Departmental Offices; Interim Guidance Concerning the Terrorism Risk Insurance Extension Act of 2005, 648-651 [E5-8281]

Agencies

• DEPARTMENT OF THE TREASURY
• Department of Treasury

[Federal Register Volume 71, Number 3 (Thursday, January 5, 2006)]
[Notices]
[Pages 648-651]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E5-8281]


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DEPARTMENT OF THE TREASURY


Departmental Offices; Interim Guidance Concerning the Terrorism 
Risk Insurance Extension Act of 2005

AGENCY: Departmental Offices, Department of the Treasury.

ACTION: Notice.

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SUMMARY: This notice provides interim guidance to insurers, 
policyholders, state insurance regulators and the public concerning 
recent statutory amendments to the Terrorism Risk Insurance Act of 2002 
(Pub. L. 107-297, 116 Stat. 2322). In particular, this notice provides 
interim guidance on the types of commercial property and casualty 
insurance covered by the Act, the requirements to satisfy the Act's 
mandatory availability (``make available'') provision and on the 
operation of the new ``Program Trigger'' provision in section 
103(e)(1)(B) of the Act.

DATES: This notice is effective immediately and will remain in effect 
until superceded by regulations or by subsequent notice.

FOR FURTHER INFORMATION CONTACT: Howard Leikin, Deputy Director, 
Terrorism Risk Insurance Program or David J. Brummond, Legal Counsel, 
Terrorism Risk Insurance Program (202-622-6770).

SUPPLEMENTARY INFORMATION: This notice provides interim guidance to 
assist insurers and policyholders in understanding certain requirements 
of the Terrorism Risk Insurance Act of 2002 as amended by the Terrorism 
Risk Insurance Extension Act of 2005 (Pub. L. 109-144, 119 Stat. 2660) 
pending the issuance of regulations by the Department of the Treasury. 
The interim guidance contained in this notice may be relied upon by 
insurers in complying with these statutory requirements prior to the 
issuance of regulations, but is not the exclusive means of compliance. 
This interim guidance remains in effect until superceded by regulations 
or subsequent notice.

I. Background

    On November 26, 2002, the President signed into law the Terrorism 
Risk Insurance Act of 2002 (Pub. L. 107-297) (TRIA or the Act). The Act 
became effective immediately. It established a temporary Terrorism Risk 
Insurance Program (TRIP or the Program) of shared public and private 
compensation for insured commercial property and casualty losses 
resulting from an act of terrorism, as defined in the Act. The Act was 
scheduled to expire on December 31, 2005.
    On December 22, 2005, the President signed into law the Terrorism 
Risk Insurance Extension Act of 2005 (Extension Act), which extends 
TRIA through December 31, 2007. In doing so, the Extension Act adds 
Program Year 4 (January 1-December 31, 2006) and Program Year 5 
(January 1-December 31, 2007) to the Program. In addition, the 
Extension Act made other significant changes to TRIA that include:
     A revised definition of ``Insurer Deductible'' that adds 
new Program Years 4 and 5 to the definition. The insurer deductible is 
set as the value of an insurer's direct earned premium for commercial 
property and casualty insurance (as now defined in the Act) over the 
immediately preceding calendar year multiplied by 17.5 percent

[[Page 649]]

for Program Year 4 and 20 percent for Program Year 5.
     A revised definition of ``Property and Casualty 
Insurance'' that now excludes commercial automobile insurance; burglary 
and theft insurance; surety insurance; professional liability 
insurance; and farm owners multi-peril insurance. Though the definition 
excludes professional liability insurance, it explicitly retains 
directors and officers liability insurance.
     Creation of a new ``Program Trigger'' for any certified 
act of terrorism occurring after March 31, 2006, that prohibits payment 
of Federal compensation by Treasury unless the aggregate industry 
insured losses resulting from that act of terrorism exceed $50 million 
for Program Year 4 and $100 million for Program Year 5.
     A change to the Federal share of compensation for insured 
losses. Subject to the Program Trigger, the Federal Share is 90 percent 
of that portion of the amount of insured losses that exceeds the 
applicable insurer deductible in Program Year 4 and decreases to 85 
percent of such amount in Program Year 5.
     Revisions to the recoupment provisions. For purposes of 
recouping the Federal share of compensation under the Act, the 
``insurance marketplace aggregate retention amount'' for the two 
additional years of the Program is increased from the level in Program 
Year 3. For Program Year 4 the ``insurance marketplace aggregate 
retention amount'' is established as the lesser of $25 billion and the 
aggregate amount, for all insurers, of insured losses during Program 
Year 4. The ``insurance marketplace aggregate retention amount'' for 
Program Year 5 is the lesser of $27.5 billion and the aggregate amount, 
for all insurers, of insured losses during Program Year 5.
     A statutory codification of Treasury's litigation 
management regulatory requirements in section 50.82 of title 31 of the 
Code of Federal Regulations (as in effect on July 28, 2004), which 
requires advanced approval by Treasury of proposed settlements of 
certain causes of action involving insured losses under the Program.

