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Economic Impact on Customers
What Will It Cost?

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By Doug Fox, CCE and Scott Blakeley, Esq.
Reprinted by permission from Trade Vendor Quarterly Blakeley & Blakeley LLP

The post-Sept. 11 costs to federal and state government and private industry are in the billions and on several levels. The U.S. government expects to spend billions in security.

Reports in the national media indicate that the insurance industry expects total insured losses to be between $40 billion and $70 billion. As of the end of October, 72,000 insurance claims had been filed in New York, alone. New York property claims associated with the Sept. 11th attacks are expected to reach up to $16 billion, with an additional $550 million in personal property claims, with automotive claims expected to exceed $40 million.

Workers' compensation losses are expected to be $4 billion to $6 billion, aviation losses of $5 billion to $9 billion, liability claims of $3 billion to $20 billion, and life insurance claims exceeding $3 billion. In addition, private industry is expected to spend billions more to protect employees in the future.

Local governments and cities report that municipal revenues have been affected by the Sept. 11 attacks, and many are finding it difficult to meet budgets, in part, because of a decrease in tax collection and an increase in expenses to cover security.

Worldwide Problems

The aftermath of Sept. 11 has and will significantly affect countries overseas. Many European companies claim to have business damaged because of the attacks. Some European governments are considering intervening with emergency tax measures. A number of European companies claim that Sept. 11 has resulted in a downturn in their business. Some question whether certain European companies are using this as an excuse for other problems facing the business.

As an example of political change, thousands of Iranians, who in previous years may have marched in the streets shouting, "America is the Great Satan," are now marching in the streets in protest of their fundamentalist Islamic government and chanting "We love you, America!"

Industry Wide Problems

The terrorist actions are impacting virtually all industries, and all segments along the production chain, from manufacturing to distribution to retail. Airlines, hotel and insurance companies are facing extraordinary losses resulting from the attacks. Likewise, telecommunications and transportation are seen as being strongly affected by these events which have only worsened the pressures on the American steel industry. Few customers will escape the downturn. Corporate customer purchases are being scaled back, as consumer purchasing wanes. It is reported that California, for example, will lose 265,000 jobs from the economic fallout of Sept. 11.

It may be difficult for the credit professional to discern those customers that are indirectly affected by the terrorist attacks. Scores of businesses have been indirectly affected by the terrorist attacks attributed poor financials to these events. Some customers may use these events as an opportunity for non-payment, whether legitimate or not.

Accounting Standards

For public companies, there was confusion as to the proper accounting and reporting as to the terrorist attacks. The Financial Accounting Standards Board (FASB), which oversees corporate accounting standards, pronounced that companies may not designate losses tied to the terrorist attacks as extraordinary items with their earnings announcements. FASB reasoned that the economic impact of the terrorist acts were so pervasive that it would be impossible to capture this impact in a single financial line item.


A number of customers may be litigation targets surrounding the Sept. 11 events, or their customers, whom they derive a significant source of business. Scores of lawsuits are expected against airlines, the airplane manufacturer and building owners, among others, for failing to anticipate or take proper steps with the attacks. Insurance companies contend that they do not have the financial wherewithal to insure against the losses and have requested federal assistance. Insurance companies have conceded that their policies that include act-of-war policy exclusions does not bar claims from the Sept. 11 terrorists acts.

The prospect of widespread litigation has prompted federal legislative efforts to limit the scope of liability suits against certain parties. Federal legislation has already passed that protects United Airlines and American Airlines from litigation liability greater than their insurance policies. Fortunately (or unfortunately, depending on your perspective), many large multi-national companies carry comprehensive general liability policies with coverages in excess of $100 million.

The federal government may propose legislation that limits liability for all companies that are targets for such litigation. The concern is that absents caps on liabilities, insurance companies may refuse to issue policies, further disrupting the economy. Insurance companies have warned companies that policies will be cancelled in the next two months, because of the extraordinary liability.

To overcome the high cost of insurance premiums for terrorism liability, major airlines have formed an insurance pool to cover terrorist acts. The airlines would pay into an insurance fund to cover terrorist acts.

Insurance Premiums Rise

Many customers whose businesses were not directly affected by the terrorist attacks have found their property and casualty insurance rates increasing dramatically. Insurance companies are looking to recoup their losses from Sept. 11 through increased premiums.

Customers may be forced to consider unconventional alternatives to meet insurance needs such as terrorism bonds, wherein companies issue the bonds and pay off in the event the company is a target of a terrorist event. Another avenue may be insurance pools sponsored by municipalities that do not profit.


The aftermath of Sept. 11 is causing an increase of bankruptcy filings. Many companies were already suffering through a slowing economy before Sept. 11, and these events have created financial crisis forcing bankruptcy filings with the result of suspending payment of creditors. Many customers will face dramatic increases in their business insurance premiums, which may further squeeze their ability to meet expenses. Some customers may find themselves in default of their bank loan covenants if they are unable to obtain Planet Hollywood and Bethlehem Steel both attribute the aftermath of Sept. 11 as uncontrollable events that have forced them to file bankruptcy. Likewise, home furnishings retailer House2Home attributed a downturn in its business to the Sept. 11 attacks, which forced a Chapter 11 filing. A number of restaurants have likewise pointed to Sept. 11 as a cause for their failure to meet trade debt and filing bankruptcy.

Absent federal legislation to limit liability, insurance companies are facing questions as to their survival. Lloyd's of London may have to cover up to $8 billion in losses in the Sept. 11 attacks. Federal legislation is being considered that would force the U.S. government to pick up the cost of future terrorist acts, after insurance companies have made an initial contribution, such as in the $10 billion range.

Fraud and Bustouts

Given the problem economy, a credit professional must be especially vigilant of customers taking steps to stay afloat, including fraudulent accounting and reporting practices. Vendors should also be mindful that the FBI and policing agencies are focusing on homeland security, making white collar crime and bust out schemes a lower priority. The Justice Department has shifted its focus from investigating and prosecuting past crimes to investigating threats of future terrorist attacks. Given the focus of law enforcement on combating terrorism and not domestic business fraud, bust-out artists may sense an opportunity to conduct fraudulent schemes against vendors.

Common red flags for the credit professional to identify fraud or a bust-out include a fake company name that is similar to the name of a well-established company. Another flag is unusually large profits depicted on the income statement - if that statement is even provided. Indeed, it may be delivered to an address other than the business address. Finally, a large merchandise order following a history of small orders should raise a question for a credit executive dealing with a relatively new vendor.

There are several steps credit executives can take to protect themselves from fraud and a bust-out, including: keep the vendor's credit functions and sales functions separate; visit the new customer during business hours and observe sales behavior; visit the customer when the business is closed; ask for a personal guarantee; and discuss the account with other vendors in the industry group.

Prior to Sept. 11, identity theft was a major concern for vendors and law enforcement. As some terrorists in the Sept. 11 attacks had stolen identities, there is greater concern over this crime. Identity theft may be as high as 750,000 cases a year according to some privacy advocates. Biometrics and other technological developments are expected that will make stealing an identity much more difficult.

Douglas G Fox, GSCFM, CCE is a member of Mid-Atlantic NACM and is active in the Greater Delaware Valley Region and Philadelphia area.

Scott E. Blakeley is a principal of Blakeley & Blakeley LLP where he practices creditors' rights and bankruptcy law. He can be reached at

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