A year-and-a-half ago, the thought of stand-alone terrorism coverage was a fleeting one. Most companies were content with their general policies. Although said policies didn't flat-out state that acts of terrorism were covered, they didn't exclude them either. Now companies that never dreamed of being potential terrorism targets are faced with making sure their coverage is complete -- whether talking about large-scale, politically motivated attacks or other acts not traditionally considered "terrorism." Defining terms, scrutinizing phrases, answering questions never asked before all come into play in a post-Sept. 11 business environment. As for the insurance companies, "They are really getting more into [what] the business [is] of manufacturers," explains Steve Lawrence, national practice leader for Ernst & Young's Insurance Risk Management Advisory Services Practice. Prior to the 2001 terrorist attacks, many insurers and re-insurers weren't all that concerned about acts of terrorism touching manufacturers. After all, many manufacturing plants are in rural areas -- far away from economic epicenters. "Now, all of a sudden, we are starting to see underwriters asking different questions," says Lawrence, who prior to joining Ernst & Young worked for PepsiCo Inc., Mars Inc. and IBM Corp., helping those companies manage their risks. From a property point of view, Lawrence says what's being asked now is: "What are the adjacent exposures? Are you right next to a stadium? Are you near a power plant? Are you near an airport? If you are, and [insurers] think those are potential targets, you could have collateral damage. Do you have security guards? Are they trained? To what extent? How many guards are there? Do you have physical security also in fencing? Is it barbed wire? Is it checked periodically? Does it have alarm systems attached? All of these questions start coming into play." Indeed, Stephanie King, director for risk analysis at Weidlinger Associates Inc., a New York-based consulting engineering firm, is in the business of asking questions. King's firm, which helps insurance companies and businesses predict risks and offers suggestions on how to mitigate those risks, has adapted natural-disaster analysis methods for potential terrorist attacks. While predicting when and how a terrorist attack will happen is nearly impossible, companies can analyze other factors that may be affected if an attack occurs. The analyses then can be used to make needed changes. "What we're doing now to assess risks for terrorism is to look at the same process of how we assess natural hazards -- combining the likelihood of occurrence with the vulnerability of the structure and the consequences given the hazard does occur," explains King. "However, in a natural occurrence we have probability -- [with terrorism] we don't." To address the lack of probability, many risk assessors rely on due diligence in the other categories. "We try to characterize the consequences -- the damage, the downtime and the casualties," says King."[We measure] what happens to the structure itself as well as the surrounding community and the regional economy and try to come up with something you can make a decision about." Those decisions may include buying insurance, making physical changes to buildings and other structures, or making operational changes (screening cars, hiring security) if the risk is large enough; or choosing to self-insure if a company feels its risk is minimal. As for downtime and casualties, another matter being affected by terrorism is workers' compensation. "Underwriters start developing scenarios," Lawrence says. For example, when considering how many employees a company has, insurers may be looking for ways to spread the risk. Suggestions of running three shifts with 500 employees each rather than one shift with 1,500 are starting to surface. Additionally, insurers are starting to talk about capacity and utilization. Lawrence offers this scenario: "You really have two facilities producing the same widget. One is outside of Cleveland, the other is outside of Fayetteville, Ark. Why can't you shift some of that production from Cleveland to Fayetteville, where there is less of a risk?" Why all the questions? "Right now preparedness is key," Lawrence explains. "Risk control programs are no longer optional." Language Loopholes On Feb. 5, 2001, William Baker, a recently fired Navistar International Corp. employee, overpowered a security guard and entered Navistar's diesel engine plant in Melrose Park, Ill. He fatally shot four people, wounded four others and then killed himself. Baker, who was involved in a plan to steal engines and parts from the plant, was going to begin a prison sentence the next day. What does this have to do with terrorism? A lot, according to Lawrence. "If a disgruntled employee does some kind of heinous act, many insurers may say that's terrorism." And if a particular act is not well defined in your policy, you could be held liable. "You really need to focus on the wording that an insurer is proposing before you accept the exclusion. Or if you have an exclusion and are buying coverages, make sure the coverages are in line with the exclusion because you can have gaps [in coverage]." For example, in the case of the disgruntled employee, if a company has coverage that covers only politically motivated acts of terrorism and an exclusion for disgruntled employees, then the coverage is not complete. Additionally, companies should look at other things that may be excluded. For example, are fires covered after a bomb is set off? "The fire could do more damage than the device," Lawrence adds. As for the future, "Even if there are no further terrorist acts on U.S. soil, the events of Sept. 11 are going to lead to certain standard industry wordings that will be adopted," says Terry Cummings, a partner with Ohrenstein & Brown, a New York-based law firm. "However, I'm not sure what they will be." The Cost of Security Insurance companies are absolutely running scared of terrorism exposure," says Cummings. "The World Trade Center loss was just huge, and nobody knows how to price for that exposure -- nobody knows what the premiums should be." Adding to the uncertainty is the fact that the insurance industry has been in a difficult market cycle for the last 10 years, according to Cummings. "Capacity [customers buying coverage] was drying up, and prices were going up anyway. And Sept. 11 really just exacerbated that." While Cummings speaks to the climate right after the terrorist acts, Ernst & Young's Lawrence paints a picture of what he sees happening now. "Pricing has come down considerably, and the amount of capacity has increased substantially. We're looking at 0.15% to 0.20% [cost per property value], which is almost like the cost of regular property coverage. Before we were looking at 1% to 2%, which was very expensive. "Now if someone asks 'Can you offer me $500 million to $750 million in coverage?' The answer is, 'Yes.' " And there are some reputable companies that offer terrorism coverage, according to Lawrence: AIG (American International Group Inc., www.aig.com), Ace (The ACE Group of Insurance & Reinsurance Companies, www.ace-ina.com), Berkshire Hathaway (Berkshire Hathaway Group, www.brkdirect.com) and Factory Mutual (Factory Mutual Insurance Co., www.fmglobal.com). In addition to a number of insurance companies offering terrorism coverage, the Federal government has decided to intervene. Indeed, since Sept. 11, terrorism insurance legislation has been on the minds of Representatives, Senators and especially the President. The legislation provides a federal backstop to the insurance industry in the event there is another attack. The measure, which was signed into law by President Bush late last year, states that the government would reimburse insurance losses up to $100 billion. The three-year program doesn't let insurers walk away without any responsibility. Insurers will pay a deductible that increases each year. Additionally, insurers won't have to pay the government back if losses are more the $10 billion in the first year, $12.5 billion the second year and $15 billion the third year. However, opponents to the legislation -- specifically the Consumer Federation of America (CFA), a Washington, D.C.-based non-profit advocacy and education group -- are worried that the new law makes taxpayers liable for billions of dollars in losses that the insurance industry could easily afford to repay. Disagreeing with the CFA is Michael Cahill, executive vice president and director of Carvill America, an independent reinsurance intermediary based in London. He says, "The magnitude of terrorist exposure is beyond the means of the insurance community. Other countries have set up a pool for terrorism, and I think [there needs to be] a balance between the government and the insurance community to find a solution that provides coverage to corporate and personal [consumers]." Agreeing with Cahill is Michael Baroody, executive vice president of the Washington, D.C.-based National Association of Manufacturers and a proponent of government intervention. A federal backstop is crucial for manufacturers and other commercial interests that have faced double- and triple-digit increases in property and casualty premiums and workers' comp insurance since Sept. 11, he says. "Companies can take steps to moderate terrorist exposures, but the government needs to be the first line of defense," says Cahill. "I think that we have finally become aware that these terrorist have exported terrorism to the U.S. -- now we have to deal with it."