II. Interim Guidance

    Treasury will be issuing regulations to administer and implement 
TRIA, as amended by the Extension Act. This notice is issued to assist 
insurers in complying with certain statutory requirements prior to the 
issuance of such regulations. This notice contains interim guidance 
concerning compliance with the mandatory availability or ``make 
available'' requirements in section 103(c) of the Act, revisions to 
commercial lines of property and casualty insurance as defined by 
section 102(12) of the Act, and the operation of the new Program 
Trigger in section 103(e) of the Act.

A. Mandatory Availability

Has the ``make available'' requirement changed?
    For Program Year 4 (Calendar 2006) and Program Year 5 (Calendar 
2007) insurers are required to continue to ``make available'' coverage 
for insured losses as required by TRIA and Treasury regulations. 
Amendments to the ``make available'' requirement in section 103(c) of 
the Act are simply conforming amendments that continue the requirements 
through Program Years 4 and 5. Thus, insurers issuing or renewing 
commercial property and casualty insurance policies in Program Years 4 
and 5 must continue to offer coverage for insured losses resulting from 
an act of terrorism as required by section 103(c) of the Act and 31 CFR 
50.20 to 50.24 for their insured loss claims to be eligible for the 
Federal share of compensation in the extended Program Years.
Does an insurer have to provide a separate, new offer of terrorism risk 
insurance coverage on January 1, 2006, or shortly thereafter for 
property and casualty insurance policies that are now in mid-term if 
the insurer previously complied with the Act's ``make available'' 
requirement when the policy was issued or renewed in 2005?
    No additional ``make available'' offer is required if terrorism 
coverage for the duration of the policy term was offered for policies 
issued or renewed in 2005. No additional action is required because the 
``make available'' provision of section 103(c) of the Act and 31 CFR 
50.20 to 50.24 has been satisfied for coverage periods extending into 
Program Year 4. For example, policies with ``conditional'' terrorism 
coverage exclusions that do not arise or become effective on or after 
January 1 are policies in which the terrorism coverage portion 
continues to cover insured losses within meaning of the Act. In such 
situations, no additional action is required for insurers to remain in 
compliance with the Act's ``make available'' provision.
What are the ``make available'' requirements for insurers who issued 
terrorism coverage that expired on December 31, 2005, but the remainder 
of the policy continues in force in 2006?
    If terrorism coverage was made available and accepted by the 
policyholder but the terrorism portion of coverage expired on December 
31, the insurer must provide the policyholder with a new offer of 
terrorism coverage pursuant to section 103(c) of the Act and 31 CFR 
50.20 to 50.24 for the remaining period of coverage for the policy. 
Ideally, policyholders should be given the offer of terrorism coverage 
before January 1, 2006. However, Treasury recognizes the late date of 
passage of the Extension Act and the administrative difficulties this 
poses for some insurers who otherwise have complied with the ``make 
available'' provision in 2005. Treasury expects that all insurers will 
make a good faith effort to provide policyholders whose terrorism 
coverage expires as of January 1 with a new offer of terrorism coverage 
along with the appropriate disclosures by January 1, 2006, or as 
quickly as possible following that date. In this regard, Treasury 
considers January 31, 2006, to be the latest reasonable date for offers 
of coverage to midterm policyholders, barring unforeseen or unusual 
circumstances. If the January 31 date is not met by an insurer, 
Treasury will expect the insurer to explain any delay as well as its 
good faith efforts when submitting a claim for the Federal share of 
compensation under the Program. In its discretion, Treasury will 
determine whether good faith efforts to comply have been made.
What if terrorism coverage with an expiration of December 31, 2005 was 
offered and rejected by a policyholder in 2005; must an insurer that 
offered such coverage renew its offer of terrorism coverage for the 
remaining term of a policy that extends into 2006?
    The Extension Act makes no changes to the ``make available'' 
requirement for insurers. However, if an insurer met its ``make 
available'' obligation by offering terrorism coverage that expired on 
December 31, 2005 for a policy otherwise extending into 2006, no 
further ``make available'' requirement will be expected of insurers 
during the remaining 2006 term of that policy if the offer of terrorism 
coverage was rejected by the policyholder at policy issuance or renewal 
in 2005. The insurer must nevertheless make an offer of terrorism 
coverage and appropriate disclosures at time of policy renewal in 2006.

