Massachusetts recently adopted a law, effective April 13, 2011, that permits insurers to exclude coverage in commercial property insurance policies for losses caused directly or indirectly by acts of terrorism. Until April 13, insurers are blocked from excluding coverage for these types of losses by the Massachusetts standard fire policy (SFP) statute, which prescribes the use of certain minimum terms for fire insurance coverage issued in the State.
Massachusetts is one of 28 states that still have SFP statutes on their books. These statutes have their roots in a 19th century effort to achieve uniformity in the terms of fire insurance policies. Although SFP statutes still specify standard wording for use in fire insurance policies, they have been liberalized over the years so that they generally permit the use of alternative wording as long as it is no less favorable to policyholders. Insurers bound by SFP statutes are not free to expand on the limited set of exclusions found in statutory SFP wording since any such expansion would not favor policyholders.
The SFP wording adopted by the various states (SFP states) typically includes exclusions for fire losses caused by enemy attack, invasion, insurrection, rebellion and revolution but not for losses caused by acts of terrorism. In fact, at the time of the World Trade Center attacks, none of the 28 SFP states permitted insurers to exclude terrorism losses resulting from fire.
In the wake of the World Trade Center attacks, the US Congress adopted the Terrorism Risk Insurance Act (TRIA), which requires insurers to offer coverage under commercial property insurance policies for losses resulting from acts of terrorism. TRIA is intended to give commercial policyholders the choice of purchasing terrorism coverage. Under TRIA, policyholders are free to reject such coverage if they do not wish to pay for it. However, TRIA does not preempt state SFP statutes. As a result, absent amendments to those statutes, any fire insurance issued in the 28 SFP states must include coverage of fire losses resulting from acts of terrorism.
Insurers find terrorism risks extremely hard to price and are concerned that, given the potential for huge losses from terrorism, insurance of such losses may threaten insurers’ solvency. For these reasons, insurance trade groups have been strong advocates of amending SFP statutes to permit the exclusion of losses from fire caused by acts of terrorism.
To date, 14 of the 28 SFP states have amended their statutes in ways that allow some exclusion of terrorism losses. Like Massachusetts, the majority of these 14 states permit the exclusion of fire losses caused directly or indirectly by acts of terrorism but only in commercial insurance policies. Other states have taken different approaches in amending their SFP statutes. New Hampshire has added an exclusion for terrorism to its SFP wording applicable to both commercial and personal lines policies. Nebraska, New Jersey and Rhode Island exempt commercial lines policies or certain sorts of commercial lines policies, such as policies issued to large policyholders, from all SFP restrictions.
With the amendment of the Massachusetts SFP statute, half of the SFP states permit some exclusion of terrorism losses. However, among the SFP states that still do not permit terrorism exclusions in any fire insurance policies are states such as New York and California that have very large insurance markets and very large terrorism exposures. Thus, SFP statutes remain a substantial barrier to insurers’ ability to manage their exposure to terrorism risks.