Looking at the events of September 11: some effects and implications; while the impact on insurers is large and apparent, there are many other possibilities, even probabilities, of contention and litigation.

• Author: Stamper, John W.

WITH estimates of financial losses from the attacks of September 11, 2001, at $70 billion or more, the impact on the insurance industry will be profound. There will be numerous disputes at various Levels--cutting across many forms of insurance--as to the amount and nature of the losses and how they should be borne. September 11 will affect how policies are written and underwritten. Some legislation has been enacted, and other proposed legislation would provide federal support for coverage for terrorism acts in the future.

The immediate issues for the insurance industry will include the scope of coverages, the applicability of exclusions and the amount of damage sustained. The claims will involve virtually all forms of insurance and reinsurance, including property and casualty, business interruption, life, health, accidental death and disability, workers' compensation, aviation, and automobile. Some commentators anticipate that most disputes will stem from the amount of money requested in claims and not from whether coverage actually exists, but certainly there will be coverage issues.

One dispute that arose immediately relates to the number of occurrences. Given their close coordination, were all four attacks one occurrence? Were they all separate? Were the attacks on the World Trade Center one occurrence regardless of the others? It also will be necessary to determine where and how disputes are to be resolved. Does the legislation giving the U.S. District Court for the Southern District of New York exclusive jurisdiction over the claims preclude contractually agreed arbitration of coverage issues?

The attacks will have a profound impact on the internal operation of the insurance market. Aside from the staggering financial losses the industry will incur, future policies face dramatic changes. Some premiums already are affected as insurance and reinsurance contracts renewed on January 1,2002. In addition to increasing premiums, some policies now will include exclusions for losses from terrorism or will price terrorist risks separately. Policyholders will face higher costs and additional exclusions.

The various claims also will present a variety of reinsurance issues. For example, some primary insurers have indicated that they will not seek to rely on war exclusion clauses in their policies, and some may not even invoke exclusions for terrorism. Reinsurers with similar exclusions will have to decide whether to rely on those exclusions, or, if the reinsurer does not have such an exclusion, will need to consider whether to take the position that the primary carrier must enforce such limitations on coverage. Reinsurers will have to consider whether there are rights of subrogation to pursue not only against the terrorists and their backers, as well as governmental bodies and other entities that may be held in some respect responsible for the losses.

WAR EXCLUSION CLAUSES

1. Introduction

   A number of policies that may be implicated contain war exclusion clauses, one form of which excludes coverage for "war, invasion, civil war, revolution, rebellion, insurrection or warlike operations, whether there be a declaration of war or not." While many U.S. carriers have indicated that they will not seek to invoke those exclusions, some, including some reinsurers, may do so. (1)

   While decisions as to any specific exclusion must turn on policy language, there is some case law as to how an act of war will be defined by the courts. The Second Circuit, addressing that issue in Pan American World Airways v. Aetna Casualty & Surety Co., (2) reasoned that the terrorist act there at issue did not equate to an act of war as used in the insurance contract. To date, no case has held that a terrorist act does constitute an act of war, (3) and the prevailing view of commentators appears to be that the events of September 11 will not fall within a war exclusion. It may be worthwhile, however, to examine the facts and reasoning of Pan Am, as well as those cases that have followed it, and to consider whether there may be potential distinctions between the events of 9/11 and those at issue in Pan Am.

2. Pan Am

   Two men from the Popular Front for the Liberation of Palestine (PFLP) hijacked Pan Am Flight 83, a 747, while en route from Brussels to New York. The hijackers demanded that the pilots fly to Lebanon. When the aircraft reached the Beirut airport, several more PFLP members came aboard and placed explosives in the plane. The hijackers then forced the pilots to fly to Cairo, where they gave the passengers and crew only a few minutes to exit before the PFLP detonated the explosives, destroying the aircraft. The incident was not isolated. The PFLP had staged three other airplane hijackings on the same day, resulting in the destruction of two more planes.

