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Terrorism Risk Insurance Act of 2002
National Association of Professional Surplus Lines Organizations has reviewed the Terrorism Risk Insurance Act of 2002 bill and put together the following information.
The Terrorism Risk Insurance Act of 2002 creates a program for a system
of “shared public and private compensation for insured losses resulting
from acts of terrorism” committed on behalf of any foreign person
or foreign interest (domestic terrorism is not covered by the program)
and resulting in losses that exceed $5 million.
The House unanimously passed the legislation on November 14th and the
Senate approved it, 86 to 11, on November 19th. President
Bush signed the bill on November 26th.
The program, which lasts through December 31, 2005, will be administered
by the Secretary of the Treasury and covers primary and excess commercial
insurance including workers’ compensation insurance and surety. Personal
lines, reinsurance, medical malpractice, flood insurance, crop insurance,
livestock insurance, life insurance, health insurance and financial guaranty
insurance are not covered by the program.
Any insurance company licensed or admitted to provide primary insurance
in any state and any insurer listed on the NAIC quarterly listing of alien
insurers is subject to “mandatory participation” in the program.
Thus, all U.S. based (domestic) insurers operating on a surplus
lines basis and all alien insurers appearing on the NAIC Quarterly Listing
of Alien Insurers are “participants” in the program and subject
to the act’s provisions.
The following points summarize some of the major provisions of the act:
1) Nullification of Terrorism Exclusions - Upon
enactment (the President’s signing of the bill), all existing terrorism
exclusions and all terrorism exclusion approvals granted by state regulators
for all policies issued by insurers subject to the act are nullified (at
least to the extent that those exclusions conflict with the new law’s
definition of an “Act of Terrorism”).
2) Reinstatement of Terrorism Exclusions - An
insurer can "reinstate" any annulled exclusion provision by
obtaining a written statement from the insured agreeing to the reinstatement
of the exclusion and providing the insured with notice of the premium
amount for the terrorism coverage and the date of the reinstatement the
exclusion would occur and the insured's rights under the coverage, and
waiting for up to thirty days for the insured to reject the exclusion
or not pay the premium.
3) Mandatory Offering of Terrorism Coverage
- all participating insurers (including U.S. based and NAIC listed
alien insurers writing on a surplus lines basis) must provide a mandatory
offer of terrorism coverage in all property and casualty insurance contracts
in all participating lines “that do not differ materially from the
terms, amounts, and other coverage limitations applicable to losses arising
from events other than acts of terrorism.” The mandatory
offer requirement is applicable for all years through 2004. For
the year 2005, the mandatory offer requirement is discretionary with the
Secretary of the Treasury.
In making the mandatory offer, there is to be a "clear and conspicuous
disclosure" of the premium for the terrorism coverage and the "federal
share of compensation for insured losses" For policies
in effect on date the law is enacted or within 90 days of enactment, the
disclosure must be made within 90 days of enactment. For
policies issued within 90 days of or more than 90 days after enactment,
the premium disclosure must be contained on a separate line item on the
policy, at time of offer, purchase and renewal of the policy.
4) Preemption of State Laws - State
laws or authority that require insurance contract forms to meet state
legal requirements and state laws or authority that allow state regulators
to disapprove rates as excessive, inadequate or unfairly discriminatory
are retained. However, in order to meet the act’s
condition of immediate implementation, state laws or regulations that
would require prior approval of rates and forms or any time delays in
using a rate or form for terrorism coverage are not applicable through
December 31, 2003.
While participating surplus lines insurers are subject to and must observe
the nullification provisions and mandatory offer of coverage requirements
and the other requirements governing the offer and provision of terrorism
coverage as set forth in the act, they still retain their freedom of rate
under state laws.
The Secretary of the Treasury has the authority to obtain the “books
and records of any insurer relevant to the program” so long as the
program is in effect.
5) Loss Sharing/deductibles - Losses
will be shared in the following manner:
Each company is responsible for meeting a yearly deductible for insured
terrorism losses. After meeting this deductible, the Federal
Government will share the company’s losses from terrorism coverage
on a 90/10 basis (Federal share of the loss is 90% and the company’s
share is 10%). The maximum combined liability of all participating
companies and the Federal Government, under the program, is $100 billion
in any one calendar year.
This annual company deductible is:
For transition year (remainder of 2002)--- 1% of direct earned premium
for the preceding calendar year
For 2003--- 7% of direct earned premium for the preceding calendar year
For 2004 --- 10% of direct earned premium for the preceding calendar year
For 2005 --- 15% of direct earned premium for the preceding
calendar year
In addition to the individual company deductible, there is an industry
deductible of:
$10 billion for the transition year (remainder of 2002) and for 2003,
$12.5 billion for 2004, and
$15 billion for 2005.
In any one calendar year of the program, the aggregate Federal payments
for losses that exceed the company deductibles but do not exceed the industry
retention for that must be "recouped" the through a mandatory
assessment of up to 3% on all property / casualty policyholder premium. The
Secretary of the Treasury has discretionary authority to require additional
recoupment through a discretionary assessment depending upon
the "health" of the industry and economic conditions.
6) Other points:
a) The definition of "terrorist act" includes an
action committed by a "foreign individual or foreign interest,"
i.e. domestic terrorism is not included in the program.
b) The decision as to whether an incident or act constitutes
a "terrorist act" that is covered under the legislation is to
be made by the Secretary of the Treasury's (in concurrence with the Secretary
of State and Attorney General) and the Treasury Secretary’s decision
is not subject to judicial review.
c) Worker's Compensation losses under the legislation also
include "war losses,” i.e. losses from acts or events "committed
in the course of a war declared by Congress." Otherwise, "war
losses" are excluded from the program.
d) There are reporting requirements for insurers to both the
NAIC and Secretary of the Treasury.
e) An exclusive Federal Cause of Action is created
for all suits for property losses, personal injury or death arising out
of a "terrorist act" covered under the act. While
the federal cause of action will pre-empt all state causes of action,
the law governing these actions is governed by applicable state law and
all federal cases are to be consolidated in one federal district court
or courts which will be determined by the Judicial Panel on Multi-district
litigation.
f) Any amounts awarded in any action that are attributable to punitive
damages shall not count as insured losses for purposes of the
act. Therefore, punitive damages are 100% net to
the insurance company.
last updated: January 20, 2003
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Diversified Risk Insurance Brokers
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