Implications for Church Leaders
Article summary. As the shock caused by the terrorist attacks on the World Trade Center towers and the Pentagon diminishes, it is time to acknowledge how vulnerable we are to such attacks and to address some important legal issues associated with terrorism. This feature article reviews ten issues for church leaders to consider.
On September 11, 2001, our country declared war on terrorism. This will be new kind of war, and our military and economic initiatives may trigger additional terrorist acts. Some of these, like the destruction of the World Trade Center towers, may directly impact churches, either directly or as “collateral damage” because of their proximity to another target. In either case, it is important for church leaders to be aware of several legal issues that may arise. This article will review ten of these issues.
1. Property insurance
Most church insurance policies exclude any property damages resulting from an “act of war” from coverage under the policy. If your church’s property is damaged or destroyed because of a terrorist attack, your insurer may attempt to invoke the “act of war” exclusion to avoid payment of any claims. Such a response, however, is unlikely because of the following considerations:
Public Image
Some insurance companies would waive the “act of war” exclusion rather than face the “public relations” backlash that would result from a denial of coverage.
Court Rulings Defining “Acts of War”
It is legally questionable whether the “act of war” exclusion would apply to a terrorist attack. Consider three leading cases.
Case #1. In a landmark case the United States Supreme Court (Justice Oliver Wendell Holmes, Jr.) was asked to decide if the “act of war” exclusion applied to damages occurring to two merchant ships which collided while traveling in a convoy at night without lights during World War I in order to avoid detection by German submarines. The Court concluded that the “act of war” exclusion did not apply since the war was not the immediate cause of the loss. This decision provides a very strict interpretation of the “act of war” exclusion. Queen Insurance Co. of America v. Globe & Rutgers Fire Insurance Co., 44 S.Ct. 175 (1925).
Case #2. On September 6, 1970 Pan American Flight 083, departed from Brussels to New York. Forty-five minutes after take-off, two men acting for the Popular Front for the Liberation of Palestine (“PFLP”) produced handguns and grenades and took control of the aircraft, ordering the crew to fly to Beirut, Lebanon. The aircraft, a Boeing 747, was then flown to Egypt. In Cairo, after the passengers were evacuated, the aircraft was totally destroyed. The insurance company that insured the plane invoked the “act of war” exclusion in an attempt to avoid paying for the loss of the plane. In explaining why they hijacked the plane, the hijackers stated, “We took the American plane because the government of America helps Israel daily. The government of America gives Israel planes which attack our camps and burn our villages. We know that by warning the people of America for the crimes and murders which are committed always on Palestine [we] make them feel how their government helps Zionism. Every day the Jews attack us in our camps. We think that by our work we will make you know the truth.” The court noted that the insurance policy excluded damages resulting from “war, civil war, revolution, rebellion, insurrection or warlike operations, whether there be a declaration of war or not.” It concluded,
English and American cases dealing with the insurance meaning of ‘war’ have defined it in accordance with the ancient international law definition: war refers to and includes only hostilities carried on by entities that constitute governments at least de facto in character …. In the present case, the loss of the Pan American 747 was in no sense proximately caused by any ‘war’ being waged by or between recognized states. The PFLP has never claimed to be a state. The PFLP could not have been acting on behalf of any of the states in which it existed when it hijacked the 747, since those states uniformly opposed hijacking …. In the present case, the criminal acts of [the two terrorists] were the proximate cause of the loss of the 747, not a remote conflict between warring states. In any event, the present record discloses that there was no ‘war’ in the Middle East on [the date of the hijacking] …. The loss of the Pan American 747 was not caused by any act that is recognized as a warlike act. The hijackers did not wear insignia. They did not openly carry arms. Their acts had criminal rather than military overtones. They were the agents of a radical political group, rather than a sovereign government. Pan American World Airways, Inc. v. Aetna Casualty & Surety Co., 505 F.2d 989 (2nd Cir. 1974).
• Key point. This case is directly relevant to the terrorist attacks on the World Trade Center and Pentagon.
