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TDI Commissioner’s Bulletin B-0011-08 – Reauthorization of Terrorism Risk Insurance Program

Apr 5, 2008 | Procedural Updates

Texas Commissioner’s Bulletin No. B-0011-08 has been issued to all P&C insurers and eligible surplus lines insurers. Insurers subject to rate and form regulation must submit policy language and rates regarding terrorism coverage. For surplus lines insurers, the bulletin is primarily advisory, reminding them that domestic acts of terrorism must now be covered. Also, insurers must provide a clear disclosure to policyholders of the existence of a cap of $100 million in aggregate industry insured losses before federal reimbursement is triggered under the program. The bulletin can be accessed at this link, or below:

 

To:ALL PROPERTY AND CASUALTY INSURERS AND ELIGIBLE SURPLUS LINES INSURERS

Re:Terrorism Risk Insurance Program Reauthorization Act of 2007

Purpose

The purpose of this bulletin is to advise insurers of certain provisions of the Terrorism Risk Insurance Program Reauthorization Act of 2007 (the Reauthorization Act) that may require insurers to submit a filing in Texas of the policy language and the applicable rates as a result of the Reauthorization Act.

Background

There has been much uncertainty in the markets for commercial lines property and casualty insurance coverage in light of the substantial losses experienced by the industry on September 11, 2001. Soon after the tragic events, many reinsurers announced that they did not intend to provide coverage for acts of terrorism in future reinsurance contracts. This led to a concerted effort on behalf of all interested parties to seek a temporary federal backstop to calm market fears over future terrorist attacks and the ability of the insurance industry to allocate capital to provide coverage for these unpredictable and potentially catastrophic events. As a result, Congress enacted and the President signed into law in November 2002, the Terrorism Risk Insurance Act of 2002 (the Act). This federal law provides a federal backstop for defined acts of terrorism and imposes certain obligations on insurers. The Act was extended for a two-year period covering Program Years 2006 and 2007. The Act has now been extended for an additional seven years through December 31, 2014 with the enactment of the Reauthorization Act.

Several provisions of the initial Act have changed in the 2007 reauthorization. Those changes include:

  • Revising the definition of a certified act of terrorism to eliminate the requirement that the individual(s) is acting on behalf of any foreign person or foreign interest.
  • Extending the program through December 31, 2014.
  • Requiring clear and conspicuous notice to policyholders of the existence of the $100 billion cap.
  • Fixing the Insurer Deductible at 20% of an insurer’s direct earned premium, and the federal share of compensation at 85% of insured losses that exceed insurer deductibles.
  • Fixing the program trigger at $100 million for all additional program years.
  • Requiring the U.S. Treasury to promulgate regulations for determining pro-rata shares of insured losses under the program when insured losses exceed $100 billion.
  • Requiring the Comptroller General to study the availability and affordability of insurance coverage for losses caused by terrorist attacks involving nuclear, biological, chemical, or radiological materials and issue a report not later than one year after the enactment of the Reauthorization Act.
  • Requiring the Comptroller General to determine whether there are specific markets in the United States where there are unique capacity constraints on the amount of terrorism insurance available and issue a report not later than 180 days after the enactment of the Reauthorization Act
  • Requiring the President’s Working Group on Financial Markets to continue an ongoing study of the long-term availability and affordability of terrorism risk insurance.
  • Accelerating the timing of the mandatory recoupment of the federal share through policyholder surcharges.

Other terms of the Act, as amended by the Terrorism Risk Insurance Act of 2005, remain unchanged.

Definition of Act of Terrorism

One of the changes made to the Act with the enactment of the Reauthorization Act was a revision to the definition of an act of terrorism that eliminated the requirement that an individual or individuals that carry out an act of terrorism be acting on behalf of a foreign person or foreign interest. In short, this means that acts formerly referred to as “domestic” terrorism may now be certified as an act of terrorism under the Act.

Section 102(1) of the Act defines an act of terrorism for purposes of the Act. Please note that the unmodified reference to “the Secretary” refers to the Secretary of the Treasury. The revised Section 102(1)(A) states, “The term “act of terrorism” means any act that is certified by the Secretary, in concurrence with the Secretary of State, and the Attorney General of the United States-(i) to be an act of terrorism; (ii) to be a violent act or an act that is dangerous to-(I) human life: (II) property; or (III) infrastructure; (iii) to have resulted in damage within the United States, or outside the United States in the case of-(I) an air carrier or vessel described in paragraph (5)(B); or (II) the premises of a United States mission; and (iv) to have been committed by an individual or individuals, as part of an effort to coerce the civilian population of the United States or to influence the policy or affect the conduct of the United States Government by coercion.” Section 102(1)(B) states, “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.” Section 102(1)(C) and (D) specify that the determinations are final and not subject to judicial review and that the Secretary of the Treasury cannot delegate the determination to anyone.

