The entire insurance industry is being re-examined as a result of the terrorist attacks in the US.

The Insurance Services Office has now categorised the attacks as Cat 48, which means as a grouping it is the 48th insurable catastrophe recorded worldwide. Cat 48 far surpasses any insurance worst case scenario and is significantly larger than the two previous largest property catastrophes combined - Hurricane Andrew in 1992 (at $19.6 billion in 2000 dollars) and the Northridge earthquake in 1994 (at $16.3 billion in 2000 dollars). The attacks also far exceed the previous largest single risk basis loss - Piper Alpha in 1988 that was the largest industry loss.

Because of the sheer magnitude of Cat 48, it will undoubtedly highlight the pitfalls of the insurance industry as well as present new opportunities to enable the industry to work more efficiently. This is the first catastrophe to impact so many different lines of businesses and layers of insurance at the same time.

The first task of the insurance world is to start redefining the basics of the insurance contract to minimise its ambiguities so that claim disputes are resolved easily. The insurance contract is legally classed as a "contract of adhesion". A contract of adhesion means the onus is on the entity that drafts the contract (the insurance company) to prove the meaning of the terms and conditions of its contract.

Contract ambiguity is often the reason why it takes disputes so long to settle because the contract wording usually becomes an issue when there is a claim. Despite insurance companies simplifying policy wording to make them easily readable by the insured, contract disputes are still very prevalent. In most cases, it has been determined that clients do not even read their contracts but rely upon the fact that they have purchased insurance and thus should be fully compensated in the event of a loss.

One of the scenarios, which will significantly impact the future of the industry, is how the courts interpret what constitutes a single loss. Mr. Silverstein, the holder of a 99-year lease for The World Trade Center, is trying to assert that because two separate aircraft flew into each tower, the incident should be treated as two separate losses rather than as a single loss.

He is trying to maximise the amount of money he will recoup from his insurers because of the huge costs he is anticipating to rebuild the towers to comply with new building codes.

Never before has the industry experienced such an event - with two airplanes hitting two separate towers - which were insured as a single building. In insurance terms, the common cause, which caused the destruction of the World Trade Center, was the terrorist attack, therefore the insurance industry is defining this incident as a single loss.

In addition, because the World Trade Center was quoted and rated as a single entity and premium was collected to cover a single entity, the insurance industry has not collected enough premium to pay for two separate events.

In a ground breaking move, Swiss Re, which is estimated to be one of the largest contributors to the loss (estimated to be $1.25 billion) has agreed to make an advance payment of the claims on the condition that the US Federal Court in Manhattan declares the incident as a single loss. I believe the reason why Swiss Re has taken this unprecedented step is because it recognises that, as the drafter of the insurance contract, the burden of proof will be on it to prove that the policy clearly states that the attack on the World Trade Center is a single loss and not two separate losses.

Swiss Re is also trying to show its willingness to honour the terms and conditions of its contract wording by offering to act in the best interest of the worst hit clients, including the Port Authority of New York and New Jersey, owners of the World Trade Center, by promptly advancing payments for Cat 48.

More importantly, Swiss Re is trying to establish future case law as to how an incident of this nature will be handled. Swiss Re is trying to expedite a debate which could take years to resolve because it is a totally unprecedented case.

To the best of my knowledge, never in the history of insurance has there been a doubling of policy limits for a loss stemming from the same event. The decision made by the US Federal Court will be a very difficult and political one to make because it is located in Manhattan, a city which has been devastated by Cat 48 and whose very powerful business people stand to lose lots of money if it does not take the appropriate steps to help them rebuild.

However, the courts also have the social responsibility to ensure that the insurance funds made available will be adequately spread to compensate all of the victims of the tragedy and not just for the rebuilding of the World Trade Center.

This is precisely the case that Swiss Re is trying to advance by offering to initiate claims payments because of the social responsibility it owes to all of the policyholders who have suffered tremendous losses. Therefore, the decision will significantly impact the insurance industry's ability to adequately respond to the many claimants. No matter what decision is made, there will be losers. The question that remains is which loss is the least detrimental to society as a whole.

Previously completed studies indicated the maximum catastrophe that the insurance industry could sustain without any insurance companies becoming insolvent was $50 bilion. Well, Cat 48 is now estimated to settle at around $70 billion.

This estimation is based upon the event being treated as a single loss. If the event is treated as two separate losses, many insurance companies would be forced into insolvency.

It's a dicey situation for the city of New York and the insurance industry but I applaud Swiss Re for making this gutsy first move. Someone had to do it to force the industry to resolve this sensitive issue.

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Cathy Duffy is a Chartered Property Casualty Underwriter (CPCU) and is now a freelance writer. She is a former executive of Zurich Global Energy and has 15 years experience in the insurance industry. She writes on insurance issues in The Royal Gazette every Monday.