   The PFLP was one of more than 10 organizations dedicated to the "Arab reconquest of Palestine," but it was unique among the groups because its central belief structure centered on a "militant, Marxist-Leninist-Maoist ideology," according to the district court opinion. It advocated a revolution throughout the Middle East, not just in Palestine. For these reasons, the PFLP followed an independent course from the other Palestinian organizations. Indeed, the district court went to great lengths to paint the PFLP as a minor group, adrift among the sea of Palestinian causes. It characterized the PFLP's objectives as "relatively subordinate, separate, often tangential, and concentrated primarily upon the organization's own advancement and unique objectives." (4)

   The PFLP had a unique objective. The hijackings arose as an attempt to "instill pride, bolster spirits, generally to inspire and be applauded by the fedayeen and the Palestinian masses." The group's leadership did not design the events to impact those beyond the Arab world; they were designed primarily to further the PFLP's revolution among Palestinians and other Arabs.

   When the hijacking occurred, Pan Am maintained an "all-risk" insurance policy through Aetna on its 747. The policy contained an exclusion for "war, invasion, civil war, revolution, rebellion, insurrection or warlike operations, whether there be a declaration of war or not." The "all-risk" insurers maintained that the PFLP's destruction of the 747 fell under this exclusion. Pan Am argued that the incident and subsequent loss were not due to war within the meaning of that clause. Pan Am also obtained coverage via the London war risk insurance market covering the exclusion left by the Aetna policy.

   The primary issue was whether the war risk exclusion applied. The Second Circuit held that it did not. In arriving at this decision, the court addressed the definition of "war" for the purposes of the insurance policy, reasoning, "The cases establish that war is a course of hostility engaged in by entities that have at least significant attributes of sovereignty. Under international law war is waged by states or state-like entities." The court also examined a series of English and American cases that dealt with the definition of war, embracing the opinion that "war refers to and includes only hostilities carded on by entities that constitute governments at least de facto in character." According to the court, the key criteria centered on the entities' attributes of sovereignty.

   Applying this definition to the PFLP's actions, the court concluded, "the loss of the Pan American 747 was in no sense proximately caused by any `war' being waged by or between recognized states." The court compared the structure of the PFLP and determined that it could not amount to a state, nor did the PFLP act on the part of any state at the time it carried out its attacks. Indeed, as the facts suggest, the PFLP remained an isolated group with very few ties to other organizations.

   The Second Circuit went further, however, noting that "war can exist between quasi-sovereign entities.... And of course an undeclared de facto war may exist between sovereign states." (5) It concluded that the PFLP could not constitute a "quasi-sovereign entity" because it had no claim to sovereignty, never acted on behalf of a recognized government, and no Arab state had recognized it.

   The court finally rejected as "wholly untenable" an argument by the insurance companies that the PFLP engaged in a guerrilla war with the United States, stating, "The only evidence that the PFLP and the United States were at war consists of the PFLP's self-serving propaganda, propaganda claiming that the PFLP was effectively at war with the entire Western World. Such radical rhetoric cannot affect the outcome of this insurance case." (6)

   In the end, the court held that the PFLP's actions could not constitute "war" nor could the PFLP amount to a sovereign state; none of the other terms in the policy exclusions accurately described the actions taken by the PFLP. The court focused specifically on the intent of the PFLP, and it simply could not find that the PFLP intended their actions to initiate a war.

3. Since Pan Am

   The handful of cases discussing war exclusions within the context of insurance policies since Pan Am have primarily followed that decision. Perhaps the most comprehensive elaboration is found in Holiday Inns Inc. v. Aetna Insurance Co., (7) in the which the U.S. District Court for the Southern District of New York relied on Pan Am in determining whether the loss Holiday Inn sustained from damage during a strife between Christians and Muslims in Beirut was covered under its insurance policy.

   The court engaged in a lengthy and exhaustive discussion concerning the facts surrounding the hostilities that led to the damage at the Beirut Holiday Inn. Heavy damage occurred from October 1975 to April 1976 during intense fighting among several factional groups for control of a wealthy area of Beirut. Aetna argued that the damage occurred as a direct result of fighting between three distinct groups within Lebanon: Syria, the Palestine...