Terrorism Risk

Fear Takes No Holiday

When businesses are affected indirectly by a terrorist attack, their losses can fall through the many cracks that exist in terrorism insurance policies.
By: | September 20, 2016 • 12 min read

In April 2013, an explosion rocked the street in front of the Charlesmark Hotel, a boutique property on Boylston Street in Boston that overlooked the finish line of the Boston marathon. In the chaos that ensued, the FBI closed a 12-block radius around the blast scene. Five hotels were completely locked down, including the Charlesmark, Mandarin and Lenox hotels.

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Strictly from an insurance standpoint, the hotels, restaurants and businesses in that 12-block radius may have been the lucky ones. Direct impact to their operations would have at least given them access to insurance recovery for physical damage or for business interruption due to civil authority action, assuming they had the right coverages in place.

But what about the businesses outside that radius? No doubt their revenues suffered in the days and weeks that followed, as media coverage fanned the flames of fear, keeping Boston’s terrorism connection alive in the minds of the public.

It’s likely that few, if any of them, had language in their insurance policies that would help offset their losses while Boston struggled to regain some normalcy.

The volume of terror attacks has increased worldwide in a short period of time. At the time of this writing, three U.S. attacks with potential connections to terrorist organizations took place within a single 12-hour span on Sept. 17.

Fear has become one of the most challenging market conditions facing business that rely on travel and tourism. Gaps in coverage can take companies by surprise when high-profile events suppress travel, tourism and the general flow of commerce.

“There’s no question that the hospitality industry is affected by fear, as much or more than the event itself,” said Chad Callaghan, principal of Premises Liability Experts, based in Atlanta. Callaghan served Marriott International Inc. for 35 years, as vice president of safety and security.

Business hubs rebound more quickly, because business travelers can’t stay away for long. But companies dependent on leisure travelers for revenue can take heavy hits, depending on the nature and severity of an attack in their vicinity. It’s hard to calculate what the financial impact would be of a major attack at Disney World, or at the primary airport of the host city of the Super Bowl a week before the event.

“Terrorism is the thing that scares everybody,” said Joe Addison, executive vice president at JLT Specialty USA, “People don’t want to walk down Las Vegas Boulevard when two weeks ago there was a truck bomb there, and every time they look at a truck they’re going to worry, ‘Is there one in there?’ ”

Financial Toll

Following the November 2015 terrorist attacks in Paris, bookings at luxury hotels in the city fell by 50 percent. Within days of the Brussels terror attack, hotel occupancy plunged from 82 percent to 25 percent across the city.

Jan Schnabel, managing director and director of risk management with Hub International’s Hospitality Practice

Jan Schnabel, managing director and director of risk management with Hub International’s Hospitality Practice

“Acts of terrorism have a lingering negative impact on revenue that simply can’t be recovered,” said Jan Schnabel, managing director and director of risk management with HUB International’s hospitality practice.

“The hundreds of billions of dollars that are lost in overall revenue in the tourism and hospitality world following an attack is inconceivable.”

The World Travel & Tourism Council estimates that it takes a region, on average, about 13 months to get back to normal following a terrorist attack. In the grand scheme of things, that’s not long. But it can still take a mighty toll.

And booking and cancellation stats don’t really give a complete picture of what hotels may face in the immediate wake of a terrorist attack, when trying to serve the limited guests they do have.

“It’s a tough thing for risk managers to really wrap their minds around,” said Sheri Wilson, national property claims director for Lockton.

“What if I can’t get laundry? What if the roads are closed so I can’t get the people in? What if I can’t get fresh fruit in?” Hotels may need to spend a considerable amount to get the goods and services they need.

Terrorism coverage for such losses and unexpected expenses is a tricky beast. Coverage under standard property policies is typically limited to property damage and business interruption related to property damage. It also relies upon the event to be certified as an act of terrorism by the U.S. Secretary of the Treasury.

“If you elect coverage through TRIPRA, or one of the other national terrorism pools, there may be limited or no cover depending on your underlying property policy and how the terrorism ‘pool’ ultimately responds,” said Steve Truono, vice president of global risk management and insurance for Starwood Hotels & Resorts.