[[Page 650]]

What if a policy renewal or application was processed in 2005 for 
coverage becoming effective in 2006 and the insurer did not ``make 
available'' terrorism coverage for Program Year 4 as contemplated by 
the Extension Act?
    The Extension Act makes no changes to the ``make available'' 
requirement for insurers under TRIA. If an insurer wishes to receive 
Federal compensation under the Program for insured losses, the insurer 
must ``make available'' terrorism coverage for insured losses for all 
policies becoming effective in 2006, even if the policy was processed 
in late 2005 or early 2006. However, as noted above, Treasury is 
mindful of the late date of the passage of the Extension Act. Treasury 
expects that all insurers will make a good faith effort to provide 
policyholders an offer of terrorism coverage and appropriate 
disclosures as quickly as possible following January 1, 2006 in 
circumstances where commercial property and casualty insurance coverage 
was processed in 2005 to become effective on or after January 1, 2006. 
As noted above, Treasury considers January 31, 2006 to be the latest 
reasonable date for offers of coverage, barring unforeseen or unusual 
circumstances. If the January 31 date is not met by an insurer, 
Treasury will expect the insurer to explain any delay as well as its 
good faith efforts when submitting a claim for the Federal share of 
compensation under the Program. In its discretion, Treasury will 
determine whether good faith efforts to comply have been made.
May an insurer still use NAIC Model Disclosure Forms to meet the 
disclosure requirement for property and casualty insurance policies 
with coverage extending into 2006 or for policies issued, purchased or 
renewed early in 2006?
    Pursuant to 31 CFR 50.17, insurers are permitted to use NAIC Model 
Disclosure Forms that were in existence on April 18, 2003 to satisfying 
the disclosure requirements of section 103(b)(2) of the Act. Although 
the Extension Act made no change to the requirements for clear and 
conspicuous disclosure to policyholders of the premium charges for 
insured losses covered by the Program and of the Federal share of 
compensation for insured losses under the Program, revisions were made 
to the Act that may require rewording of the NAIC Model Disclosure 
Forms. It is Treasury's intention that an insurer may continue to use 
the NAIC Model Forms until such time that Treasury-endorsed revised 
forms are issued by NAIC. Future rulemaking by Treasury will be 
initiated to provide insurers with a safe harbor in satisfying the 
disclosure requirement of the Act if the insurers use the latest 
available NAIC Model Disclosure Forms.

B. Property and Casualty Insurance

How will Treasury determine the types of property and casualty 
insurance that were recently excluded from the Program?
    Section 102(12) of the Act was amended by adding types of insurance 
that are now excluded from the definition of property and casualty 
insurance under the Program. To the extent the new exclusions represent 
specific lines of business as used on the NAIC Annual Statement, 
Treasury will continue to utilize NAIC line of business definitions to 
determine coverage and premium issues in implementing the Act. The 
newly excluded lines of business from the NAIC Annual Statement 
include: Line 3--Farmowners Multiple Peril; Line 19.3--Commercial Auto 
No-Fault (personal injury protection); Line 19.4--Other Commercial Auto 
Liability; Line 21.2--Commercial Auto Physical Damage; Line 26--
Burglary and Theft; Line 24--Surety; and Professional Liability 
Insurance as reported on Line 17--Other Liability (see below).
What about types of insurance that are excluded from the definition of 
property and casualty insurance but are not specific lines of business 
on the NAIC Annual Statement?
    The only type of insurance that is newly excluded from the Act, but 
is not a specific line of business on the NAIC Annual Statement, is new 
subsection 102(12)(xi)--professional liability insurance. Until 
Treasury issues regulations or provides further guidance on the meaning 
of the definition of ``professional liability insurance'', insurers 
should use the following definition for what constitutes professional 
liability insurance:

    Coverage available to pay for liability arising out of the 
performance of professional or business duties related to an 
occupation, with coverage being tailored to the needs of the 
specific occupation. Examples include abstracters, accountants, 
insurance adjusters, architects, engineers, insurance agents and 
brokers, lawyers, real estate agents and stockbrokers.

    This interim definition is derived from the definition of 
``Professional Errors and Omissions Liability'' found in the Uniform 
Property & Casualty Coding Matrix currently utilized by the System for 
Electronic Rate and Form Filing (SERFF) sponsored by the National 
Association of Insurance Commissioners (NAIC).\1\ Insurers should use 
this definition in identifying policies excluded from the Program, as 
well as for determining policies whose premiums should be subtracted 
from Line 17--Other Liability on the NAIC Annual Statement when 
computing direct earned premium for Program purposes. Directors and 
officers liability insurance, which is sometimes considered a type of 
professional liability insurance, is not included in the definition as 
discussed in the next section.
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    \1\ The Matrix can be found on the NAIC Web site at https://
www.naic.org/industry_home.htm.
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What is the effect of adding the definition of ``directors and officers 
liability insurance'' to the definition of ``property and casualty 
insurance'' in section 102(12) of the Act?
    The explicit addition of this type of insurance to section 102(12) 
does not substantively modify the previous definition of property and 
casualty insurance under the Act, but is a statutory clarification that 
directors and officers liability insurance is distinct from 
professional liability insurance. Premium for directors and officers 
liability insurance is already included in Line 17--Other Liability on 
the NAIC Annual Statement, one of the commercial lines of business 
under Treasury's previous regulations defining property and casualty 
insurance (31 CFR 50.5(l)). Treasury recommends that insurers consult 
the definition of ``Directors & Officers Liability'' found in the 
Uniform Property & Casualty Coding Matrix now being utilized by SERFF 
if further guidance is needed on what constitutes ``Directors & 
Officers Liability''.

