Freeze Damage
Another potential outcome of a terrorist attack on a public utility is the cessation of natural gas flow and a resulting freeze during the winter. The failure to maintain heat in a building can result in significant damage to homes and their plumbing and water systems. Mass claims would be sure to follow a power failure from a terrorist act. A typical homeowners insurance policy contains an exclusion for freeze damage.
SECTION I – PERILS INSURED AGAINST
A. Coverage A – Dwelling And Coverage B – Other Structures
* * *
2. We do not insure, however, for loss:
* * *
c. Caused by:
(1) Freezing of a plumbing, heating, air conditioning or automatic fire protective sprinkler system or of a household appliance, or by discharge, leakage or overflow from within the system or appliance caused by freezing. This provision does not apply if you have used reasonable care to:
(a) Maintain heat in the building; or
(b) Shut off the water supply and drain all systems and appliances of water.133
This exclusion excludes losses due to frozen pipes or other household appliances. However, determining what constitutes “reasonable care” on the part of the insured to maintain heat, shut off the water supply and drain water is not so clear.
This question of reasonable care is ultimately one for the jury, with the burden of proving the exclusion on the insurer.134 While the application of the term “reasonable care” to specific factual circumstances may at times be difficult, the meaning of that term is well established. “The duty to use ‘reasonable care’ . . . is the care which the ordinary prudent person under the circumstances would exercise.”135 Reasonable care depends upon the circumstances involved. The amount of care required is proportionate to the potential dangers of the situation.136 The standard of reasonable care is an objective one, not subjective.137
C. “Stigma” Damages
There is a recent trend for owners of contaminated property bringing environmental contamination claims alleging that their property is less valuable on the market even after it has been cleaned up, and that they are entitled to so-called stigma damages.138 Some courts have upheld stigma damages for a claimant’s proximity to the contamination.139 However, many courts have refused to allow such recovery because the economic loss doctrine precludes recovery for economic losses that do not arise from an actual, physical injury to the plaintiff’s person or property.140 “According to the Restatement (2nd) of Torts…, an element of a trespass case is proof that the property has been physically invaded, and an element of a nuisance case is proof of ‘a real and appreciable invasion of the property owner’s use or enjoyment of his land.’”141 “[A] proximity claim is not based on any…interference with the use of the plaintiff’s property” but is “based on negative publicity and claimed third-party fears, both of which may be unfounded. It is therefore ‘a loss without an injury in the legal sense.’”142
The market value of homes in close proximity to an area that falls victim to a terrorist attack may decrease as a result of negative publicity and third-party fears of a future terrorist attack. However, such a loss in property value would not be covered under a traditional homeowners insurance policy without a direct physical loss to the property.
SECTION I – PERILS INSURED AGAINST
A. Coverage A – Dwelling And Coverage B – Other Structures
1. We insure against risk of direct physical loss to property described in Coverages A and B.143
* * *
“The 3rd U.S. Circuit Court of Appeals has established a three-factor test for residual contamination sigma [sic] damages. This test states”: (1) The loss “must have caused some (temporary) physical damage to the property[;]” (2) “[R]epair of this damage will not restore the value of the property to its prior level[;]” and (3) “[T]here is some ongoing risk to [the] land.”144
Stigma damages have not yet been addressed by most appellate courts and, therefore, the law in this area is still very much unsettled.145 Therefore, a homeowner with direct physical damage resulting from a terrorist attack may be successful in a claim for stigma damages under a homeowners insurance policy, but a homeowner in the surrounding neighborhood experiencing a decline in the market value of the home should be unsuccessful in bringing a similar claim. Insurance companies should take a proactive stance on this issue and consider excluding or limiting coverage for stigma damage to avoid potential claims and resulting litigation in this area.
V. Conclusion
No matter how unpleasant it may be, it is imperative that Americans discuss the possibility of another terrorist attack on our soil so we can be more prepared to deal with the consequences than we were on September 11, 2001. While it is obvious that an efficient military, police force, fire department and other emergency units are necessary, an efficient insurance industry that is well-equipped to handle such a catastrophic event is instrumental as well. The potential for damage to homes resulting from a terrorist attack is real. That is why it is important to understand post-September 11 insurance law and its impact not only on commercial lines but on personal lines of insurance as well. The law in this field is still very young and unsettled, which is why it is so important for the insurance industry to foster discourse and the development of new ideas for how to handle some the problems addressed in this article.
Footnotes
1 Robert W. Cockerham is a principal in the law firm of Brown & James, P.C., located in St. Louis. He received his J.D. from Saint Louis University School of Law in 1984, his M.A. from the University of Missouri in 1982, and his B.F.A. from Webster College in 1980. This paper was written as part of a seminar presentation entitled “Explosions: Homeowners with a Bang!” at the Property Loss Research Bureau’s Large Loss Conference at the Camelback Inn Spa & Resort in Scottsdale, Arizona on November 30 – December 1, 2004.