Business interruption (BI), or time element coverage, can be triggered by other situations such as evacuation orders, transportation interruptions or power outages. Contingent BI can come into play as well, in some cases.

“I rely on housekeeping to keep my hotel open but if housekeeping [can’t get to work] because of a terrorist attack, I could, as a hotel owner, have [CBI] coverage,” said Wilson.

“Once the terrorism is certified, all of the coverages in the policy come into play.”

Consider the Boston marathon incident, said Christian Waeldner, vice president, crisis management and political risk at Starr Cos.

“You had a bunch of restaurants and hotels in close proximity to the finish line who were indirectly impacted by the bombing. … It took a quite some time for life to get back to normal in the city center after the bombing and that’s a huge financial impact.”

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Waeldner said Starr Cos.’ cyber and terror response product includes contingent BI that can be triggered by a terrorist event within two miles of an insured’s property, even if they are not directly impacted.

But it’s important to remember that the Boston bombing was never declared a terrorist act. Products such as Starr’s or Lockton’s new terrorism crisis solutions offer more comprehensive coverage that doesn’t require the Secretary of the Treasury to certify an act of terrorism.

Stand-alone terrorism policies often have a distinct advantages for insureds, said John Welty, practice leader for SUITELIFE from program administrator Venture Insurance Programs.

“The hundreds of billions of dollars that are lost in overall revenue in the tourism and hospitality world following an attack is inconceivable.” — Jan Schnabel, managing director and director of risk management with HUB International’s Hospitality Practice

“A stand-alone terrorism insurance program can help to reduce the gray areas of where our standard insurance policies are providing coverage,” he said.

“Depending on the policy form obtained, you may find some coverage for cancellation of booking or non-physical damage,” added Truono, but “a lot depends on your business exposures, what markets you buy from, and how much you’re willing or able to spend.”

Even in cases where one has cancellation of booking included in their terrorism policy, it is very likely that the coverage is sublimited, well below the several hundred million dollars of limits you may have for direct property damage, he said.

Loss of attraction is a specialized time element coverage that may provide some relief. But like cancellation of booking, the coverage is typically subject to low sublimits and is often subject to annual aggregate, not per occurrence, limits as well.

Risk managers should keep in mind that it can be complicated to prove a loss, said Turono.

“As risk managers, we have to be able to support the loss and demonstrate that the loss of net income was a result of the terrorist act, despite no physical damage to one’s own property.

“For example, in the hospitality industry, we would need to show that the reduction in room occupancy, RevPAR and ultimately net income, is a direct result of the terrorist act which results in interruption of our business due to guests’ or customers’ inability to freely and safely access the hotel.

“Likewise, loss emanating from leader property interruption (airport, convention center, etc.) ingress-egress, and/or military-civil authority may also support the basis for a claim.”

Customized Coverage

“The terrorism policies are pretty staid and strict and there’s a lot that they don’t cover,” said a Western U.S. risk management professional for a large resort and casino operator.

That can potentially leave risk managers on the hot seat if the C-suite assumes that buying any kind of terrorism policy means the company will be covered no matter what the circumstances.

“The worst thing is to have your boss think that, ‘oh we have terrorism coverage so anything that happens around here might be covered,’ because that’s not necessarily the case,” the risk manager said.

But the marketplace is changing for the better.

Sheri Wilson, national property claims director, Lockton

Sheri Wilson, national property claims director, Lockton

We’ve gone from basic terrorism add-ons that most owners didn’t even look twice at [to] new offerings in the marketplace that are more comprehensive because of events such as [those in] Orlando and San Bernardino,” said Sean Spagnoli, vice president and client executive for HUB International’s hospitality practice.

“The notable changes are the new contingent products where you don’t have to have damage just to your location. It can be an event that happens anywhere from a 5 to a 50 mile radius.”

One such product from Florida-based New Paradigm provides parametric and contingent terrorism coverage for business income, extra expense, loss of attraction and brand protection. Coverage triggers can include terrorism occurring within a predetermined radius from insured locations, or occurring at other predetermined locations that could cause a loss.

