By its very nature, terror is designed to invoke fear and change lives. Certainly, the events of September 11, 2001 demonstrate this impact. Individuals and businesses were impacted by the tragic losses, both human and physical, which required a comprehensive response from the insurance industry. This was a catastrophic loss that went beyond the traditional property and casualty markets. Other lines of insurance sustained historic losses – including life insurance, workers’ compensation and aviation.

The result is that underwriting requirements and the nature of the insurance market have been impacted just like airport security. Policies carry new exclusions and new coverages. Although many of the claims related to the September 11 losses have already been resolved, the threat of future terrorist actions remains — as government warnings seem to constantly remind us.

How can claims professionals prepare for a future characterized by the threat of major losses from terrorist events? The following discussion attempts to provoke thought on this subject by introducing the myriad claims issues that arise from the potential for terrorism. No attempt is made to rank priorities, but to cover the principal challenges that insurers face in today’s geopolitical environment.

A Model based on Catastrophic Losses

In some ways, the losses sustained as a result of a significant terrorist action are similar to other catastrophic losses. Multiple businesses are damaged in a concentrated area, and a high volume of claims for property damage, business interruption, and casualty losses ensue. Using this analogy, the claims management process developed for hurricanes, earthquakes, and other natural catastrophes may serve as a basis from which to develop a model for response to terrorist actions. Following are some key aspects of traditional catastrophe response that may be instructive in dealing with terrorism.

The concept of a CAT team is well established. Insurers and businesses have developed extensive disaster plans. Past experience shows that certain conditions will inevitably prevail. For example, local conditions at the disaster site likely will not allow normal communication methods. In addition, local carrier representatives will be more focused on personal and family issues than on the business – a natural human response. As a result, for a catastrophe insurers almost always must mobilize special resources for communications and operations and bring in response teams from other areas.

An important aspect of the CAT team’s work is the advance development of relationships with vendors that will allow some type of priority response during times of overwhelmed capacity. Through retainers and preferred provider relationships, the insurer can provide support to a vendor between catastrophes in exchange for prompt response during an emergency situation.

Once the response team is ready for action, claims management becomes almost a triage situation. For example, all claims must be logged in and recorded to help ensure that nothing is missed – and so priorities can be assigned. Reserves must be established and plans made to control serious losses. Coverage issues must be identified early and grouped to allow for policy and legal research and the development of a comprehensive, cohesive response.

These are just some of the higher-profile issues. Others will arise depending upon the specific circumstances of the event and the losses.

Modifying the Model

How well does the traditional CAT claims management model respond to terrorist-related losses? We think it is attractive as a starting point solution. An accidental plane crash into a structure can produce a terrible and terrifying result or an earthquake or hurricane can devastate entire regions. So there are definite similarities to a terrorist attack.

But it’s vital to keep in mind that an act of terrorism is inherently different. Terrorism is a deliberate attack, often on innocent parties. Once terror strikes, there is no way of knowing whether it will strike again. And while the location of immediate damage may be relatively small, the entire disaster area is treated as a crime scene.

So what does this phenomenon of terror do for our claims management model based on the CAT team approach? The immediate lesson is that local insurer resources and local businesses systems for communications and other functions cannot be counted on. So advance planning for alternatives is imperative.

One also must assume that any significant terrorist attack will increase security levels to such an extent that travel to the affected region may not be practical or even possible. Important facilities such as rail terminals, tunnels and bridges may be destroyed or blocked. Air travel might be curtailed even if there is no physical damage to airport facilities. The access to the disaster area itself will likely be blocked by emergency response and investigative activities.

This could prevent first-hand inspections. In that case, insurers will need to rely on external sources such as computer modeling of known insured risks within an area or even television news reports. This means that underwriting and claims professionals should develop risk maps of commercial insureds in order to identify exposures within a given area.

As all this shows, planning for the effects of the terrorist act is a complex task. We see this in the events of September 11. Entire businesses or significant portions thereof were completely destroyed. Thousands of employees, including senior executives, were forced to work from temporary locations. In addition to the damages sustained in lower Manhattan, many other businesses were financially impacted. The airline and hospitality industries sustained severe blows. Many other businesses and industries that provide products or services to businesses located in lower Manhattan were impacted, as were entities who received products or services from these same businesses. Other businesses were adversely impacted simply due to the subsequent changes in the economy.

As this shows, in a future terrorist incident, claims management will be faced with a barrage of coverage issues, many of them probably different than those now being addressed from the September 11 loss incidents. How will terrorism exclusions be applied? What is the meaning of civil authority? How far does impairment of ingress or egress apply? The application of coverage for business interruption will once again be tested for concepts such as the “period of restoration.” Economic loss will result from the terrorist act whether there is physical damage to property or not.