2 John F. Mahon is an associate with the law firm of Williams Venker & Sanders LLC located in St. Louis. He received his J.D. from Saint Louis University School of Law (2004) and his B.A. from Boston College in 2001. The authors extend a special thanks to M. Brendhan Flynn for his diligent editing and cite verification work on this article.
3 Gene Rappe, The Role of Insurance in the Battle Against Terrorism, 12 DePaul Bus. L.J. 351, 353 (2000).
4 Id.
5 Id.
6 Id.
7 Id. at 354.
8 Id.
9 Id.
10 Id. at 353-54.
11 Annemarie Sedore, War Risk Exclusion in the 21st Century: Applying War Risk Exclusions to the Attacks of Septermber 11th, 82 B.U. L. Rev. 1041, 1043 (2002).
12 Steven Plitt, The Changing Face of Global Terrorism and a New Look of War: An Analysis of the War-Risk Exclusion in the Wake of the Anniversary of September 11, and Beyond, 39 Willamette L. Rev. 31, 75 (2003).
13 James G. Rizzo, Tragedy’s Aftermath: The Impact of 9/11 on the Insurance Industry, 46 Boston B.J. 10, 11 (Feb. 2002) (citing The Washington Post, September 13, 2001.)
14 Id.
15 Id. (citing U.S. Const. art. I, § 8, cl. 11).
16 Id. (citing ‘Act of War’ Exclusion Doesn’t Apply to Attacks, Insurers Say, L.A. Times, Sept. 17, 2001 at Business 3).
17 “[I]t seems clear that the attacks in New York, on the Pentagon, or on the plane that crashed in Pennsylvania, do not constitute ‘acts of war’ as contemplated by the language of these [insurance policy] exclusions.” Richard Allyn & Heather McNeff. The Fall and Rise of Terrorism Insurance Coverage Since September 11, 2001, 29 Wm. Mitchell L. Rev. 821, 827 (2003) (citing Commissioner James C. Bernstein, Minnesota Commerce Department Insurance Division, September 24, 2001).
18 See standard HO 00 03 policy.
19 Rizzo at 12 (citing Pan Am. World Airways, Inc. v. Aetna Cas. & Sur. Co., 505 F.2d 989 (2d Cir. 1974) (deciding not to “apply the war risk exclusion, stating that war refers to ‘hostilities carried on by entities that constitute governments at least de facto in character’.”); Holiday Inns, Inc. v. Aetna Ins. Co., 571 F. Supp. 1460 (S.D.N.Y. 1983) (holding that “the war risk exclusion did not apply to the Palestinian Liberation Organization because it was not a sufficiently sovereign power.”).
20 Id. (citing Letter from the House Committee on Financial Services to the National Association of Insurance Commissioners 1 (Sept. 17, 2001)).
21 Id.
22 Id.
23 Id. (citing Black’s Law Dictionary 1093 (6th ed. 1991)).
24 Rizzo at 12 (citing 28 C.F.R. § 0.85 (2001)).
25 Id.
26 44 N.E.2d 687 (Mass. 1942).
27 122 F. Supp. 246 (D. Mass. 1954).
28 Stankus, 44 N.E.2d 687, 688 (1942).
29 Id.
30 Id. at 690.
31 Id.
32 Gagliormella,122 F. Supp. 246, 247 (D. Mass. 1954).
33 Id.
34 Id. at 250.
35 505 F.2d 989 (2d Cir.1974) (holding that the loss of an airplane hijacked by a terrorist group was not an act of war and therefore the war-risk exclusion did not apply). More recent policy forms contain even broader exclusionary language, and courts have enforced this language. Plitt, note 13 at 63 fn. 80 (citing Smith v. Union Auto Indem. Co., 752 N.E.2d 1261 (Ill. App. Ct. 2001); Assurance Co. of Am., Inc. v. J-Mar, Inc., 38 F. Supp. 349 (D. N.J. 1999)).
36 Id. at 993.
37 Id.
38 Id.
39 Id. at 995.
40 Plitt at 63.
41 Pan Am.,505 F.2d at 996.
42 Id.
43 Id.
44 Plitt at 67.
45 Pan Am., 505 F.2d at 997.
46 Id.
47 Id. at 1023-29.
48 Id. at 1022.
49 Id. at 1007.
50 Id. at 1009.
51 Plitt at 67.
52 Pan Am, 505 F.2d at 1013.
53 Id.
54 Id.
55 Id.
56 Plitt at 69 n. 281 (citing Younis Bros. & Co. v. Cigna Worldwide Ins. Co., 899 F. Supp. 1385 (E.D. Pa. 1995), aff’d 91 F.3d 13 (3d Cir. 1996); Holiday Inns, Inc. v. Aetna Ins. Co., 571 F. Supp. 1460 (S.D. N.Y. 1983)).
