Telecommuting May Solve Terrorism Insurance Debate

Saturday, December 16, 2006 | 0

By Nicole Belson Goluboff

What would happen if future terrorist attacks bankrupted the insurance industry?

In the face of this prospect, re-insurance companies -- the companies that insure insurers -- began excluding terrorism from the coverage they offered. The lack of re-insurance left primary insurers, in turn, with no good choices for how to manage the indeterminate risk terrorism presents: If state law permitted, they could charge astronomical rates for terrorism coverage, exclude terror-related losses from their own policies or simply refuse to write certain business.

Significant concern arose that the absence of affordable terrorism insurance could bury the economy -- that construction and other business projects would halt. In part to enable the industry to make terrorism insurance available at affordable rates, the federal government enacted temporary backstop legislation called the Terrorism Risk Insurance Act of 2002.

Under TRIA, commercial property and casualty insurers were required to make terrorism coverage available "that does not differ materially from the terms, amounts, and other coverage limitations applicable to losses arising from events other than acts of terrorism." In return, the federal government would cover a portion of the losses above an insurer deductible resulting from certain terrorist acts -- as long as losses did not exceed $100 billion in a year.

In December 2005, Congress extended TRIA through December 2007, albeit with modifications that reduced the government's liability. Now, the issue of whether the feds should stay in the insurance business -- and, if so, on what terms -- is high on the agenda for the incoming Congress.

Support for a Backstop

There is evidence that, since TRIA was enacted, terrorism coverage has become more available and more affordable. Nonetheless, to strengthen further the stability the insurance industry has achieved with a backstop in place, industry representatives and other stakeholders argue that a public/private partnership is still necessary -- certainly in the short term and probably indefinitely.

One reason the government cannot simply wipe its hands of risk-sharing, some say, is that both insurance and reinsurance for losses arising from the use of unconventional weapons remain scarce. Unconventional weapons include nuclear, biological, chemical and radiological weapons (NBCR).

In a September 2006 report issued by the U.S. Government Accountability Office concerning such losses, the agency concluded that, "any purely market-driven expansion of coverage is highly unlikely in the foreseeable future."

Compelling Needs of the Workers' Compensation Industry

Workers' compensation insurers have an especially strong need for federal help because their exposure is tremendous. In most states, employers are required to buy workers' compensation insurance, and, in some, certain workers' comp insurers may be required to insure every applicant. Often, workers' comp policies must cover injuries or death resulting from both conventional and unconventional terrorist attacks.

Many states regulate strictly the price workers' comp insurers may charge, and the approved prices may not be nearly adequate to cover the insurers' liability in the event of an attack involving NBCR.

Further, according to a September 2006 report issued by the President's Working Group on Financial Markets, some states impose "exit barriers" on workers' comp insurers, making it extremely difficult for them simply to stop writing policies. With mandates to cover terror losses, no flexibility to set prices based on the risk, virtually no reinsurance for NBCR coverage, and, in some cases, steep obstacles to leaving the market, many workers' comp insurers could easily be felled by a terrorist attack absent federal support.

Opposition to a Backstop

Homeland security experts have opposed continued federal involvement. They believe TRIA removes the incentive for certain businesses to reduce their risk: If the government will pick up the tab after a terror attack, why worry about the cost?

A Proposal for Balance

We must balance the need to protect insurers -- particularly heavily regulated workers' comp insurers -- from insolvency with the need to encourage businesses to reduce risk. One way to strike this balance is to make telecommuting and other flexible work arrangements part of the terrorism insurance solution.

Employers with robust and geographically expansive telework programs -- with employees who frequently work from home, telework centers or satellite offices -- have fewer employees located at the central office at any given time. So do employers with policies permitting employees to begin and end their workdays at non-traditional times. If a terror attack affects the main office of an organization with these work arrangements, the potential for injuries or deaths is substantially lower than in a traditional office. So, then, is the potential for workers' compensation liability.

Concededly, a distributed workforce might still suffer significant losses if a terrorist attack involved nuclear or other unconventional weapons affecting a wide area. Nonetheless, an employer that permits employees to telecommute from anywhere in the country stands a better chance of reducing workers' comp liability in the event of any terror attack, including an NBCR event, than an employer clinging to traditional workplace models.

Backstop legislation specifically promoting telework and other work practices that reduce the number of employees in the same place at the same time would, at once, protect insurers and encourage risk avoidance among businesses.

The backstop legislation could key government liability for workers' comp-related losses to the proportion of the workers' comp industry's policyholders with a decentralized workforce. This proportion could help determine the deductible insurers must pay before the government would assume responsibility: The higher the proportion of policyholders implementing telework or flextime policies, the lower the deductible would be.

Or, the proportion could help determine the government's share of the loss after the deductible is met: The higher the proportion of decentralized policyholders, the greater the government's post-deductible share would be.

Providing significant legislative incentives to expand the use of telework and flextime work arrangements would communicate to both insurers and their policyholders that the feds will not foot a bill businesses make no effort to contain.

But more than putting reasonable limits on the government's aid, the proposed legislative approaches would reduce the actual risk of loss for all concerned -- employees, employers, insurers and government. Enhancing the nation's safety can -- and should -- be a part of any program to limit the insurance industry's terror-related exposure.

Nicole Belson Goluboff is a lawyer in Scarsdale, N.Y., who writes extensively on the legal implications of telework. She is the author of "The Law of Telecommuting" (ALI-ABA 2001 with 2004 Supplement), "Telecommuting for Lawyers" (ABA 1998) and numerous articles on telework. She serves on the Board of Advisors of The Telework Coalition, a telework advocacy group. This column first appeared on the Web site, http://legalnews.tv/

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