“It will allow you to pick and choose different hotels and different scenarios,” said the Western U.S. risk professional, and it also offers the kind of capacity he needs for a large organization.

For many companies, said Addison, that kind of capacity is the key.

“Someone like MGM or Caesars … the amount of money going through those facilities a day — $10 million in coverage isn’t going to cut it. If they were to have a substantial event in Vegas and people just cancelled their reservations and were scared to go there, they’re going to need more like a quarter billion, half a billion.

“If they go from a 90 percent occupancy down to 60, that’s a lot of revenue because they’re making money from the food, they’re making money from the gambling. Then the question is — how long does it take before it comes back? Before people feel safe again?”

“Imagine if you were a company in Las Vegas and [after a terrorist event] you had to tell your shareholders that you didn’t have coverage for that, and your share price drops 20 percent.” — Joe Addison, executive vice president, JLT Specialty

These conversations need to happen with the CFO, experts agreed.

Finance and risk management need to look closely at what could make people afraid to come to your properties and how it would affect the balance sheet, or significantly impact share price or investor ownership value or dividends.

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“Imagine if you were a company in Las Vegas and [after a terrorist event] you had to tell your shareholders that you didn’t have coverage for that, and your share price drops 20 percent,” said Addison.

When you look at what companies pay in property insurance, the potential financial exposure to non-physical could be so much bigger, he added. “You could lose a lot more by having occupancy at your hotel drop by 50 percent for three months.

“At the end of the day, the idea of something out of your control affecting your business scares the crap out of people.”

Risk Mitigation

Decisions about terrorism coverage, said experts, should be part of a larger process that includes a detailed risk assessment, the creation of a comprehensive crisis management plan specific to acts of terrorism, and simple measures to reduce the likelihood of becoming a target.

A good risk assessment doesn’t have to be expensive, time-consuming or interfere with operations, said Peter DiDomenica, former director of security policy at Boston’s Logan International airport, and president of security firm Quantum Innovation Corp. It can be as straightforward as reviewing the geography and physical layout of the property and evaluating existing training and security measures.

“It’s going to give you a road map for everything else.”

Most U.S. hotels and resorts haven’t undergone the level of “hardening” common in many other countries, but it’s important to take all reasonable measures, experts said.

“We have hundreds of thousands of people at a hotel,” said the resort and casino risk manager. “If someone just starts shooting, you can have a huge loss of life that impacts your property, your workers’ comp, your liability and your reputation worse than anything else.

Steve Truono, vice president of global risk management and insurance, Starwood Hotels & Resorts

Steve Truono, vice president of global risk management and insurance, Starwood Hotels & Resorts

“The reputation is the thing that is very difficult to do anything with. So it makes sense to do as much as you can on the front end because you’re limited in what you can do after something happens.”

That said, most U.S. property owners are reluctant to anything that might appear extreme.

You want to “harden your properties, but do it in a soft way,” said Tarique Nageer, leader for U.S. property terrorism placements with Marsh USA. “By the nature of hotels, you can only do so much because they’re free-flowing places so you don’t want to impede guests or visitors … so you’ve got to weigh those needs.”

There are surprisingly simple ways to improve a property’s risk profile, said DiDomenica. Just trimming the hedges could be enough to “make it less inviting in terms of the physical environment for someone who’s going to do surveillance or plan an attack,” he said.

Staff members can also play a key role in helping to thwart an imminent attack, said Reggie Gibbs, senior underwriter and product manager with Starr Cos. In hotels, for example, they have the best handle on typical guest behavior and what might constitute a red flag.

“They can spot when a car is parked in an unusual place,” he said. “They know when a guest has been in a room for an extended amount of time and for some reason isn’t letting housekeeping in to clean.”

Brokers and insurers are key partners throughout the process. They have the experience to help insureds assess and quantify risks and coverage parameters. Truono, for instance, asks brokers to explain coverage through hypothetical claim scenarios.

“I don’t want to solely focus on coverage terms, but I also want to understand how the policy will be interpreted in the event of a claim. I want to understand how and if a claim will be covered, because in the end, that’s the inherent risk transfer value and what we are buying.”

