Exclusion of Terrorist-Related Harms from Insurance Coverage: Do the Costs Justify the Benefits?

27 Pages Posted: 27 Sep 2007

See all articles by Jeffrey E. Thomas

Jeffrey E. Thomas

University of Missouri at Kansas City - School of Law

Abstract

The September 11 attack was the largest single insured event in history. In the end, insurance companies are expected to pay approximately $50 billion to victims of the attack. In response to the perceived potential of future terrorist losses, many insurers have begun to exclude terrorist-related losses from their policies. In light of the size and uncertainty of future losses, this is understandable. In adopting this approach, however, it appears that little thought has been given to the transaction costs associated with the exclusion. One of the significant contributions of Law and Economics to legal literature has been to illuminate the importance of transaction costs in making normative and policy decisions. This Article applies that contribution to the insurance industry's response to the September 11 attack. It contends that the transaction costs associated with the terrorism exclusions will be so great that they will seriously erode, and perhaps outweigh, the benefits to be derived from the exclusion. This Article begins with a brief description of the events leading up to the adoption of the exclusion and an outline of the basic provisions of the exclusion. It then develops a simple quantitative model to illustrate and evaluate the potential transaction costs from the use of the exclusion. The final section of the Article will identify insights and conclusions that can be drawn from the model.

Keywords: Terrorism, terrorist, terror, insurance, September 11, exclusion, transaction costs, single-event losses, underwriting, insurable, catastrophic, loss, Terrorism Risk Insurance Act

JEL Classification: D23, D81, G22, H56, K12

Suggested Citation

Thomas, Jeffrey E., Exclusion of Terrorist-Related Harms from Insurance Coverage: Do the Costs Justify the Benefits?. Indiana Law Review, Vol. 36, 2003, Available at SSRN: https://ssrn.com/abstract=1017280

Jeffrey E. Thomas (Contact Author)

University of Missouri at Kansas City - School of Law ( email )

5100 Rockhill Road
Kansas City, MO 64110-2499
United States

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