Case #3. A federal district court in New York ruled that damages sustained by a Holiday Inn hotel in Beruit, Lebanon during incessant fighting between Muslim and Christian militias in the 1970s was covered by a property insurance policy. The insurance company argued that it was not required to pay claims for damages to the hotel since the damages had occurred in the course of an “act of war” and as such were excluded from coverage. The court defined “war” as “a course of hostility engaged in by entities that have at least significant attributes of sovereignty.” It concluded that the fighting among the private militias in Lebanon did not amount to “war,” since none of the militias had the status of a sovereign or “quasi-sovereign” government. The government of Lebanon continued to function throughout the fighting, and it was not directly involved. The court concluded, “The most that can be said is that as the power of the central government to control affairs in Lebanon diminished, groups such as the [private militias] came to the fore in conducting the fighting in certain areas. But that is not sufficient, under the cases, to endow the [militias] or comparable entities with the attributes of sovereignty or quasi-sovereignty.” Both the Palestine Liberation Organization and el Fatah were among the private militias that the court concluded were not “sovereign” states, and therefore damages caused by conflicts involving their militias did not constitute an “act of war.” Holiday Inns, Inc. v. Aetna Insurance Co., 571 F. Supp. 1460 (D.C.N.Y. 1983).
• Key point. Some prominent insurers announced in the weeks following the terrorist attacks on the World Trade Center and the Pentagon that they would not be asserting the “act of war” exclusion to deny claims stemming from the attacks.
• Key point. The recent terrorist attacks on the World Trade Center and the Pentagon may prompt some insurance companies to draft new exclusions to cover damages caused by terrorism.
2. Automobile insurance
Terrorist attacks often involve collateral damage to vehicles. Church-owned vehicles would be subject to the “act of war” exclusion contained in the church’s insurance policy. Some automobile insurance policies written for private individuals contain an “act of war” exclusion. Therefore, it is possible that a church employee, member, or visitor whose personal vehicle is damaged or destroyed while on church property because of a terrorist attack would be denied coverage for the loss.
3. Life and health insurance
Most life insurance policies written for private individuals (who are not members of the armed forces) contain no “act of war” exclusion. As a result, life insurance companies ordinarily will pay life insurance proceeds on the lives of church employees, members, and visitors killed while on church property because of a terrorist attack. The same is true of health insurance. Most policies contain no “act of war” exclusion and so persons injured on church property during a terrorist attack will be able to draw upon their health insurance policy to cover their injuries.
4. Workers compensation insurance
Church employees who are injured or killed by a terrorist attack while at work would be covered by workers compensation in many cases. This is another reason why it is important for church leaders to check to be sure their church has workers compensation coverage. Most church liability insurance policies exclude employment-related injuries from coverage, since it is assumed that churches carry workers compensation insurance. When a church fails to do so, it creates an uninsured risk for which it will be personally liable without any insurance coverage.
5. Evacuation plan
Every church should have an emergency evacuation plan to cover natural disasters such as fires and tornadoes. This plan should be modified as necessary to cover terrorist acts. The assistance of a local public health office can be of immeasurable value in drafting such a policy.
• Key point. While the risk of evacuation due to a terrorist attack is remote, it must be considered together with other, more likely, causes for a general evacuation. These include a number of natural disasters (fire, tornado, hurricane, earthquake, volcano, flood) and mechanical failures (natural gas leaks, explosions, water line breaks, power failure).
• Key point. The Oppenheimer Funds investment company, whose 598 employees occupied floors 31-34 of the World Trade Center (South Tower), was fully operational within 48 hours after the terrorist attacks because of a disaster response policy it had implemented before the attacks. Churches should consider implementing a similar policy. Church leaders need to ask themselves, “How would we respond if our building were destroyed or rendered unusable due to a natural disaster such as an earthquake, fire, tornado, hurricane, flood, or volcano? How would we respond if our building were destroyed or rendered unusable because of a mechanical failure such as a chemical explosion, boiler explosion, power failure, natural gas line failure, or water line failure? What about a terrorist attack or act of war? Where would our congregation meet? Where would our employees work?” These questions deserve serious consideration. As the Oppenheimer Funds company discovered, an emergency response policy can be of vital importance in responding to such emergencies.
• Resource. Our newly released “Safety Checklists for Churches and Schools (2002 edition)” contains specific checklists to assist church leaders in managing the risks associated with natural disasters, and helpful guidance on how to respond to a disaster should one occur. See Module 8. This new resource is available from Christian Ministry Resources by calling 1-800-222-1840.
A related issue is how your church would treat employees following a temporary cessation of activities due to a terrorist act or natural disaster? Would you continue salary and benefits when staff are not able to physically be present at work? While the risk of a cessation of activities due to a terrorist act is remote, it is worth addressing this issue in the broader context of cessation of activities due to any reason since there are some natural disasters (hurricanes, tornadoes, fires, earthquakes, floods, volcanoes) and a host of other conditions (such as heating, cooling, plumbing, or electrical problems) that could result in a cessation of activities resulting in church staff being unable to come to work for a temporary period.
