Insuring against terrorism - and crime.

• Author: Levmore, Saul

1. INTRODUCTION

   The attacks of September 11th produced staggering losses of life and property. They also brought forth substantial private-insurance payouts, as well as federal relief for the City of New York and for the families of individuals who perished on that day. The losses suffered during and after the attacks, and the structure of the relief effort, have raised questions about the availability of insurance against terrorism, the role of government in providing for, subsidizing, or ensuring the presence of such insurance, as well as the interaction between relief and the incentives for taking precautions against similar losses in the future. In response to such losses, and in anticipation of others, one might imagine an array of government responses--ranging from nonintervention, to subsidized private insurance, to after-the-fact government payments of a fixed or uncertain kind.

   It is our claim that the particular mix of responses the government has chosen with respect to 9/11, including the September 11th Victims' Compensation Fund (1) and the Terrorism Risk Insurance Act of 2002, (2) will significantly affect private expectations about the government's likely response to future terrorist attacks. These expectations will in turn affect future private actions, ranging from the types of insurance policies that will be written, to the character of real estate development that will take place (especially in the country's largest cities), and to the level of charitable contributions that will be made following any future terrorist attack. The causal arrow can also point in the opposite direction. Future political actors may evaluate private responses to the risk of terrorism in deciding on the character or degree of a governmental response.

   One aim of this Article is the exploration of the relationships between promised or expected government actions (or inactions) and private decisions regarding terrorism risk. These issues lead to some novel ideas about the role of government in insuring against terrorism--and then against crime more generally. In Part II we begin with some background on the response of the private-insurance market and the federal government to the losses resulting from September 11th. Part III looks at the positive question of how government and private actors should be expected to respond to the losses of 9/11 and to the prospect of such losses in the future. It explores the interactions between government relief and charitable responses to 9/11, as well as the existence or absence of private insurance, and it draws contrasts between terrorism disasters and natural disasters, as well as between 9/11 and prior terrorist attacks. Part III also analyzes the circumstances in which episodic relief of the 9/11 variety will lead to (or be replaced by) more permanent, routinized relief, as is available in some other countries.

   Part IV takes up the normative question of the optimal mix of government and private relief (including insurance) for terrorism-related losses. It provides a skeptical view of government intervention in property-insurance markets generally and of the particular federal terrorism-reinsurance regime that Congress recently adopted. Part V then broadens the inquiry by arguing that, whatever one thinks of the case for government-sponsored terrorism compensation or insurance, the case for government-sponsored insurance against crime--which is to say a much broader set of crimes than terrorism alone--is at least as sound. Part VI concludes. Throughout the Article, we refer to "insurance" and government "relief" because specific programs and reactions have been in the form of insurance-market interventions and relief programs. But we also use these expressions to refer to government payments, subsidies, and liability rules more generally. It is the larger questions we are after, and those concern the government's role in preventing losses and in compensating victims following certain events.

2. INSURANCE, RELIEF, AND THE EVENTS OF 9/11

   The terrorist attacks of September 11th produced an enormous set of losses, some insured through private markets and some not. Insured loss estimates range from 30 to 100 billion dollars, and include property-, liability-, workers-compensation-, and life-insurance claims. (3) Much of the damage done on 9/11 to private property and private economic interests was insured through policies sold by insurance companies, although substantial damage was inflicted on publicly owned facilities in lower Manhattan, including the New York City subway system, that were likely underinsured. (4) To this we add the staggering loss of nearly 3000 lives, (5) some completely uninsured and many underinsured by any plausible standards of measurement. The total loss dwarfs that of any other single-day disaster or insurable event in U.S. history, at least since the major battles of the great wars and the Galveston hurricane of 1900 in which 6000 people perished, (6) and rivals the losses experienced in the Kobe, Japan earthquake of 1995, which may be the most costly natural disaster in modern history. (7)

   When thinking about these issues, it makes sense to separate the loss of property, private and public, from the loss of life and limb, in large part because the present mix of private and public insurance, and of relief generally, is different for property than it is for persons. In addition, government relief or compensation for lost property presents somewhat different moral-hazard issues than does relief for lost life; the politics of relief may also differ. We consider these important differences below.

   1. Losses to Property

      The bulk of private property losses suffered in the 9/11 attacks was covered by private insurers. Some claims remain in dispute, of course, but by and large the assets that were lost, including buildings, aircraft, and office contents, were insured under conventional insurance policies that did not (following conventional practice) exclude losses from terrorism. (8) The federal government did and will provide some relief for losses of uninsured private property, but this relief often takes the form of subsidized loans and is small in comparison with the role of private insurance. (9)

      The picture is quite different with respect to losses to public property. The largest such losses associated with 9/11 in New York City concern damage to the subway system in lower Manhattan. (10) The Metropolitan Transportation Authority claims that those losses will be covered mostly by private-insurance policies, with only relatively small amounts coming from the Federal Emergency Management Agency ("FEMA") and its state equivalent to fill in the gaps. (11) We suspect, however, that when all of the insurance claims have been finally settled and when all of the damages to public facilities (not just the subways) are taken into account, the amount to be covered by government relief dollars will represent a sizeable fraction of the total losses.(12) Indeed, the sheer magnitude of the federal funding that has already been earmarked for the reconstruction and overhauling of lower Manhattan strongly suggests that the federal government will end up bearing a substantial portion of the losses. (13)

      Apart from the physical damage to property, many New York businesses also experienced substantial monetary losses in the aftermath of 9/11. Focusing solely on the businesses in and around the World Trade Center site, the lost profits during the period of recovery and reconstruction have been undoubtedly enormous. Indeed, the total private-insurance payouts for "business interruption" coverage are expected to be larger for 9/11-related lost profits than for any previous single-day event, amounting to more than twenty-five percent of all private-insurance payouts related to the 9/11 losses. (14) Despite this insurance coverage, however, and despite the presence of federal grants and loans for some business losses, (15) it must be the case that huge financial losses that can be directly attributed to the attacks will go uncompensated. (16) To be sure, some of these losses are private rather than social losses because some of these losses are offset by gains to other businesses located far from Ground Zero. This distinction may matter when it comes to encouraging governments to take precautions or when structuring optimal insurance policies, but it seems sale to proceed from the assumption that there were substantial uninsured social losses associated with the interruption and destruction of business caused by the attacks.

      In sum we might think of the 9/11 physical property losses as having been effectively insured whether through private insurance or government relief, but regard other property-related financial losses as having been only partially insured. This summary, and much of the discussion below, intentionally bends the idea of insurance to include government relief. Insurance and relief are obviously not the same--one may be expected by contract while the other depends on politics and circumstances. But inasmuch as governments can subsidize insurance or offer insurance without requiring premiums, and because private parties can come to expect relief in some circumstances, it can be useful to fold insurance and relief into one package.

   2. Losses to Life

      As for loss of life, it is almost certain that a large number of those killed on 9/11 were uninsured or underinsured. (17) Although there are no publicly available data on this issue, the likelihood that many of the victims had only small life-insurance policies, or none at all, is overwhelming. For one thing, underinvestment in life insurance is a pervasive problem. (18) Although many households purchase life insurance, few purchase enough to maintain their standard of living should a primary earner die prematurely. (19) Moreover, the main motivation for the large amount of charitable giving, as well as the...