The issues raised by a terrorist attack, and the actions needed to respond to those issues, will certainly go beyond property claims. Most notably, the human aspect will be the priority in a terrorist attack. While the human dimensions of a natural disaster are critical, they can potentially take on a new gravity when a terrorism act occurs because frequently the terrorist act is aimed at a place where there is a large concentration of people. Therefore, people will be the primary focus of all efforts immediately after an attack and for some time thereafter as well. Losing a facility is one thing, but losing people is the greatest trauma any business can experience. We at Marsh understand this deeply. We and our parent company, MMC, lost 295 colleagues and another 65 consultants in the World Trade Center disaster. Our first priority was, and continues to be, those colleagues, the families they left behind, and all our colleagues, who were profoundly affected by this loss of friends and fellow workers.

Quick Answers Needed

In the event of a catastrophic loss due to terrorism, employers will need answers quickly. There will be issues related to workers’ compensation. Who is going to respond with payments for medical costs and lost wages? A quick response on coverage must address the definition of “course of employment” and “workplace”. Will commuting to work be considered “course of employment? Can mental stress be covered in absence of bodily injury?

Employers with deductible programs and retentions will need to know whether these will be applied per event or per injured worker. Will agreements on other lines of insurance have an impact on these issues? How might the “Other Insurance” clause affect coverage? Liability issues come into play as people seek other sources of compensation and look toward security in the building, in the airports, on through all layers of government. Although these questions and others are difficult in natural disasters or accidents, terrorist events can potentially bring an even greater emotional level to the claim process.

Planning for Terrorism Responses

As already noted, managing claims for a terrorist situation requires preparation. All organizations, from insurance providers, to adjusting companies, to other experts, need to establish an ongoing planning committee for catastrophes of all types and make sure this committee’s agenda includes terrorism risks. Planning should be based upon the potential severity of credible threats. This requires the type of risk assessment discussed earlier. Where does the insurer have accumulated risks and what is the potential exposure? Are there risks that might be particularly vulnerable to the effects of a terrorist act - for example, risks dependent on free movement of people, goods, and services? Some of the programs developed for hurricane risk assessment by underwriters and claims personnel could perhaps be adapted for this analysis.

Planning also requires the inventory and assessment of resources available to meet identified risks. The CAT/Terrorist response team will require a media spokesperson, a clear chain of command, a command post with adequate resources and training, and, as was tragically demonstrated on September 11, substitutes and backups in case the primary team is affected. The command team should determine its functions and the level of response required in each situation and have the capacity to organize response teams for specific action.

While most larger companies already have significant CAT teams, some of the claims resulting from September 11 suggest additional considerations. The response team should include an underwriting representative who is dedicated to obtaining coverage documentation as quickly as possible. There is nothing so frustrating to an adjuster on scene as not knowing the type of coverage available. Because coverage and interpretation questions arise so frequently, the addition of coverage counsel to the team might speed up the investigation process. Counsel could immediately identify the types of documents required to demonstrate coverage. For example, after September 11 there were many questions on defining civil authority and airport “closures” – counsel could have been involved in obtaining the background documentation immediately rather than expect that insureds research these issues.

The involvement of multi-line exposures also suggests that the CAT team be expanded to liability, workers’ compensation, and other departments within the insurer’s organization. Also, because of the crunch of cash flow caused by the severe interruption of business operations, the team requires a member with the authority to provide advance or partial loss payments quickly. The goodwill developed by cooperation with an insured, easing a cash bind or perhaps even determining the future survival of a business, can make the difference in managing a claim to a successful resolution.

Planning should provide a framework for an effective response. One approach is to develop a flexible procedure for handling any crisis, whether natural or man-made. Another is to develop a “library” of plans tailored to specific types of emergencies. Any plan must be integrated easily into the organization’s structure and operations. The plan must respond to the risk and resource assessment defined above. Testing of the plan before any actual event will also identify any deficiencies and allow for updating. Coordination with public emergency services might provide for better access to damage sites and information. Lastly, the plan should allow for post-incident trauma, both internal and external. How will the response plan and its implementation be affected by a terrorist act, especially by the tragedy of human loss? How will media coverage and subsequent governmental actions affect businesses?

It’s important to recognize that no amount of planning can anticipate every possible contingency. Terror can come from the street or the sky and strike icons or simple places of everyday work. What happened before may be replaced with another variation on tragedy. In this respect, the risk of loss from terrorist actions broadens the mandate of the catastrophe response and forces us to constantly assess the adequacy and flexibility of our planning and preparation.

This article was originally published in Claims Magazine.