PORT SECURITY AND TERRORISM RISK

1. PORT SECURITY ANDTERRORISM RISK Presented by: Paul H. Zoubek, Esquire The Insurance Institute of London October 14, 2003 Montgomery, McCracken, Walker & Rhoads, LLP Philadelphia, PA United States of America

2. www.oreillynet.com/cs/weblog/view/wlg/684 (credit pending)

3. Where Are We Now? • The Clear and Present Danger • Port and Maritime Threat • Key Security Responses • Impact on Duty of Care and Risk Management • Terrorism Risk Insurance

4. The Continuing Threat • We’ve routed the Taliban but Osama Bin Laden’s whereabouts are unknown • We’ve driven Hussein from Iraq but Hussein’s whereabouts are unknown • Political conditions in the Middle East have worsened

5. The Clear and Present Danger • Goal of the Al-Qaeda and International Jihad Movements - The Destruction of Western Interests • We must think the unthinkable and prepare for the unimaginable • Complacency is our greatest threat

6. Memories tend to be short Assassination of Anwar Sadat 1993 World Trade Center Bombing 1996 Khobar Towers 2000 U.S.S. Cole 1998 Bombing in Kenya and Tanzania

7. The Clear and Present Danger Bin Laden - Holy War We hear the beats of drums and they are storming his forts and shouting: “We will not stop…until you free our lands.”

8. FBI Warns “The Al-Qaeda and other groups associated with the international jihad movement continue to focus on attacks that yield significant destruction and high causalities, thus maximizing worldwide media attention and public anxiety.” Dale Watson, FBI Counter-Terrorism Unit

9. Maritime Security Threat • As governments harden key assets, terrorists will move to symbolic targets to attack western economic interests and trade

11. Port Security • Pre 9/11 - Drug interdiction focus - Lack of manpower - Grossly under funded • Risks Underestimated - Biological - Nuclear • New Threat Paradigm - Suicide Bombers - Martyrs

12. Key Security Responses • Maritime Transportation Security Act (MTSA) • Homeland Security Department Legislation • International Ship and Port Facility Security Code (ISPS) • Advance Cargo Declaration (24 Hour Rule) • Container Security Initiative (CSI) • Customs-Trade Partnership Against Terrorism (CT-PAT) • Terrorism Risk Insurance Act (TRIA)

13. Maritime Transportation Security Act • Mandates - Vulnerability Assessments - Security Plans by December 31, 2003 - Transportation Security Cards - Maritime Safety and Security Teams - Audits of 2,500 International Ports • Establishes - Grants - Extension of Seaward Jurisdiction to 12 Nautical Miles

14. ISPS Port Facility Security Plan • Amendment to 1974 Safety of Life at Sea Convention (SOLAS) • By July 2004 - Must Complete - - Risk Assessment - Action Plan - Port Facility Security Plan - Tied to 3 levels of security risk • International trade may be obstructed where port fails to meet ISPS requirements

15. ISPS Code Calls for Standardized Security Assessments • Evaluate critical infrastructure • Identify threats • Address possible weaknesses in physical security, structural integrity, protection systems, communications, and other areas within a port facility

16. ISPS Code Requires • Companies to appoint security officers at company level and for each ship • All vessels must carry: - Approved ship security plan - Continuous synopsis record (lifetime record of vessel’s identification, ownership, registration, and classification)

18. HOMELAND SECURITY • Consolidates agencies • Establishes system of threat warnings • Establishes Homeland Security Technology Research and Development

19. Support Anti-Terrorism by Fostering Effective Technologies Act Qualified Anti-Terrorism Technology - “any product, device, or technology, designed, developed, or modified for the specific purpose of preventing, detecting, identifying, or deterring acts of terrorism and limiting the harm such acts might otherwise cause”

20. Support Anti-Terrorism by Fostering Effective Technologies Act • Limits litigation against sellers when “qualified anti-terrorism technologies have been employed” • Exclusive federal jurisdiction • Eliminates - punitive damages - non-economic damages unless plaintiff suffered physical harm

21. Product Liability Provisions • Requires seller to obtain liability insurance • Seller is not required to obtain liability insurance of more than the maximum amount reasonably available from private sources at terms that will not unreasonably distort the sales price of the product • Liability shall not be greater than limits of required insurance coverage

22. Other Developments • Advance cargo declaration (24 hour rule) • Container Security Initiative (CSI) • Customs-Trade Partnership Against Terrorism (CT-PAT)

23. Advance Vessel Cargo Declaration(24 Hour Rule) • U.S. Customs Requirement - A vessel cargo declaration must be provided 24 hours prior to loading cargo at a foreign port if the vessel is bound for the United States