An Evolving Risk

The forms and manifestations of terrorism keep changing, said Truono, and risk managers must continue to ensure their prevention and risk mitigation strategies evolve as well.

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“A truck bomb is one type of an event with specific control countermeasures,” he said. “A lone-wolf or individuals who enter a hotel with IEDs [improvised explosive devices] or automatic weapons, however — that’s a totally different type of event requiring  specialized tactics and controls, and it’s necessarily more difficult to manage.”

“How do you protect yourself against situations where someone just wants to kill people rather than destroy a building?” asked Nageer.

The harsh reality is that no one and no place is immune from terrorism acts.

“We must remain vigilant, aware and informed,” said Truono. “We need to continue to educate our people and enhance our prevention and response strategies. Our practices, processes, priorities and physical plants must be dynamic and continually adapt to ever-changing landscape and information.”

Michelle Kerr is associate editor of Risk & Insurance. She can be reached at [email protected]

More from Risk & Insurance

More from Risk & Insurance

Risk Report: Entertainment

On With the Show

Entertainment companies are attractive and vulnerable targets for cyber criminals.
By: | December 14, 2017 • 7 min read

Recent hacks on the likes of Sony, HBO and Netflix highlight the vulnerability entertainment companies have to cyber attack. The threat can take many forms, from the destruction or early release of stolen content to the sabotage of broadcast, production or streaming feeds.

Brian Taliaferro, entertainment and hospitality specialist, JLT Specialty USA

“Cyber attacks are becoming the biggest emerging threat for entertainment companies, bringing risk to reputations, bottom lines and the product itself,” said Brian Taliaferro, entertainment and hospitality specialist, JLT Specialty USA.

For most entertainment firms, intellectual property (IP) is the crown jewel that must be protected at all costs, though risk profiles vary by sub-sector. Maintaining an uninterrupted service may be the biggest single concern for live broadcasters and online streaming providers, for example.

In the case of Sony, North Korea was allegedly behind the leak of stolen private information in 2014 in response to a film casting leader Kim Jong Un in what it considered an unfavorable light.

This year, Netflix and HBO both faced pre-broadcast leaks of popular TV series, and Netflix last year also had its systems interrupted by a hack.

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Online video game platforms are also ripe for attack, with Steam admitting that 77,000 of its gamer accounts are hacked every month.

The list goes on and will only get more extensive over time.

Regardless of the platform, any cyber attack that prevents companies from producing or distributing content as planned can have huge financial implications, particularly when it comes to major releases and marquee content, which can make or break a financial year.

“People and culture are the biggest challenges but also the keys to success.” — David Legassick, head of life science, technology and cyber, CNA Hardy

The bottom line, said David Legassick, head of life science, technology and cyber, CNA Hardy, is that these firms have a combination of both assets and business models that are inherently open to attack.

“Vulnerabilities exist at every point in the supply chain because it’s all tech-dependent,” he said, adding that projects often run on public schedules, allowing criminals to time their attacks to maximize impact.

“The combination of IP, revenue and reputation risk make entertainment a hot sector for cyber criminals.”

Touch Point Vulnerabilities

Film, TV, literary and music projects invariably involve numerous collaborators and third-party vendors at every stage, from development to distribution. This creates multiple touchpoints through which hackers could gain access to materials or systems.

According to Kyle Bryant, regional cyber manager, Europe, for Chubb, there is nothing unique about the type of attack media companies suffer — usually non-targeted ransomware attacks with a demand built in.

“However, once inside, the hackers often have a goldmine to exploit,” he said.

He added targeted attacks can be more damaging, however. Some sophisticated types of ransomware attack, for example, are tailored to detect certain file types to extract or destroy.

“NotPetya was designed to be non-recoverable. For a media company, it could be critical if intellectual property is destroyed.”

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As entertainment companies have large consumer bases, they are also attractive targets for ideological attackers wishing to spread messages by hijacking websites and other media, he added.

They also have vast quantities of personal information on cast and crew, including celebrities, which may also have monetary value for hackers.

“It is essential to identify the most critical information assets and then put a value on them. After that, it is all about putting protection in place that matches the level of concern,” Bryant advised.