57 571 F. Supp. 1460 (S.D. N.Y. 1983).
58 Id. at 1463.
59 Id.
60 Id. at 1501.
61 Id.
62 Id.
63 Id. at 1502.
64 Id.
65 Id. at 1503.
66 Id.
67 Jason Zorn, Compensation in the Event of a Terrorist Attack on a Nuclear Power Plant: Will Victims Be Adequately Compensated? 38 New Eng. L. Rev. 1087, 1119-20 (2004).
68 Id. at 1120 (citing United States v. Rahman, 189 F.3d 88, 160 (2d Cir. 1999) “(affirming conviction of World Trade Center bombing conspirators)”).
69 Id. (citing United States v. McVeigh, 153 F.3d 1166, 1222 (10th Cir. 1998) (affirming conviction)).
70 Id. n. 268 (citing Thanassis Cambanis, Sentenced to Life, Reid Denounces U.S. ‘You Will be Judged by Allah,’ He Shouts, Boston Globe, Jan. 31, 2003, at A1).
71 Id.
72 Id. at n. 264 (citing Paula Span, Enemy Combatant Vanishes into a ‘Legal Black Hole’, Wash. Post, July 30, 2003, at A1); Rumsfeld v. Padilla, 124 S. Ct. 2711 (2004).
73 Id. (citing Wayne Washington, Lindh Makes Deal, Enters Guilty Pleas, Agrees to Aid Government, Faces 20-year Sentence, Boston Globe, July 16, 2002, at A1).
74 Plitt at 77.
75 Id. at 79.
76 Id. at 79-80.
77 Id. at 80.
78 Id.
79 Id. at 81 (citing Pan Am., 505 F.2d at 1017).
80 Id.
81 Id. at 82.
82 Allyn at 822.
83 Id.
84 See text accompanying footnotes 13-82.
85 Allyn at 828.
86 Id. at 829.
87 Id.
88 Id.
89 Id. at 830.
90 Joseph G. Jarret, The Business of Terrorism: The Terrorism Risk Insurance Act of 2002, 77 Fla. B.J. 63 (2003).
91 Id.
92 Id.
93 Id.
94 Id.
95 Id. (citing § 101(b)(1)(2) of the ct).
96 Allyn at 838-39.
97 Id.
98 Terrorism Risk Insurance Act of 2002, Pub. L. No. 107-297, 116 Stat. 2322.
99 Allyn at 839-40.
100 Id. at 841.
101 Peter J. Korda & Daniel J. Evans, Covering the Risks of Terrorism, 5 New York Law Journal 58 (Special Section January 17, 2006). The Terrorism Risk Insurance Extension Act of 2005 was introduced in the Senate as S. 467 on Feb. 18, 2005. The Terrorism Insurance Backstop Extension Act of 2005 was introduced in the House of Representatives as H.R. 1153 on March 8, 2005.
102 Id.
103 Id.
104 Id.
105 Id.
106 Press Release. ISO Files Conditional Terrorism Insurance Policy Endorsements (May 3, 2004). Available at: http://www.iso.com/press_releases/2004/05_03_04.html. Last visited December 13, 2006.
107 Id.
108 ISO website, statistics on terrorism exclusions. Available at: http://www.iso.com/filings/preTRIA/index.html. The NAIC recommendation stated: “[S]tates should grant conditional approval to commercial lines endorsements that exclude coverage for acts of terrorism consistent with the exclusion framework developed by ISO. To the extent permitted by state law, such approvals would sunset or be withdrawn 15 business days after the President signs into law a federal backstop to address insurance losses attributed to acts of terrorism, or be subject to other conditions on the approval consistent with state law.” Id.
109 Id.
110 John D. Reiersen, Terrorism and Its Impact on Small Insurers, 18 St. John’s J. Legal Comment. 481, 482 (2004).
111 Id. at 482-83.
112 Id. at 483.
113 Katherine Reynolds Lewis, Does Your Insurance Cover Claims for Terrorism?, The Star-Ledger, Aug. 8, 2003, at 024 (according to Julie Rochman, spokeswoman for the American Insurance Association, the national advocacy organization for property and casualty insurers); Christopher Oster, Some Homes May Find Insurance Coverage Against Terrorists Gone, Chicago Tribune, May 11, 2002, at 18 (according to Insurance Services Office, Inc.).
114 Press Release, National Association of Insurance Commissioners, NAIC Members Come to Agreement Regarding Terrorism Exclusions for Personal Lines (Jan. 29, 2002) (on file with the author).
115 Katherine Reynolds Lewis, Does Your Insurance Cover Claims for Terrorism, The Star-Ledger, Aug. 11, 2003, at 024.
116 Id.
117 Letter from Scott B. Lakin, Director, Missouri Department of Insurance, to All Property and Casualty Insurers (March 18, 2003), available at: http://insurance.mo.gov/laws/bulletin/03-01.htm.