24. Container Security Initiative CSI • Targets high-risk cargo containers by: - Establishing criteria to identify high-risk containers - Pre-screening high-risk containers before they reach U.S. - Using technology to quickly pre-screen - Develop “smart and secure containers”

25. Customs - Trade Partnership Against Terrorism (CT-PAT) • CT-PAT is a U. S. Customs/industry partnership designed to speed the flow of commerce • Provides “fast-lane” entry to regular, “trusted shippers.” Participating firms must apply for membership and sign Memorandums of Understanding with the Customs and Border Protection Agency

26. CT-PAT Requirements • Shippers must agree to undertake certain security measures within their scope of control - Security checks for employees - Secure industrial facilities - Anti terrorism training awareness, etc. • Cargo is still subject to search, but is less likely to be inspected than a non CT-PAT container

27. Risk Management Post 9/11 • Were reasonable steps taken to protect against an incident in light of available security measures, the industry “standards” for security, and the potential threat of terrorism? • Responsible to protect others from reasonably foreseen dangers

28. Duty of Care Issues • Enhanced Duty of Care • Foreseeability of Harm • Stanford v. Kuwait Airways Corp. 89 F.3d 117 (2d Cir. 1996) Airline had duty to protect passengers from risk of terrorists boarding connecting flights

29. Stanford v. Kuwait Airways Corp. • Hijacking was a foreseeable risk • Airline knew: 1) of threatened attacks by Hezbollah terrorists 2) terrorists were boarding flights in dirty airports to infiltrate other airlines 3) Beirut had extraordinarily poor security 4) hijackers who boarded plane had tickets which teemed with suspicion No defense that it is a criminal act

30. Foreseeability Hijack of plane caused by airline complacency creates “zone of risk” Question: Is terrorist attack on ship or a port foreseeable?

31. Enhanced Standard of Care Mandates Enhanced Risk Management • Threat/Vulnerability Assessments • Security Plans • Use of State of the Art Technology • Incident Response Planning • Audits/Drills

32. New Risk Management Paradigm • Need for constant vigilance • Need for real time threat intelligence • Need for constant monitoring of - Regulatory Developments - Technological Developments - Industry Standard of Care

33. Terrorism Risk Insurance Program • Terrorism Risk Insurance Act • Applies to terrorist acts within U.S. boundaries certified by Secretary of State, Secretary of Treasury, and the Attorney General as tied to international terrorism

34. Terrorism Risk Insurance Program • TRIP is a temporary Federal system of shared public and private compensation for insured losses resulting from foreign acts of terrorism - Ensures continued widespread availability of property and casualty insurance for terrorism risk

35. Terrorism Risk Insurance Program - Provides transition period for private markets to stabilize, resume pricing, and build capacity while preserving State insurance regulation and consumer protection.

36. Terrorism Risk Insurance Program Assessment • Three program years: 2003, 2004, 2005 • Insurer participation is mandatory during Program years • Insurers must “make available” coverage for acts of terrorism during first two years of the program. Terms, amounts, and limitations applicable to TRIA coverage shall be comparable to those for property and casualty coverage for non-terrorism events.

37. Terrorism Risk Insurance Program • Regulations interpret TRIA as applying to specific lines of maritime insurance approved by a U.S. federal program such as MARAD.

38. Terrorism Risk Insurance Program Structure • The insurer’s exposure is equal to the insurer’s deductible (7% of premiums in 2003, 10% in 2004, and 15% in 2005) and 10% of insured losses in excess of the deductible - If an insurer had $200 million in direct earned premiums in 2002, its deductible for 2003 would be equal to $14 million , and 10 percent loss sharing would kick in above $14 million in insured losses

39. Terrorism Risk Insurance Program Structure • Annual Federal and insurer liability cap of $100 billion • No restrictions on rates or policyholder purchase decision

40. Terrorism Risk Insurance Program Assessment • The Secretary of Treasury shall assess the effectiveness of the Program and the likely capacity of the property and casualty insurance industry to offer insurance for terrorism risk after termination of the Program, and the availability and affordability of such insurance for various policyholders. The Secretary shall report the results of this study to Congress by June 30, 2005.

41. Paul H. Zoubek, Esquire Alfred Kuffler, Esquire Montgomery, McCracken, Walker & Rhoads, LLP 123 South Broad Street Philadelphia, PA 19109 USA Phone 856-488-7731 e-mail: pzoubek@mmwr.com Phone215-772-7454e-mail: akuffler@mmwr.com