C. Program Trigger for Federal Share/Certification of Act of Terrorism

How does the Program Trigger for the Federal share of compensation work 
and how does it coordinate with the Secretary's certification of an act 
of terrorism?
    The Extension Act adds a new section 103(e)(1)(B) to TRIA entitled 
``Program Trigger.'' This new provision directs the Secretary not to 
compensate insurers under the Program unless the aggregate industry 
insured losses from a certified act of terrorism exceed certain insured 
loss or ``trigger'' amounts.\2\
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    \2\ Section 103(e)(1)(B) states: ``In the case of a certified 
act of terrorism occurring after March 31, 2006, no compensation 
shall be paid by the Secretary under subsection (a), unless the 
aggregate industry insured losses resulting from such certified act 
of terrorism exceed--(i) $50,000,000, with respect to such insured 
losses occurring in Program Year 4; or (ii) $100,000,000, with 
respect to such insured losses occurring in Program Year 5.''

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[[Page 651]]

    The Extension Act has essentially introduced the concept of a 
``Program Trigger event'' to TRIA. A ``Program Trigger event'' is a 
certified act of terrorism occurring after March 31, 2006 in which the 
aggregate industry insured losses resulting from the event exceed the 
applicable trigger amount ($50 million in 2006 and $100 million in 
2007).
    The new Program Trigger provision does not apply to acts of 
terrorism occurring on or before March 31, 2006. The Trigger will apply 
to such acts that occur after March 31, 2006. Note that the application 
of the Trigger is based on the date of occurrence and not the date of 
certification of an act of terrorism. For example, the Program Trigger 
shall not apply to an act that occurs prior to March 31, 2006, but 
which is later certified after March 31.
    After March 31, unless an act of terrorism is a Program Trigger 
event, insured losses from that act of terrorism will not be considered 
in any determination of or calculation leading to any Federal share of 
compensation under the Act.
    Treasury is considering whether further rulemaking or guidance is 
necessary to address issues associated with the new Program Trigger, 
including whether any adjustments are necessary to reflect the 
potential difference between acts that are certified under the Program 
and not eligible for compensation and acts that are certified and 
eligible for compensation under the Program. In terms of TRIA's ``make 
available'' requirement contained in section 103(c) and Subpart C of 
the regulations, insurers should continue to make coverage available 
for insured losses, although further consideration of issues posed by 
the new Program Trigger could affect this requirement on a going 
forward basis.
What losses of an insurer count towards satisfaction of the insurer 
deductible and how will the Federal share of compensation be 
determined?
    In Program Year 4, only an insurer's insured losses resulting from 
certified acts of terrorism occurring between January 1 and March 31, 
2006, and the insurer's insured losses resulting from Program Trigger 
events after March 31, will count towards satisfaction of the insurer 
deductible. Pursuant to section 103(e)(1)(A) of the Act, the Federal 
share of compensation will be based on 90 percent of the amount of such 
insured losses in excess of the insurer deductible.
    In Program Year 5, only an insurer's insured losses resulting from 
Program Trigger events occurring in that year will count towards 
satisfaction of the insurer deductible. Again, pursuant to section 
103(e)(1)(A), the Federal share of compensation will be based on 85 
percent of the amount of such insured losses in excess of the insurer 
deductible.
    Treasury will be issuing forms changes and issuing further guidance 
and rulemaking as necessary to accomplish this compensation payment 
scheme.
How will Treasury determine and notify insurers that the Program 
Trigger has been met?
    The manner in which Treasury determines whether the Program Trigger 
has been met will be similar to the process for determining aggregate 
insured loss amounts in connection with the certification of an act of 
terrorism. Treasury would contact industry statistical reporting 
agencies and others to ascertain aggregate industry insured losses. 
Once the Program Trigger amount has been exceeded, Treasury would 
notify insurers through press release, notice in the Federal Register 
and postings on the TRIP Web site. This determination may be concurrent 
with the certification of the act of terrorism.

    Dated: December 29, 2005.
Howard Leikin,
Deputy Director, Terrorism Risk Insurance Program.
 [FR Doc. E5-8281 Filed 1-4-06; 8:45 am]
BILLING CODE 4810-25-P