Can Mass Shootings Be Covered by Captive Insurance?

In the wake of the tragic and sobering mass shooting events in El Paso, Gilroy, and Dayton, questions loom within the business community; one being, can mass shootings be insured? Those with some familiarity with alternative risk planning are asking if this is a risk that can be covered under a captive insurance arrangement. After all, insurance coverages—even those obtained through a captive insurance company—insures “fortuitous” risks. These are risk exposures which are possible, but largely unpredictable and abrupt. That said, is a mass shooting really fortuitous? Aren’t perpetrators intentional when committing their crimes?

Here, Capstone explores whether or not active shootings or other violent threats can or should be covered by a captive insurance company. And if so, what would the arrangement cover over and beyond a commercial policy?

How Commercial Insurance Covers Mass Shootings Now

U.S. Homeland Security has defined an active shooter as “an individual actively engaged in killing or attempting to kill people in a confined and populated area; in most cases, active shooters use firearms and there is no pattern or method to their selection of victims.” As of July 31, 2019, there have been 248 mass shootings in the U.S. (Source: Gun violence archive), and the FBI reports that 42 percent of the 250 mass shootings between 2000 and 2017 occurred in businesses, more than any other establishment.

The increase in active shooter events has initiated an intense national conversation about guns, security, and financial liability. Of course, many individuals, citing their 2nd amendment rights, have been vocal about protecting themselves and loved ones. But what about businesses? Do they have a responsibility to secure their establishments and support employees? When someone is injured during an active shooting, does/should workers’ compensation insurance cover medical costs and other needs? These are important questions with not so clear-cut answers. But the commercial insurance industry has made an attempt to dispel the ambiguity.

In an uncertain future regarding firearm restrictions, mental health screenings, and other issues related to mass shootings, schools and businesses have sought out insurance that would help address the aftermath of such an event.

Right now, some commercial insurers are offering limited “mass shooter” coverages, providing business owners/leaders with some level of financial safeguards. Commercial coverages have included physical damage, legal liability or litigation, crisis management, business interruption, medical & funeral expenses, and “loss of attraction” -- coverage that addresses a loss of patronage to a business following a shooting (Source: Insurance Business Mag). These are also known as “active-assailant coverages.” The services included may vary, but a majority of insurers providing this type of coverage offer a pre-incident security vulnerability assessment (Source: Business Wire). This is essentially an assessment that determines natural, criminal, terrorist, or accidental threats for a given facility or location.
One of the problems with commercially-available coverages of this type is that they are not widely available and are scant in coverage for victims. Nor have they established a significant claim / loss history (active-assailant coverages are relatively new, with the first policies issues in 2011). Many of these policies carry exclusions if the loss event stemmed from terrorism; the unlawful use of violence and intimidation, especially against civilians, in the pursuit of political pursuits.

The policies available right now are essentially gap coverages and are often very expensive for an average mid-market business – even a highly profitable one. Coverage limits average about $20 million, although some go as low as $1 million or as high as $35 million (Source: Crain’s Chicago Business).

It’s a high price tag to cover a loss event that’s unlikely to happen. But if a mass shooting does occur it could lead to disastrous financial consequences for a business.

Tailored Coverages in a Captive Insurance Arrangement

Many businesses insure workplace violence risk for situations where an employee kills or injures one or more fellow employees and/or customers. However, a captive insurance company (an insurance company specifically formed to insure the risks of an affiliated business) goes a step further to cover many of the risks that may be excluded or exorbitantly priced under a commercial policy.

“Many businesses that have unfortunately been through the terrifying experience of a mass shooting has also experienced a subsequent reputational loss,” comments Lance McNeel, Vice President of Capstone Associated Services. “Active shooter risk cannot be predicted, but businesses can still prepare for this type of loss event by thinking outside the box; opting for alternative risk planning to secure their businesses in the aftermath. Reputation management, business interruption, loss of key employees, the loss of a key customer, and a host of other coverages can all be insured through a well-designed captive insurance arrangement if the risk exists to support them. If the crime scene is damaged to the point that the business is unable to re-open for several weeks or months, captive insurance coverages can fill in. The advantages of obtaining this coverage through your own captive insurance company are cost-effectiveness, tailored coverages, and ancillary financial benefits.”

According to the Insurance Information Institute, terrorism coverage is a public/private risk-sharing partnership that allows the federal government and the insurance industry to share losses in the event of a major terrorist attack. The Terrorism Risk Insurance Act (TRIA), which was enacted by Congress in November 2002, ensures that adequate resources are available for businesses to recover and rebuild if they are the victims of a terrorist attack. Under TRIA all property/casualty insurers in the U.S. are required to make terrorism coverage available (Source: Insurance Information Institute). An active shooter event, however, is not covered under this program. With this consideration in mind, business owners should seek alternative means of coverage, as taking on the full brunt of covering the financial damages of a mass shooting event can be brutal to the bottom line.

Insuring a Mass Shooting, Leaving Nothing to Chance

The point of insurance is to transfer risk to a third party. If coverages carry gaps in insurance, the insured is left vulnerable. Businesses specifically could be subject to lawsuits and other unexpected perils. This is especially true when insuring a mass shooting.

Although coverages written under a captive allow for a more comprehensive risk management strategy, the captive manager who’s overseeing the planning should ensure the captive is compliant with federal and state laws and regulations and that nothing is left to chance. A multidisciplinary approach is essential to the captive’s success.

Among the critical aspects of captive planning left unaddressed by this limited approach are often tax, legal, corporate, financing, regulatory, and policy manuscripting services.
An on-site feasibility study at the onset of a captive arrangement can help determine what risks exist within the captive.

Regarding mass shooting risk, there’s little actuarial data available, so special attention must be given to the accuracy of premiums. Turnover and any historical situations where there has been a disgruntled employee may be taken into account. Many factors will be used in determining which coverages make sense.

It is a shared hope that no active shooter events come to pass. Beyond the heartbreaking human impact, active shooters can also threaten the profits of impacted midmarket businesses. But it is possible to soften the financial impact with a comprehensive risk management plan which includes captive insurance planning.