As with any cyber risk, humans are almost always the biggest point of vulnerability, so training staff to identify risks such as suspicious messages and phishing scams, as well as security and crisis response protocols, is essential. Sources also agree it is vital for entertainment companies to give responsibility for cyber security to a C-suite executive.

“People and culture are the biggest challenges but also the keys to success,” said Legassick.

“Managing the cyber threat is not a job that can just be left to the IT team. It must come from the top and pervade every aspect of how a company works.”

David Legassick, head of life science, technology and cyber, CNA Hardy

Joe DePaul, head of cyber, North America, Willis Towers Watson, suggested entertainment companies adopt a “holistic, integrated approach to cyber risk management,” which includes clearly defining processes and conducting background checks on the cyber security of any third party that touches the IP.

This includes establishing that the third parties understand the importance of the media they are handling and have appropriate physical and non-physical security at least equal to the IP owner in place. These requirements should also be written into contracts with vendors, he added.

“The touchpoints in creating content used to be much more open and collaborative, but following the events of the last few years, entertainment firms have rapidly introduced cyber and physical security to create a more secure environment,” said Ryan Griffin, cyber specialist, JLT Specialty USA.

“These companies are dealing with all the issues large data aggregators have dealt with for years. Some use secure third-party vendors, while others build their own infrastructure. Those who do business securely and avoid leaks can gain an advantage over their competitors.”

Quantification Elusive

If IP is leaked or destroyed, there is little that can be done to reverse the damage. Insurance can cushion the financial blow, though full recovery is very difficult to achieve in the entertainment space, as quantifying the financial impact is so speculative.

As Bill Boeck, insurance and claims counsel, Lockton, pointed out, there are only “a handful of underwriters in the world that would even consider writing this risk,” and sources agreed that even entertainment firms themselves struggle to put a monetary value on this type of exposure.

“The actual value of the IP taken isn’t generally going to be covered unless you have negotiated a bespoke policy,” said Boeck.

“If you’re in season five of a series with a track record and associated income stream, that is much easier, but putting a value on a new script, series or novel is difficult.”

Companies for whom live feeds or streaming are the primary source of revenue may find it easier to recoup losses. Determining the cost of a hack of that sort of service is a more easily quantifiable business interruption loss based on minutes, hours, ad dollars and subscription fees.

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Brokers and insurers agree that while the cyber insurance market has not to date developed specific entertainment products, underwriters are open for negotiation when it comes to covering IP. The ball is therefore in the insured’s court to bring the most accurate projections to the table.

“Clients can get out of the insurance market what they bring to the equation. If you identify your concerns and what you want to get from insurance, the market will respond,” said Bryant.And according to Griffin, entertainment companies are working with their brokers to improve forecasts for the impact of interruptions and IP hacks and to proactively agree to terms with underwriters in advance.

However, Legassick noted that many entertainment firms still add cyber extensions to their standard property policies to cover non-physical damage business interruption, and many may not have the extent of coverage they need.

Crisis Response

Having a well-planned and practiced crisis response plan is critical to minimizing financial and reputational costs. This should involve the input of experienced, specialist third parties, as well as numerous internal departments.

Ryan Griffin, cyber specialist, JLT Specialty USA

“The more business operation leaders can get involved the better,” said Griffin.

Given the entertainment industry’s highly public nature, “it is critically important that the victim of a hack brings in a PR firm to communicate statements both outside and within the organization,” said Boeck, while DePaul added that given that most cyber attacks are not detected for 200-plus days, bringing in a forensic investigator to determine what happened is also essential.

Indeed, said Griffin, knowing who perpetrated the attack could help bring the event to a swifter and cheaper conclusion.

“Is it a nation state upset about the way it’s been portrayed or criminals after a quick buck? Understanding your enemy’s motivation is important in mitigating the damage.”

Some hackers, he noted, have in the past lived up to their word and released encryption keys to unlock stolen data if ransoms are paid. Inevitably, entertainment firms won’t always get so lucky.

Given the potentially catastrophic stakes, it is little surprise these firms are now waking up to the need for robust crisis plans and Fort Knox-level security for valuable projects going forward. &

Antony Ireland is a London-based financial journalist. He can be reached at [email protected]