Terrorism - Disaster cover loopholes

Companies that have insured the lives of their employees may find that they are not covered in the event of an 11 September 2001-style terrorist attack, according to new research from Watson Wyatt.

In the wake of the attacks on the World Trade Centre and the Pentagon, many insurers have been reducing their war and terrorism exposure by bringing in exclusions or single event limits which cap the overall claim value to single events. Watson Wyatt claims that it has found one or more of the exclusions in half the policies examined by the firm for employee life insurance, health and disability insurance from 47 countries.

In the event of a similar disaster to 11 September hitting a commercial area, this would leave many employers without the proper cover that they had promised their members of staff, leaving the liability on the balance sheet.

Peter Eyre, senior consultant at Watson Wyatt, said: "While some war and terrorist exclusions existed before the 9/11 catastrophe, the introduction of single event limits is a more recent development. These limits are designed to cap the overall claim value from an undefined single event, typically by a fixed monetary limit, but they may not be confined to war and terrorism. For instance, the limitation could now extend to events such as natural calamities, earthquake and flood, and to man-made calamities, such as building collapse and fire and aircraft accidents."

According to Watson Wyatt, insurers have decided to limit their catastrophe liabilities in this way as a response to the combined pressures from reporting their potential maximum liabilities and negotiating their reinsurance contracts.

Mr Eyre added that answers to the problem include negotiations to lift the exclusions on client contracts and redesigning insurance solutions where the cover is split between insurers to maximise cover in the event of a catastrophe.