| Terrorism and Insurance | ||
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Terrorism Risk Insurance Act Terrorism Risk Insurance Act, U.S.Code 107-297 (signed November 26, 2002), requires Property & Casualty insurers operating in the U.S. to offer terrorism risk insurance. The government would reimburse a large percentage of paid losses. The Secretary of Treasury is responsible for determining that losses incurred either from a single event or multiple occurrences have triggered the act. Definition of "terrorism" The Terrorism Risk Insurance Act defines "terrorism." Damage within the U.S. extends to the premises of any U.S. mission (e.g., an embassy or consulate). The Act also stipulates that the terrorist event must produce property and casualty insurance losses in excess of $5 million to qualify for coverage under the Act. The Terrorism Risk Insurance Act does not address domestic terrorism acts. Limitations No act shall be certified by the Secretary as an act of terrorism if: (i) the act is committed as part of the course of a war declared by the Congress, except that this clause shall not apply with respect to any coverage for workers' compensation; or (ii) property and casualty insurance losses resulting from the act, in the aggregate, do not exceed $5,000,000. Aggregate industry retentions Insurer deductibles Each participating insurance company will be responsible for paying out a certain amount in claims - a deductible - before Federal assistance becomes available. This deductible is based on a percentage of direct earned premiums from the calendar year 2002. Federal reimbursement and insurer retentions In addition to the deductibles, insurance companies must pay 10% of the certified terrorism losses (co-insurance). The deductible stops at $100 billion in combined industry aggregate losses. Losses above that point are not covered by the Terrorism Risk Insurance Act and insurers are not obligated to pay under the Act. (In any program year for which certified terrorism losses exceed $100 billion, the responsibility for devising a plan to address further terrorism losses devolves upon Congress.) Insurers are to be reimbursed by the government for a portion of paid losses--up to 90% of losses, subject to the information above. Federal payments and recouping The Act provides for the Federal government to recover a portion of any payments it makes under the program. Two phases of recoupment are set up by the Act. Recoupment will be achieved by means of a premium surcharge on property and casualty insurance policies that are in force after the date the recoupment amount is established by the Treasury Secretary. Regardless of the statutorily defined recoupment amount, such surcharges may not exceed 3% of the policy premium. How is coverage provided? The Terrorism Risk Insurance Act renders void all terrorism exclusions currently in force on commercial property and casualty policies of participating insurers--in other words, virtually all the standard Insurance Services Office, Inc. (ISO) and American Association of Insurance Services (AAIS) terrorism exclusions currently in place--to the extent the "act" is a "certified terrorism act." The exclusions would still apply to non-certified terrorism losses. Likewise, state regulatory approval of such terrorism exclusions is voided by the Terrorism Risk Insurance Act to the extent to which the approved exclusions eliminate coverage as mandated under the Act. These provisions of the Terrorism Risk Insurance Act leave untouched those elements of existing terrorism exclusions that deal with terrorist activity outside the scope of the Federal program--acts of domestic terrorism, for example, or terrorism losses that do not reach the $5 million threshold. In some states, approval of the terrorism exclusions that were filed late in 2001 was given subject to a "sunset" clause that suspends the filings' approval a stated number of days after Federal backstop legislation was signed into law. The status of those state approvals--as far as they affect terrorism losses that do not come under the new Federal program--remains uncertain, and would depend on the specific conditions of each state's approval. In the meantime, ISO and AAIS are moving quickly to file new endorsements that address terrorism risks not included in the Federal program. (IRMI will have a report on these filings as soon as details of them become available.) Implementation and policyholder notification To be eligible for Federal reimbursement of certified terrorism losses, insurers must provide notice to their insureds of the premium for coverage being provided under the program, and the extent to which losses paid under the program are reimbursed by the Federal government. This notice must be given to insureds within 90 days of the enactment of the program (November 26, 2002) for policies already in effect on that date. For policies written or renewed within 90 days of enactment, notice must be given at the time of offer, purchase, and renewal. For policies issued more than 90 days after enactment, the notice must be included as a separate line item of the policy itself. Insurers are making two basic informational disclosures to their policyholders. These disclosures are: Insurers will be making these disclosures at various times and by various methods. Policyholders should expect some disclosures to be made through mailings and others through notices attached to their policies. Policyholders that have policies in effect at the time of the enactment of the Act, and which contain terrorism exclusions, should expect to receive additional information that requires prompt review and consideration. The terrorism exclusions in existing policies are suspended to the extent that the exclusions exclude loss resulting from "acts of terrorism" as defined in the Act. Those insured should expect to receive information regarding their rights and an invoice for an optional additional premium. An insured may elect to pay an additional premium for the increased terrorism coverage or elect to reinstate the terrorism exclusion in full for the remainder of the policy period. If the insured does not pay the additional premium by the due date, the terrorism exclusion will be reinstated in full. Insured's options include: Although terrorism exclusions applicable to certified terrorism losses under the program were voided as of November 26, they can be reinstated if the insured decides not to purchase the federally backed coverage. Either of two conditions must be met before an existing terrorism exclusion can be reinstated on an insured's policy: What are insurers doing? Insurers are reacting to the Terrorism Risk Insurance Act by filing their own rate factors and/or surcharges (or filing via ISO). They are also drafting and issuing disclosure forms for new, renewal, and in-force businesses. Coverage forms relating to "certified terrorism acts" are not subject to prior approval Forms excluding coverage outside the "certified terrorist act" definition are subject to normal filing procedures. For use with policies currently subject to a terrorism exclusion, the two major policy-drafting and statistical bureaus--ISO and the AAIS--have filed endorsements that define the newly mandated coverage for certified terrorism losses, or alternatively (for insureds that have declined the coverage) reinstate an exclusion of certified terrorism losses, or all losses resulting from terrorism. These filings have been made under a provision of the Terrorism Risk Insurance Act that exempts ISO and the AAIS from individual states' prior approval laws. This means that the endorsements become available for use immediately upon filing. Inland Marine Standard Fire Policy states vs. Non-Standard Fire Policy states With the exception of Nevada, Oregon, Texas, and California, companies must make their own filing of terrorism endorsements for certified and non-certified loss (if allowed) and rating for certified loss in states that require the filing of forms and rating for all Inland Marine Guide classes except Yacht (the terrorism endorsements are not compatible with the Yacht class). Companies are advised to refer to the bulletins issued by the state insurance departments for the filing requirements that apply to terrorism-related filings. Except as explained in the chart for MN and PA, in states that do not require filings for the non-filed classes, companies should use the same endorsements and rating that are being filed for the filed Commercial Inland Marine (CIM) Program for all Inland Marine Guide classes except Yacht. (Source: AAIS) Standard Fire Policy jurisdictions Non-Standard Fire Policy jurisdictions Captive insurers and other self-insurance arrangements The Secretary may, in consultation with the NAIC or the appropriate State regulatory authority, apply the provisions of this title, as appropriate, to other classes or types of captive insurers and other self-insurance arrangements by municipalities and other entities (such as workers compensation self-insurance programs and State workers compensation reinsurance pools), but only if such application is determined before the occurrence of an act of terrorism in which such an entity incurs an insured loss and all of the provisions of this title are applied comparably to such entities. |
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| Not only are policy forms, clauses, rules and court decisions constantly changing, but forms vary from company to company and state to state. This material is intended as a general guideline and might not apply to a specific situation. The authors, LunchTimeCE, Inc., CEfreedom, and Insurance Skills Center, and any organization for whom this course is administered will have neither liability nor responsibility to any person or entity with respect to any loss or damage alleged to be caused directly or indirectly as a result of information contained in this course. |
