VOLUME 5    Summer 2004

The Terrorism Risk Insurance Act of 2002 (Act) was passed by Congress on November 19, 2002 and signed into law on November 26, 2002.  The Act requires that insurers will make coverage available for losses resulting from terrorism and notify policyholders of the premium charged for this coverage.  The Act also creates a federal program to help share in the risk of loss due to foreign terrorist attacks.  The Act is triggered when the Secretary of the Treasury, the Secretary of State and the Attorney General collectively certify an event as an “act of terrorism.”  To be an act of terrorism, the act must be violent or dangerous, result in damage within the United States, and be committed by someone acting on behalf of a foreign person or interest in order to coerce the U.S. civilian population or government or influence U.S. policy.

The Act does not apply to losses from acts of terrorism that do not exceed $5 million.  Therefore, carriers are responsible for such losses in accordance with the terms of their policies.  For the losses that do exceed five million dollars, the first five million must be paid by the insurers.  For losses above five million but below 100 billion dollars, the deductible is paid by the insurer and then the excess loss is paid 10% by the insurer and 90% by the federal government.  Losses above 100 billion dollars are neither paid by the insurer nor the government.

The Act applies to insured losses from acts of terrorism for primary and excess commercial lines insurance.  The Act does not apply to personal lines, crop, livestock, mortgage, financial guaranty, medical malpractice, flood, or life and health insurance.  “Insurer” under this Act is any entity that is a licensed or admitted insurer in any state, an eligible surplus lines carrier listed on the NAIC Quarterly Listing of Lien Insurers, an insurer approved to offer property and casualty insurance by a federal agency in connection with maritime, energy or aviation activity, a state residual insurance entity or state workers’ compensation fund, or any captive or other self-insuring entity approved by the secretary of the treasury. 

Despite the help the government is providing, there is a mandatory requirement that insurers and their policyholders must, in the aggregate, repay the federal government for specified amounts of insured losses based on a pre-determined formula. However, the Act permits insurers to charge a premium for terrorism exposures that are insured but not reimbursed by the federal government. Policy exclusions for foreign acts of terrorism may be reinstated only if the insurer receives a written authorization from the insured, or if the insured failed to pay the premium for such coverage.

On June 24, 2004, the Treasury Department announced the procedures for insurers to follow in filing claims and receiving payment of the federal share of compensation. The regulation also allows for advance payments in response to the insurers cash flow concerns. The final regulation and additional information on the Terrorism Risk Insurance Program can be found at http://www.treas.gov/trip. 

On July 23, 2004, the latest Treasury regulation pertaining to the Act was announced. This regulation is a supplement to procedures for insurers to follow in filing claims and receiving payment of the federal share of compensation.  The rule ensures that taxpayer money will not be used to compensate for punitive damages. It also protects the subrogation rights of the United States regarding payments made and clarifies aspects of the program.

The full text of the Act can be found at www.ustreas.gov.

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