Compensation Policies
for Victims of Terrorism

Lloyd Dixon is a senior economist at RAND. Rachel Kaganoff Stern is an associate political scientist at RAND.

The attacks of Sept. 11 prompted an enormous outpouring of financial support from both public and private sources. But this unprecedented response has raised difficult questions about compensation policies for terrorist victims in general—not only the victims of Sept. 11 but also the victims of previous and future attacks.

For example, should victims of the 1995 Oklahoma City bombing also be compensated? Or victims of the Unabomber? (They haven't been.) Who should foot the bill—insurance companies, guilty parties, or taxpayers? Should businesses be compensated for lost revenues?

AP/WIDE WORLD PHOTOS/MIKE DERER Women who lost family members in the Sept. 11 terrorist attacks voice their concerns about the fairness of the September 11 Victim Compensation Fund during a news conference in East Brunswick, N.J., on Jan. 16.

The response to the Sept. 11 attacks brought these questions to a head. Nearly two-thirds of American families sent checks to charities. Congress created the September 11 Victim Compensation Fund, the first government program established in the United States to compensate the victims of terrorism. Congress also appropriated funds to shore up the U.S. airline industry.

Private insurers are bearing the costs as well: Estimates of their ultimate total payments range between $35 billion and $75 billion, by far the largest single-event loss in U.S. history. Meanwhile, the legal system, which provides the main source of compensation for many causes of injuries, is playing a much more limited role in this case. In fact, the Victim Compensation Fund explicitly constrains an applicant's right to sue for damages caused by the terrorist events of Sept. 11.

What can be learned from this experience to help policymakers craft a fair response in the future? Part of the answer lies in considering what mix of responses—private insurance, tort actions (lawsuits), charities, and government programs—is most appropriate for terrorism losses. As outlined below, each approach has advantages and disadvantages for compensating victims of terrorism.

Private Insurance

Even though private insurance has played a central role in compensating the losses suffered on Sept. 11, there is no guarantee that it will play a leading role in the future. Policies covering terrorism are no longer available in many cases, and when they are, the coverage is usually limited. Insurance works best when the aggregate loss can be predicted with relative accuracy and the chance of very large single-event losses is negligible, as in the case of automobile accidents. Neither of these conditions applies to terrorist attacks. The law of large numbers that allows aggregate losses in the automobile context to be predicted with relative accuracy does not apply, and potential losses from some types of attacks—such as biological, chemical, or nuclear attacks—are so large as to be uninsurable.

Private markets have several advantages: Markets allow individuals to tailor policies to their own needs, and markets are good at setting prices to reflect risk. However, the high price of terrorism insurance will limit its availability to the few who can afford it, and very large losses will likely remain uninsured. Congress is currently debating proposals for the federal government to "reinsure" the market for terrorism insurance, at least temporarily. Under these proposals, the federal government would basically reimburse private insurers for losses over a certain threshold.

The Tort System

Although the tort system is the main mechanism for compensating losses in certain disasters, such as airline accidents, it may also have a limited role for terrorist attacks. It delivers compensation slowly and with substantial legal and other transaction costs. Moreover, in the case of terrorist attacks, the parties primarily responsible for the damages will likely either not have the resources to pay the damages or be beyond the reach of U.S. courts. Victims may seek damages from other parties who are somehow connected to the incident but are arguably not negligent.

Congress considerably limited the role of the tort system in compensating for injuries caused by the 9/11 attacks. Airlines, aircraft manufacturers, airports, the owners and leaseholders of the World Trade Center, and the City of New York are liable only up to the limits of their insurance policies. Congress also required applicants to the Victim Compensation Fund to waive the right to file a civil action in any federal or state court for damages related to the airline crashes on Sept. 11. Finally, Congress required that all claims for any loss related to the 9/11 attacks be filed in federal district court for the Southern District of New York as opposed to state courts. Congress is also considering restrictions on tort actions for future attacks.

Nonetheless, tort liability should probably not be eliminated altogether for terrorist attacks. As a society, we need to provide appropriate incentives to firms that run security systems or that have access to important infrastructures, such as pipelines, bridges, or transportation systems. On the other hand, the role of torts will be less useful for deterring terrorists or penalizing them when they have few assets and may be beyond the reach of U.S. courts.

Private Charities

Private charities are based on voluntary contributions. The contributions are, therefore, innately unpredictable. Would the response to the Sept. 11 attacks have been as great if the attacks were against less visible landmarks? Can we count on charities to such a degree after the shock of attacks by foreign terrorists on U.S. soil has worn off? Probably not.

Government Assistance

The September 11 Victim Compensation Fund compensates individuals who were injured in the attacks and the survivors of those who were killed. The fund will pay economic damages (i.e., lost income and medical costs) and non-economic damages (pain and suffering). The presumed non-economic loss for decedents is $250,000 plus an additional $100,000 for the spouse and each dependent of the deceased victim. Claimants must waive their right to sue for damages in court, and options for appealing an award are limited.

Such a program can fill gaps left by the insurance system, the tort system, and private charities. Efficiently operated government programs can also circumvent the tort system's long delays and high transaction costs. There are disadvantages to government programs as well, however: They can strain the federal budget and create bureaucracies that deliver compensation less efficiently than the private insurance sector. In principle, government programs can also reduce private incentives to take appropriate actions to reduce losses. For example, the availability of subsidized federal flood insurance encourages farmers to repeatedly plant crops in land that is regularly flooded.

We at RAND are examining the gaps and overlaps of the web of programs that are compensating victims of the Sept. 11 attacks. We are also examining how losses are compensated in a number of different settings, both at home and abroad, to understand better the circumstances in which different mixes of the four approaches are effective. We hope the results of our research will help policymakers find the right balance of public and private compensation policies for the victims of future terrorist attacks.