6. Negligent supervision
As readers of this newsletter are well aware, a church is exposed to legal liability for ignoring credible information that a volunteer worker or employee presents a threat of harm to others in the church. A common example is a church that continues to use an adult in a children’s ministry despite evidence that he is a child molester. The same principle applies to terrorist acts. If church leaders receive credible information of a terrorist act, and do nothing about it, they are exposing the church (and themselves) to potential legal liability for injuries that may later result. The best response to such information is to turn it over immediately to the police.
7. Tax relief
The IRS has provided several forms of tax relief to persons affected by the recent terrorist attacks. Here are some of the major provisions:
The IRS has reminded taxpayers who suffered property losses because of the September 11 terrorist attacks that they may get a quick tax refund by claiming these losses on an amended return for 2000. Taxpayers in a presidentially declared disaster area have the option of claiming their casualty losses on the tax return for the year of the disaster or the previous year. By amending the 2000 return, a taxpayer gets a refund in a few weeks, rather than waiting until filing the 2001 return next year.
Tax relief will be given to all taxpayers, regardless of where they live, who are directly affected by the September 11 attacks. Taxpayers who will receive this help include all relief workers, airplane crash victims, and people who work, or whose tax records are kept, in the disaster areas. Residents of New York City’s five boroughs, and of Arlington County where the Pentagon is located, will also qualify for this relief. This relief is comprised of several elements, including the following: (1) A postponement of the September 17, 2001 quarterly estimated tax payment (for the third quarter of 2001). Affected taxpayers may make this payment with their final 2001 estimated payments on January 15, 2002. Taxpayers entitled to this relief should write “September 11-Terrorist Attack” in red ink at the top of the returns they file (Form 1040-ES). (2) Though deadlines for employment taxes won’t be postponed, employers (including churches) unable to make deposits because of the attacks will receive relief, and penalties will be waived on tax deposits missed between September 11 and October 31, 2001 provided they are made by November 15,2001. (3) In addition to tax relief, the IRS will suspend many enforcement activities, such as levies, seizures, and summonses during the next six months.
The IRS is speeding up applications for tax-exempt status for new organizations formed to help the victims of the September 11 terrorist attacks.
The IRS has established a special toll-free telephone number for taxpayers whose ability to meet their federal tax obligations has been affected by the September 11 terrorist attacks. People with tax issues related to the attacks can call 1-866-562-5227. “This special number will help people cut through the red tape and get their tax questions answered quickly,” IRS Commissioner Charles O. Rossotti said. “We don’t want lingering tax questions to burden anyone during this challenging time.” Taxpayers can call the number Monday through Friday from 7 AM to 10 PM.
The IRS has activated an electronic mailbox to provide assistance and answers to employers affected by the September 11 terrorist attacks. Employers can send their questions to corp.disaster.relief@irs.gov.
The IRS has created a web site devoted to the September 11 terrorist attacks. Visit this site for the most up-do-date information. The site may be accessed at www.irs.gov/relief/index.html.
• Observation. All 180 IRS employees who worked in the World Trade Center buildings survived.
• Key point. The U.S. Department of Labor’s Pension and Welfare Benefits Administration has announced an extension of the deadline for filing Form 5500 and Form 5500-EZ for employers located in the areas designated as federal disaster areas because of the September 11, 2001 terrorist attacks. The extension also applies to filers located outside the designated disaster areas who are unable to obtain the information necessary for filing from service providers, banks or insurance companies whose operations are directly affected by the disasters. Under the extension, those with filings originally due between September 11, 2001, and November 30, 2001, will be allowed an additional six months plus 120 days to file. Filers who have difficulty in meeting filing deadlines because of disruption of transportation and delivery of documents by mail or private delivery service resulting from the disasters, and who do not otherwise qualify for the extensions described above, will have until November 15, 2001 to make their Form 5500 and 5500-EZ filings. Filers entitled to the extension relief described above should check Part 1, Box D, on the Form 5500, or Part 1, Box B on the Form 5500-EZ, and attach a statement labeled “SEPTEMBER 11, 2001 TERRORIST ATTACK” that explains the basis for the extension being claimed under this release. Filers who have additional questions may contact the PWBA Help Desk at 1-866-463-3278. For a discussion of Form 5500, and its application to churches, see chapter 5, section I, in Richard Hammar’s annual Church and Clergy Tax Guide.
