National Association of Independent Insurers analysis of HR 3210. Received 11-26-02 from Dan Hartford of Hartford Steam Boiler.
Executive Summary
The Senate approved H.R. 3210, the Terrorism Risk Insurance Act of 2002, on Nov. 19. President Bush is expected to sign the legislation on Nov. 26. The new legislation creates a high-level federal backstop for losses related to foreign acts of terrorism. The legislation creates new obligations for insurers writing commercial policies, including mandatory offer of terrorism coverage, policyholder notice and disclosures, and submission of premium information. The NAIC is currently developing a model bulletin relating to insurer obligations under the new legislation. NAII is preparing to host an informational compliance seminar for members in mid-December.
Terrorism Risk Insurance Act of 2002
Legislative Summary
After over a year of negotiations, the Senate overwhelmingly gave final approval to H.R. 3210, the Terrorism Risk Insurance Act of 2002, on Nov. 19 by an 86 to 11 vote. The House previously approved the language by voice vote on Nov. 14, and President Bush is expected to sign the bill into law on Nov. 26. The text of the legislation is available on NAII's Web site at
The new legislation establishes a three-year high-level federal backstop for losses related to acts of foreign terrorism. Highlights of the new legislation include
The Terrorism Risk Insurance Act establishes a three-year program within the Department of the Treasury, to provide coverage for losses incurred from foreign acts of terrorism from the date of enactment to Dec. 31, 2005
The program covers most commercial property and casualty policies, including workers' compensation. Workers' compensation policies would also receive a federal backstop for losses resulting from acts of war. Covered insurers are required to
- participate in the federal program
- Municipalities or other entities participating in self-insurance arrangements, such as self-insurance pools or risk-retention groups, may participate in the program if the Secretary of the Treasury makes the determination to allow such participation prior to any act of terrorism in which the entity suffers insured losses
·The program provides for individual insurer and aggregate industry retention
levels. Individual insurer retention levels are based on a percentage of direct
earned premiums from the previous calendar year, and rise from one percent for the
remainder of 2002; to seven percent in 2003; 10 percent in 2004 and 15 percent in
2005
· Losses above an insurer's deductible will be reimbursed by the federal government
on a 90/10 cost sharing arrangement. Losses covered by the program will be capped at
$100 billion for both the government and insurers. For losses above $100 billion,
Congress will determine the procedures for and the source of any payments
· In any year in which the government pays for insured losses, the Secretary of the
Treasury will be required to recoup the difference between total of the individual
insurers' retention levels and the industry aggregate retention level. The industry
aggregate for the remainder of 2002 and 2003 is $10 billion; $12.5 billion for
2004; and $15 billion for 2005. Federal funds will be recouped through a surcharge
of up to three percent annually on commercial policies
· Enactment of the federal legislation immediately nullifies and pre-empts any
exclusion or policy provision which excludes or limits coverage for losses from
foreign acts of terrorism
· Covered insurers are required to make terrorism coverage available on all covered
policies on terms and conditions that do not differ materially from the underlying
terms of the contract. This mandatory offer is required during the first two years
of the program and the Secretary of the Treasury has discretion to extend this
requirement to the third year of the program.
· Insurers are required to notify policyholders of the availability of terrorism
coverage, the cost of such coverage and the federal share of any covered loss
· During the transition period and first year of the federal program, the
legislation pre-empts state prior approval laws; however, states retain the right to
review any rate and overturn such rate if the commissioner deems it inadequate,
excessive or unfairly discriminatory.
· The legislation requires the Department of the Treasury to study the impact of
potential terrorism losses on the group life market, life insurance and other
insurance, including personal lines and report to Congress on its findings. The
study of group life is an expedited study and Treasury is granted the authority to
extend coverage to the group life market, if it deems such action appropriate.
Treasury is directed to complete the study of other insurance within nine months of
enactment; however, unlike group life, the department is not granted unilateral
authority to extend program coverage to other lines.
· The legislation creates an exclusive Federal cause of action, governed by
applicable state law, for all suits for property loss, personal injury or death
arising out of a terrorist event; consolidates claims into a single Federal district
court assigned by the Judicial Panel on Multi-district Litigation; and includes a
provision to ensure that the Federal government is not directly or indirectly
responsible, in its role as a reinsurer, for payment of any punitive damages
Impact on
Enactment of the new legislation imposes many new requirements upon covered insurers.
President Bush is expected to sign the legislation on Nov. 26 and on that date, all
approved exclusions for foreign acts of terrorism are immediately null and void, as are
any contract terms excluding or limiting coverage for such losses. Insurers will be
required within 90 days to provide notice and disclosure to all covered policyholders
making terrorism coverage available, disclosing the cost of such coverage and
describing the federal share of any covered loss. For any policy written or renewed
within 90 days of enactment, insurers will be required to provide such notice at the
time of purchase or renewal. In the case of policies written or renewed after 90 days
of enactment, such disclosures must be made as a separate line item. Failure to
provide proper disclosure jeopardizes the ability of the insurer to seek federal
reimbursement for covered claims. In addition, the Secretary of the Treasury may
assess civil penalties on participating insurance companies for submission of false or
misleading information or failure to repay the Secretary for any amount required to be
repaid
There are a number of serious implementation issues impacting insurers that require
immediate attention. NAII staff has met with the staff of the House Financial Services
Committee and the Department of the Treasury in an attempt to address these issues.
NAII raised a host of issues including waiver of penalties for good faith compliance
with the notification requirements, clarification of the definition of direct earned
premiums, treatment of non-participating insurers allocated a share of covered
terrorism losses through state residual market plans, issues relating to disclosures
including model language, separate line items, and timing, and claims processing
procedures. Staff will continue to work with Treasury and congressional staff on
expeditious and effective guidance.
In an effort to assist member companies, NAII will be setting up an informational and
compliance seminar in early to mid-December. Further details on this important event
will be provided in the near future.
State and NAIC
The NAIC's Catastrophe Insurance Working Group is developing a model bulletin for use
by the states, to be sent by the state insurance departments to all insurers. The
bulletin will include background information on the federal legislation and several
specific sections containing guidelines for insurer filings. For example, there will
be information on department expectations relative to submission of rates, policy form
language and disclosure notices. Indications are the states will direct that rates and
forms be filed within 30 days after they are implemented. At this point it appears the
NAIC's bulletin will also include sections on workers' compensation, provisions for
standard fire policy states, filing transmittal documents and draft notices for
potential use with policyholders
NAII has participated in the Working Group deliberations. Given the fluid nature of
the discussions we thought it would create more confusion by disseminating the NAIC
draft at this time. As soon as the NAIC bulletin is complete, we will send it to
members immediately. The NAIC is attempting to finish its work on the bulletin by the
end of this week
If you have any questions on the federal legislation please contact Julie Gackenbach at
(202) 639-0473 () or Don Griffin at (847) 297-7800 (
). If you have any questions regarding state or NAIC action,
please contact Bob Zeman at (847) 297-7800 () or Don Griffin
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