Redefining war, risk in P&C policies

By Martin Beaudry | November 20 2001 07:25PM

In the wake of the September 11 terrorist attacks, the P&C insurance industry is scrambling to properly define war and terrorism.

There is no legal definition for those terms in the Insurance Act of Canada, and both insurers and insured fear the consequences. The Insurance Bureau of Canada (IBC), in an effort to stem those worries, has created a taskforce to examine the issue.

According to Robert Tremblay, Manager of Public Affairs at IBC, “the insurance industry cannot cover infinite risk with finite resources. In other words, what happened September 11 is that the worst-case scenario that we would have imagined in the case of a terrorist attack was just completely redefined.”

“In our industry we set premiums in line with risk, taking into consideration the mechanisms that we have to spread the risk amongst many players – in this case reinsurance. What happened after September 11 is that reinsurers started to look at their liability and the new risk and asked if the premiums are in line. The answer was no.”

Another problem with current definitions lies at the level of how ‘aggressive actions’ are classified, and whether they may be excluded from insurance coverage. Mr. Tremblay explains, “In Canada we have a different wording than the U.S.. They have ‘act of war’ and that is defined based on the traditional definition of a war – an act of aggression between two sovereign countries. In Canada we have an additional clause which is an ‘act of foreign enemy.’ But what does it mean? How is it defined?”

“That is the question for which we are seeking clarifications. The IBC has appointed a taskforce, chaired by Stanley Griffin [Senior Vice-President, responsible for Regional Operations], which comprises a representation from all sectors of the insurance industry. That taskforce has the complex task of reviewing what our wording means, and what else can be done to bring clarity. The taskforce has to report to the board of directors of the IBC at the December meeting. There’s obviously a sense of urgency here because what would happen if a similar event was to happen in Canada? We would have all sorts of interpretations, and we want to make sure that we have one accepted definition.”

Mr. Tremblay is staying positive. Although he admits to having the impression that there will be a lot of litigation surrounding the September 11 events, he claims, “I’m quite optimistic that, the P&C insurance industry being what it is, we are going to figure out something that would be sound for the insurance industry and for the insured. In a broad context, that’s what the task force mandate is.”

Mr. Tremblay’s colleague Randy Bundus, Vice-President and General Counsel at the IBC, is more cautious. He implies that the task force’s efforts may have lesser value. “We could attempt at IBC to come up with a definition, but the courts wouldn’t be bound by that definition. The terms were left undefined in the legislation. That’s why we can do our best but it won’t really advance the cause, because the courts can say, “Yes, nice try, IBC, but we don’t agree,” after the fact, and by then the loss has happened. It’s too late. That’s a part of what would prevent us from spending huge amounts of effort on that, unless we could be sure that the legislation would be amended to incorporate the definitions we propose.”

For the moment, the fact remains that ‘war,’ ‘act of war,’ and ‘act of foreign enemy’ are terms undefined by the Insurance Act of Canada. P&C insurance companies may themselves apply definitions to these terms, according to their mandates, and accordingly accept or deny insurance claims.

In fact, the terms will remain undefined for as long as the issue is not brought before the courts. According to Mr. Bundus, “If there were claims on Canadian policies, and if these claims were denied on the basis of the war exclusion, at that point it would rest with the insured to have a judicial determination to say whether or not that was an appropriate use of risk exclusion for that set of facts. That could take some time.”

For the foreseeable future, then, it seems that the best defence is knowledge. Mr. Bundus says that people seeking P&C insurance at the moment should be extra attentive to detail. “They’d be wise to check their policy wording in advance with their agents and companies. Some companies may be changing their wording.”

“You want to watch out for a wording that actually specifically says ‘we do not cover losses arising from terrorist acts.’ That might go quite a way to dealing with situations like September 11. You would also want to check to determine if the company made an effort to define ‘terrorist act.’ In their exclusion perhaps they’ll limit sorts of terrorist acts that would be excluded.”