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. Last Updated: 07/27/2016

States: Insurance Must Include Terrorism

WASHINGTON -- Insurance regulators in California and New York have denied a blanket request to allow hundreds of insurers to exclude terrorism coverage from commercial policies.

Both states declined to approve an initial request by Insurance Services Office Inc., a private firm that filed nationwide for the terrorism exclusions on behalf of about 200 insurance groups. More than 35 states, including Maryland and Virginia, and the District of Columbia have approved the request.

Neither denial was unexpected. Insurance brokers said Wednesday that finding coverage for commercial policy holders could be more difficult if enough insurers scale back their businesses rather than write policies that include terrorism coverage.

"There are companies that are just not going to be able to buy insurance at all because it will be too cost-prohibitive" with fewer players in the market, said James Hutchinson, first vice president of Kaye Insurance Associates Inc., a New York brokerage. "Some places are going to go bare, or they are going to go out of business. It's scary."

The states that have approved the Insurance Services Office request have done so on the recommendation of the National Association of Insurance Commissioners, which encouraged exclusions until Congress creates a federal backup to help pay terrorism claims.

Under the association's guidelines, exclusions would be allowed if a terrorist act caused more than $25 million in damage and would apply only to commercial policies. The exclusions would expire if Congress enacted backup.

Terrorism damage was covered in most U.S. policies before Sept. 11, and most states require primary companies to get permission to drop the coverage. Reinsurers, which provide insurance to the primary companies and are not regulated, have indicated their intentions to drop terrorism coverage. Without reinsurance for terrorism, primary insurers would have to assume the entire risk of coverage.

But regulators from California and New York, whose decisions were issued Tuesday, said they are not convinced that the exclusions are necessary.

They are working with the Insurance Services Office to modify the request to narrow the definition of a terrorism event and to limit the conditions under which insurers could deny claims.

"It isn't an outright rejection," said Scott Edelen, California deputy insurance commissioner. The Insurance Services Office will be allowed a hearing to petition regulators to reconsider a modified request, he said.

Like their counterparts in California, New York regulators are concerned that the $25 million threshold for a terrorism attack is too low.

Representatives of both states said limited permission to exclude terrorism may be granted, as it already has been in California.