(This is for informational purposes and not to be considered legal advise. Members should contact legal and regulatory counsel for advice. Information will be updated as changes occur.)

Terrorism Risk Insurance Act of 2002

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, federal flood insurance, federal 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.