8. Charitable contributions
Hundreds of millions of dollars in individual contributions to victims of the terrorist attacks have been given to a variety of charities. As might be expected, some of the friends and loved ones of the victims are wanting to make contributions to churches and other charities that are designated for use by the victim’s family. This raises the question of the deductibility of these designated contributions. The IRS recently released the advanced text of a special Publication entitled “Disaster Relief: Providing Assistance Through Charitable Organizations,” that contains the following information:
Charitable contributions are tax-deductible if made to a qualified organization. Qualified organizations include charitable organizations that the IRS has determined are exempt from federal income tax; churches, their integrated auxiliaries, and conventions or associations of churches; and domestic fraternal societies operating under the lodge system (if the contribution is to be used exclusively for charitable purposes) …. Persons can help victims of disaster or hardship by giving gifts directly to individual victims or through non-qualified organizations. This type of assistance does not qualify as tax-deductible contributions since a qualified organization is not the recipient. However, individual recipients of gifts are not subject to tax on the value of the gift, unless an employer provides the assistance for the benefit of an employee. Persons who provide gifts directly to individuals may be subject to gift tax if the value of the gift exceeds $10,000 to a person in a particular year. The $10,000 amount is periodically adjusted for inflation. Sometimes providing financial assistance apart from a qualified charity is desirable.
• Example. Jim, a college student and a counselor at a summer camp, accidentally rolls his old truck into a lake. The other counselors collect several hundred dollars and give the monies directly to Jim to help with the down payment for another truck. Since the counselors are making personal gifts to a particular individual, the use of a qualified charitable organization would not be appropriate. The counselors cannot take a tax-deduction on their gifts to Jim. But, neither Jim nor the other counselors are subject to federal tax on the gift.
9. How churches can help
Many churches and other religious organizations are wanting to assist victims of the terrorist attacks. The IRS recently released the advanced text of a special Publication entitled “Disaster Relief: Providing Assistance Through Charitable Organizations,” that contains the following information. While this publication refers to “disaster relief or emergency hardship organizations,” the same principles would apply to churches and religious organizations.
The following sections emphasize how charitable organizations can provide assistance to disaster or emergency hardship victims in ways that accomplish charitable purposes.
Charitable class. Disaster relief or emergency hardship organizations may provide loans or grants in the form of funds, services or goods to ensure that victims have the basic necessities, such as food, clothing, housing (including household repairs), transportation, and medical assistance (including psychological counseling assistance). The type of aid that is appropriate depends on the individual’s needs and resources. Immediately following a devastating flood, a family may be in need of food, clothing and shelter, regardless of their financial resources. However, they may not require long-term assistance if they have adequate financial resources. Persons who are needy or distressed are appropriate recipients of charity. Examples include persons who are: (1) impoverished as a result of low income and lack of resources; (2) temporarily in need of food or shelter when stranded, injured or lost because of fire, flood, accident or other disaster; (3) victims of a civil disturbance; (4) temporarily unable to be self-sufficient as a result of a sudden and severe personal or family crisis, such as victims of crimes of violence or physical abuse; or (5) refugees or immigrants experiencing language, cultural or financial difficulties.
The group of persons that may properly receive assistance from a charitable organization is called a charitable class. A charitable class must be large or indefinite enough that providing aid to members of the class benefits the community as a whole. Because of this requirement, a disaster relief or emergency hardship organization cannot be formed and operated to assist particular, pre-selected individuals, such as a few persons injured in a particular fire. Similarly, contributions cannot be earmarked to a charitable organization for a particular individual. When a disaster or emergency hardship occurs, a charitable organization may help persons who are needy and/or distressed because they are part of a general class of charitable beneficiaries, provided the organization is in control of who gets the assistance.
• Example 1: Linda’s baby, Todd, suffers a severe burn from a fire, which will require considerable costs that Linda cannot afford. Linda’s friends and co-workers form the Todd Foundation to raise funds from fellow workers, family members and the general public to meet Todd’s expenses. Since the organization is formed to assist a particular, pre-selected person, it would not qualify as a charitable organization even though Todd is otherwise an appropriate charitable beneficiary. Alternatively, if Linda’s friends and co-workers form a charitable organization to raise funds to meet the expenses of all children in the community injured by disasters where financial help is needed, then it could qualify as a charitable organization. Neither Linda nor members of Linda’s family control the charitable organization. In this circumstance, the charitable organization must be in a position to determine whether any assistance for Todd is appropriate. Therefore, donors should be advised that, while funds may be used to assist Todd, their contributions might well be used for other children who have similar needs. Contributions earmarked for Todd, specifically, cannot be accepted by the organization. Because the organization is now formed and operated to assist an indefinite number of persons, it would qualify as a charitable organization.