The Act, as amended, contains in Section 103(1)(B) a program trigger of $100 million in aggregate industry insured losses resulting from a certified act of terrorism before federal reimbursement is triggered.

Submission of Rates and Policy Form Language

Insurers subject to policy form and rate regulation must submit the policy language and rates that they intend to use in Texas. The policy should define acts of terrorism in ways that are consistent with the Act, as amended and state law. The definitions, terms and conditions should be complete and accurately describe the coverage that will be provided in the policy. Insurers may conclude that current filings are in compliance with the Act, as amended and state law, in which case no filing is necessary. However, if policy forms make a distinction between acts of a foreign person or foreign interest and a domestic person or domestic interest, it is likely that a filing is necessary. Proposed rate changes filed in Texas should reflect any reduction in ultimate exposure provided by the Federal program. Supporting documentation for such filings must be sufficient for the Texas Department of Insurance (the Department) to determine if the rates are excessive, inadequate or unfairly discriminatory.

The Department has approved/accepted various filings relating to certified acts of terrorism for the Insurance Services Office, Inc. (ISO) and the American Association of Insurance Services (AAIS). A list of the Advisory Organization Approved/Accepted filings can be found on the Department’s website at https://www.tdi.texas.gov/commercial/pccpadvs1.html. Please contact ISO or AAIS for details.

All filings should be made in accordance with the requirements contained in the Department’s Property & Casualty Filings Made Easy Manual. This manual can be found on the Department’s website at http://www.tdi.texas.gov/company/rspceasy.html.

Disclosures

Another change introduced in the Reauthorization Act is a new disclosure requirement for any policy issued after the enactment of the Act. Specifically, in addition to other disclosure requirements previously contained in the Act, insurers must now also provide clear and conspicuous disclosure to the policyholder of the existence of the $100 billion cap under Section 103(e)(2), at the time of offer, purchase and renewal of the policy. The disclosures should comply with the requirements of the Act, as amended, and should be consistent with the policy language and rates filed by the insurer. Insurers must continue to separately state the amount of the estimated portion of the premium being charged a policyholder for acts of terrorism, as defined in the Act. Disclosure notices are not required to be filed with the Department.

Effect on Workers’ Compensation Insurance Coverage

Even with the passage of the Reauthorization Act, workers’ compensation coverage continues to be treated slightly different than the other property and casualty insurance lines. Section102(1)(B)(i) continues to provide that the Federal program will share the risk of loss for workers’ compensation for acts of war in addition to acts of terrorism. This treatment occurs because of the statutory scheme of workers’ compensation, which does not provide an exclusion for losses resulting from an act of war or an exclusion for losses resulting from acts of terrorism. There is no provision in the Reauthorization Act that would preempt the compulsory coverage aspects of Texas workers’ compensation insurance policies. In other respects, however, workers’ compensation coverage is treated under the Reauthorization Act as any other covered line of insurance.

The notice requirements of the new Section 103(b)(3) and the mandatory availability requirements of Section 103(c) still apply to workers’ compensation policies. Workers’ compensation insurers must continue to separately state the amount of the estimated portion of the premium being charged a policyholder for acts of terrorism, as defined in the Reauthorization Act. Since the Texas workers’ compensation law does not have any exclusion for terrorism or war, neither insurers nor policyholders may create an exclusion.

All filings should be made in accordance with the requirements contained in the Department’s Property & Casualty Filings Made Easy Manual. This manual can be found on the Department’s website at https://www.tdi.texas.gov/pubs/pc/rspceasy.html .

Contact Information

Questions regarding workers’ compensation should be addressed to Nancy Moore, Deputy Commissioner, Workers’ Compensation Division, MC 105-2A, Texas Department of Insurance, P.O. Box 149104, Austin, TX 78714-9104, (512) 322-3486, Nancy.Moore@tdi.state.tx.us. Questions regarding surplus lines should be addressed to Kathy Wilcox, Registration Officer, Company Licensing and Registration Division, MC 305-2C, Texas Department of Insurance, P.O. Box 149104, Austin, TX 78714-9104, (512) 322-3535, Kathy.Wilcox@tdi.state.tx.us, and other questions regarding this bulletin should be addressed to Mark Worman, Manager, Commercial Property/Casualty Section, MC 104-PC, Texas Department of Insurance, P. O. Box 149104, Austin, TX 78714-9104, (512) 305-7544, Mark.Worman@tdi.state.tx.us.

The Department may supplement this bulletin as necessary.

Sincerely,
Mike Geeslin
Commissioner of Insurance