Case Overview, Terrorsim Re-insurance

This document provides background information and summarizes the debate over Terrorsim Re-insurance. The links to the left will lead you to public documents that we have found.

           For most people their contact with insurance companies is limited to the public, retail side of the industry. Car insurance or homeowners' insurance, for example, are typically purchased from independent agents or from regional or nationally known retail companies like State Farm. Behind these companies, however, are reinsurance companies. Reinsurance is a means of off-loading risk. If, for example, a modest sized retail insurance company sells a property insurance policy to the owner of an office building, a fire that destroyed the building could result in the bankruptcy of that particular insurance company. Thus, behind the frontline of the insurance industry are large companies like GE and Swiss Re that backstop retail companies by underwriting their policies.
          The attack on the World Trade Center towers on September 11, 2001, catalyzed the reinsurance companies into action on Capitol Hill. The risk from terrorism is rather different from the everyday sorts of risks that insurers face. Terrorism, as in the case of New York's twin towers, can cause a catastrophic level of destruction. The attacks on the World Trade Center cost insurance companies $70 billion. In light of the scope of these losses, the reinsurance industry felt that the risks from terrorism were so great that they would have to rethink insuring buildings and complexes that might be the target of such an attack.
          The reinsurance companies began working with sympathetic members of Congress to try to enact legislation that would provide emergency support for the insurance companies, the way government does with flood or hurricane disasters. The companies worked with CALA (the Coalition Against Lawsuit Abuse), a coalition comprised of large business associations. The terrorism reinsurance issue quickly became embroiled in another: tort reform. For many years business groups have tried to get a law passed reducing their exposure to certain kinds of consumer litigation. At the heart of this approach is the right of defendants to move trials from state courts to federal courts, as well as limitations on class action lawsuits. Federal courts are seen as more sympathetic to business this kind of litigation, and class action suits have the potential for very large judgments.
           Tort reform sharply divides the parties. Republicans strongly favor such legislation as it benefits their business supporters, while Democrats work against it because trial lawyers, a solidly Democratic constituency, oppose laws making it more difficult to sue. The American Trial Lawyers of America (ALTA) fought tooth and nail against the legislation. The House of Representatives backed the insurance industry with passage of a bill shortly after 911. The Senate was slower to act but it enacted legislation as well. The new law contained a relatively narrow tort reform by giving federal courts original jurisdiction for class action suits arising out of acts of terrorism.