• Example 2: A hurricane causes widespread damage to property and loss of life in several counties of a coastal state. Over 100,000 homes were damaged or destroyed by high winds and floods. The group of people affected by the disaster is large enough so that providing aid to members of this group benefits the public as a whole. Therefore, a qualified charitable organization can be formed to assist a definite group of persons provided the people are part of a sufficiently large community.
Needy and distressed test. Generally, a disaster relief or emergency hardship organization must have in place a needy or distressed test-a set of criteria by which it can objectively make distributions to individuals who are financially or otherwise distressed. Adequate records are required to support the basis upon which assistance is provided.
Persons do not have to be totally destitute to be needy, merely lacking the resources to meet basic necessities. Moreover, the type of information needed to support assistance may vary depending on the circumstances. A charitable organization that is distributing short-term emergency assistance may require far less documentation, in the way of victims establishing that they need relief assistance, than an organization that is distributing longer-term aid. Providing a drug rescue and telephone crisis center or rescue service to a person lost at sea or trapped by a snowstorm, flood or other disaster would not require a showing of financial need, since the individual requiring these services is distressed irrespective of the individual’s financial condition.
A charitable organization that provides disaster or emergency hardship relief is not required to make a person whole, such as by rebuilding the person’s uninsured vacation home destroyed by a flood or replacing a person’s income after the person’s business is destroyed in a riot. Furthermore, a person who is eligible for assistance because the person is a victim of a disaster or emergency hardship has no right to funds. This is especially relevant when the volume of contributions received in response to appeals exceeds the immediate needs. A charitable organization is responsible for taking into account the charitable purposes for which it was formed and the individual needs of the victims when using its discretion to distribute the funds.
Short-term and long-term assistance. Often charitable organizations are established as a result of a particular disaster where both short-term and long-term assistance might be required.
• Example: A group of persons are killed by the actions of terrorists. A charitable organization, previously formed to assist persons who are victims of terrorism in the United States, determines that some victims’ spouses and dependents have adequate resources and insurance to meet immediate financial and medical needs, but others lack resources to meet these needs. The organization also determines that there will likely be a need for long-term help, such as for financial assistance and post-secondary education expenses for the victims’ dependents. In this circumstance, the organization can grant funds to assist in meeting more immediate financial and medical needs. Such a grant may take into account needs likely to arise in the immediate future as well as current needs. The organization can also set aside funds for anticipated long-term needs; however, when a grant is made out of the set-aside funds, it must be based on needs that exist at the time the grant is made. Charitable funds cannot be distributed to persons merely because they are victims of a disaster. Therefore, an organization’s decision about how its funds will be distributed must be based on an objective evaluation of the victim’s needs at the time of the grant.
Employer-related assistance. Frequently, employers provide programs that assist employees in coping with personal tragedy. At issue is whether an employer, by providing disaster or emergency hardship assistance to its employees through a charitable organization, is chiefly serving the employer’s private interests. If that happens, the organization will not qualify as charitable and the assistance will likely be taxable compensation to the employees.
Employer-related assistance programs qualify as charitable and do not result in taxable compensation to employees provided specific criteria are satisfied. The employer-related criteria do not apply to organizations where the employer does not provide any financial support, such as employee-funded disaster or emergency hardship relief organizations. These criteria demonstrate that employment is merely a factor rather than the sole basis for providing relief. See the following chart on criteria.
Military Duty
A federal law enacted in 1994 specifies that a person “who is a member of, applies to be a member of, performs, has performed, applies to perform, or has an obligation to perform service in a uniformed service shall not be denied initial employment, reemployment, retention in employment, promotion, or any benefit of employment by an employer” on the basis of his or her military service or application for service. The law applies to all employers, including churches, whether or not they are engaged in interstate commerce and regardless of the number of their employees. The law defines “service in the uniformed services” to include “active duty, active duty for training, initial active duty for training, inactive duty training, full-time National Guard duty, and a period for which a person is absent from a position of employment for the purpose of an examination to determine the fitness of the person to perform any such duty.” The law only protects employees whose military absences from an employer have not exceeded 5 years, with certain exceptions. An employee’s reinstatement rights depend upon the time he or she is away on military leave.
This law will have limited application to ministers, who are exempt by federal law from the military training and service. However, some ministers do perform “service in the uniformed services,” and the protections of the law may apply to them. Church leaders should assume that the law applies to both ministers and lay workers unless an opinion to the contrary is received from legal counsel.
© Copyright 2001 by Church Law & Tax Report. All rights reserved. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is provided with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional person should be sought. Church Law & Tax Report, PO Box 1098, Matthews, NC 28106. Reference Code: m50 m81 m08 c0601
