By Steven R. Gilford, Lawrence R. Hamilton, Marc E. Rosenthal, Richard Warren Shepro and John A. Sloat
In the wake of September 11, policyholders and insurers have been concerned about the availability of insurance coverage for any future terrorist attacks in the United States. The Congressional Joint Economic Committee recently estimated that insured losses resulting from September 11 total $30 to $70 billion, or between 10-23% of the estimated industry-wide insurance surplus. The insurance industry felt that any future attacks of this magnitude could put insurers at risk of insolvency, and policyholders feared that coverage for terrorism risks could become unavailable.The Terrorism Risk Insurance Act of 2002 (the "Act") is designed to address these concerns. As outlined below, the Act provides a back-stop to the insurance industry, in the form of federal reimbursement for certain losses in excess of an insurer-specific deductible, while mandating that policyholders be offered the option of purchasing terrorism coverage on substantially the same terms and conditions (other than price) as other coverages in their property and casualty insurance policies. The Act was signed into law by President Bush on November 26, 2002, and became effective immediately. Title I of the Act, which relates to insurance coverage, features the following elements:
Requirement to Provide Terrorism Coverage
During the period November 26, 2002, through December 31, 2004—which may be extended by the Secretary of the Treasury to December 31, 2005 - each insurer is required to make available, in all of its policies of property and casualty insurance, coverage for losses arising from acts of terrorism. This coverage may not differ materially from the terms, amounts, and other coverage limitations applicable to losses arising from events other than acts of terrorism. Such coverage must be offered as part of first-party property policies, as well as many forms of liability coverage, including excess insurance, workers’ compensation, and surety insurance. The Act does not apply to life and health, financial guaranty, federal crop or flood insurance, or any reinsurance or retrocessional coverage.
While coverage for terrorism risks must be made "available," the Act does not cap the premium for such coverage. Accordingly, subject only to state prohibitions against excessive or discriminatory rates, insurers’ offers of terrorism coverage might come with substantial price tags. It is important to note, however, that while the Act requires terrorism coverage to be made available on substantially the same terms as other coverage, nothing prohibits the parties from agreeing upon different coverage for a lower premium. For example, policies may be negotiated to include terrorism coverage with a higher deductible, lower limits, or restrictions on the properties or risks covered.
Nullification of Terrorism Exclusions
The Act voids any provisions in existing policies that exclude losses resulting from an act of terrorism, as well as any state approvals for such exclusions. Insurers may, however, reinstate exclusions for terrorist acts in two circumstances:
(i) if the insurer has received a written statement from the insured that affirmatively authorizes such reinstatement, or
(ii) if the insured fails to pay any increased premium charged by the insurer for providing such terrorism coverage after having received at least 30 days’ notice from the insurer of:
(A) the increased premium for such terrorism coverage, and
(B) the rights of the insured with respect to such coverage, including the date on which the exclusion would be reinstated if no payment is received.
Types of Policies and Insurers Covered by the Act
The Act covers policies of "property and casualty insurance" issued by "insurers." "Property and casualty insurance," as used in the Act, includes all types of commercial P&C policies, including first- and third-party policies, workers’ compensation, excess, and surety insurance. State residual market insurance and State workers’ compensation funds are also included.
The Act expressly excludes financial guaranty insurance written by monoline companies, reinsurance or retrocessional coverage, life and health insurance, federal crop and flood coverage, private mortgage insurance, and medical malpractice insurance. The Act does not prohibit insurers from procuring reinsurance for its accepted terrorism risks, including required retentions.
The term "insurer" includes insurance companies licensed or admitted in any State, as well as alien insurers eligible to write surplus lines business and listed on the NAIC’s quarterly listing of alien insurers. It is not clear from the Act whether it is intended to reach captive insurance companies domiciled in the United States; however, the Treasury Department’s interim guidance dated December 18, 2002, indicates that domestic captives are included if they otherwise fit the definition of "insurer." Some captives are lobbying for the final regulations to allow captives to opt out of the requirements of the Act. Also unclear, and not yet the subject of a guidance, is whether the Act covers alien insurers writing on a non-admitted basis pursuant to exemptions such as the industrial insured or independently procured exemptions.
Definition of Losses Resulting from Acts of Terrorism and Certification by the Government
The definition of "insured loss" under the Act includes any loss resulting from an act of terrorism that is covered by primary or excess property and casualty insurance issued by an insurer if such loss:
(i) occurs within the United States; or
(ii) occurs to an air carrier or to a United States flag vessel (or a vessel based principally in the United States, on which United States income tax is paid and whose insurance coverage is subject to regulation in the United States), regardless of where the loss occurs.
The Secretary of the Treasury, in concurrence with the Secretary of State and the Attorney General of the United States, is responsible for certifying whether an act of terrorism has occurred. Under the Act, an act of terrorism must be committed by persons acting on behalf of a foreign interest in an effort to coerce U.S. citizens or U.S. policy or conduct. In addition, with the exception of workers’ compensation, no act that is committed as a part of the course of a war declared by the Congress can be certified as an act of terrorism. Similarly, no act will be certified as an act of terrorism where property and casualty insurance losses resulting from the act, in the aggregate, do not exceed $5,000,000. Any certification of, or determination not to certify, an act as an act of terrorism will not be subject to judicial review.
Required Disclosures to Policyholders
In order to be eligible for federal reimbursement of payments made for losses arising from acts of terrorism, the insurer must have provided clear and conspicuous disclosure to the policyholder of:
(i) the premium charged for insured losses resulting from an act of terrorism, and
(ii) (the federal share of compensation for those losses.
For existing policies, that disclosure must be furnished to policyholders by February 24, 2003. For policies issued between the Act’s effective date of November 26, 2002, and February 24, 2003, the disclosure must be furnished at the time of issuance of the policy. For policies issued after February 24, 2003, the disclosure must be a separate line item in the policy.
Government-Shared Risk
The Act establishes a temporary federal program, administered by the Department of the Treasury and due to sunset on December 31, 2005, under which the federal government will share with the insurance industry the risk of loss from future terrorist attacks. Subject to certain requirements, an insurer is eligible to recover from the federal government 90% of any terrorism losses that exceed its deductible (as calculated by formula based on its premium written).
Policyholder Premium Surcharge
The government may recoup any payments it makes through a "terrorism loss risk-spreading premium," imposed as a surcharge on policyholder premiums. The surcharge is to be set by the Secretary of the Treasury and may not exceed 3% of the future premium charged for property and casualty insurance coverage.
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It is important to note that the full effect of many provisions of the Act will not be known until the Secretary issues implementing regulations or additional interim guidances. If you have questions or concerns about the applicability or effect of the Act or concerning the coverage being offered, please do not hesitate to contact any Mayer, Brown, Rowe & Maw lawyer, including those listed at the end of this Update.
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Copyright © 2007, Mayer, Brown, Rowe & Maw LLP. and/or Mayer Brown International LLP. This Mayer Brown article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.
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