118 See standard HO 00 03 policy (emphasis added).
119 Scott G. Johnson & Amy M. Churan, The August 2003 Blackout and Insurance Coverage for Power Outage Losses, 39 Tort Trial & Ins. Prac. L.J. 813, 816 (2004) (quoting 696 N.E.2d 553 (Mass. App. Ct. 1998)).
120 526 S.W.2d 222 (Tex. Civ. App. 1975).
121 Johnson at 816.
122 207 F. Supp.2d 459, 469-70 (E.D. Va. 2002), aff’d, 347 F.3d 89 (4th Cir. 2003).
123 96 N.W.2d 880 (Minn. 1959).
124 Id. at 881. The court also noted the absence of an exclusion that would address coverage for these types of losses. Id. at 885-86.
125 235 F. Supp. 540, 542 (D. Or. 1964).
126 Id. at 543-44.
127 Johnson at 817.
128 See standard HO 00 03 policy.
129 Johnson at 820.
130 Id.
131 See text accompanying footnotes 125-129.
132 Johnson at 820.
133 See standard HO 00 03 policy.
134 O’Brien v. John Hancock Mutual Life Ins. Co., 119 A.2d 329 (Conn. 1955); Young v. American Fidelity Ins. Co., 479 S.2d 244 (Conn. 1984); Souper Spud, Inc. v. Aetna Casualty & Surety Co., 501 A.2d 1214 (Conn. App. Ct. 1985).
135 Hall v. Burns, 569 A.2d 10 (Conn.1990); see Fid. & Cas. Co. of New York v. Constitution Nat’l Bank, 356 A.2d 117 (Conn. 1975); Vacca v. Camera, 179 A.2d 616 (Conn. 1962); Lambert v. City of New Haven, 30 A.2d 923 (Conn. 1943); Canfield Rubber Co. v. Leary, 121 A. 283 (Conn.1923).
136 Lunny v. Pepe, 165 A. 552 (Conn.1933); Ward v. Avery, 155 A. 502 (Conn.1932); Geoghegan v. Fox & Co., Inc., 132 A. 408 (Conn. 1926); Stratton v. Newberry Co., 169 A. 56 (Conn.1933).
137 See Nolan v. New York, New Haven & Hartford R.R. Co., 4 A. 106 (1885); Neal v. Gillet, 23 Conn. 437, 443 (1855).
138 Robert D. Cox, Jr., Environmental Contamination Claims: Is There More to Recover Than Clean-Up Costs? (on file with the author).
139 Gail L. Wurtzler, Proximal Fear, The Daily Journal (1998). Available at: http://www.dgslaw.com/documents/articles/291565.pdf (citing Sterling v. Velsicol Chemical Corp., 855 F.2d 1188, 1212-13 (6th Cir. 1988); MHE Associates Ltd. Partnership v. United Musical Instruments USA, Inc., 1995 U.S. Dist. Lexis 5808 (N.D. Ohio Mar. 24, 1995); De Sario v. Industrial Excess Landfill, Inc., 587 N.E.2d 454 (Ohio App. 5 Dist. 1991) (appellate court did not reverse certification of property damages class that included owners of uncontaminated property); Allen v. Uni-First Corp., 558 A.2d 961 (Vt. 1988) (trial court erred in limiting jury’s consideration to contaminated areas)).
140 Id. (citing Adams v. Star Enterprise, 51 F.3d 417 (4th Cir. 1995); Ogden v. Star Enterprise, 1995 WL 709862 (4th Cir. 1995) (unreported opinion); Berry v. Armstrong Rubber Co., 989 F.2d 822, 829 (5th Cir. 1993), cert. denied sub nom. Cooper v. Armstrong Rubber Co., 510 U.S. 1117 (1994); O’Neal v. Department of the Army, 852 F. Supp. 327, 336 (M.D. Pa. 1994); Good Fund Ltd. - 1972 v. Church, 540 F. Supp. 519, 534-35 (D. Colo. 1982), rev’d on other grounds sub nom. McKay v. U.S., 703 F.2d 464 (10th Cir. 1983); Lamb v. Martin Marietta Energy Systems Inc., 835 F. Supp. 959, 968-70 (W.D. Ky. 1993); Adkins v. Thomas Solvent Co., 487 N.W.2d 715, 724-27 (Mich. 1992); Leaf River Forest Products Inc. v. Ferguson, 662 So.2d 648 (Miss. 1995)).
141 Id. (citing §§ 158, 821D, 821F (1979)).
142 Id. (citing Adkins, 487 N.W.2d at 725).
143 See standard HO 00 03 policy (emphasis added).
144 Wurtzler (citing Paoli, 35 F.3d at 798).
145 Id.