The purpose of this bulletin is to inform licensed insurers and eligible surplus lines insurers of the enactment on November 26, 2002 of the Federal Terrorism Risk Insurance Act of 2002, Pub. L. 107-297 (the Act). The Terrorism Insurance Program specified in the Act terminates on December 31, 2005. The complete text of the Act can be found at http://www.congress.gov, and continuing guidance from the Secretary of the United States Department of the Treasury who is charged with administering the Program can be found at www.treas.gov/offices/domestic-finance/financial-institution/terrorism-insurance/.
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. Congress enacted and the President has signed into law, the Terrorism Risk Insurance Act of 2002. This Federal law provides a Federal backstop for defined acts of terrorism and imposes certain obligations on insurers.
Definition of Insurer
Section 102(6) of the Act defines "insurer" for purposes of the Act. "Insurer" means any entity and affiliate thereof--(A) that is--(i) licensed or admitted to engage in the business of providing primary or excess insurance in any State; (ii) an eligible surplus lines carrier listed on the Quarterly Listing of Alien Insurers of the NAIC, or any successor thereto; (iii) approved for the purpose of offering property and casualty insurance by a Federal agency in connection with maritime, energy, or aviation activity; (iv) a State residual market insurance entity or State workers' compensation fund; (B) that receives direct earned premium for any type of commercial property and casualty insurance coverage. The Secretary of Treasury may extend the Act to other classes or types of captive insurers and other self-insured arrangements by municipalities and other entities as well as to insurers who offer group life insurance.
Definition of Property and Casualty Insurance
Section 102(12) of the Act states the term "property and casualty insurance" (A) means commercial lines of property and casualty insurance, including excess insurance, workers' compensation insurance, and surety insurance, and (B) does not include crop or livestock insurance, private mortgage or title insurance, financial guaranty insurance issued by monoline financial guaranty insurance corporations, medical malpractice, health or life insurance including group life, flood insurance provided under the National Flood Insurance Act, or reinsurance or retrocessional reinsurance.
Definition of Act of Terrorism
Section 102(1) defines an act of terrorism for purposes of the Act. Section 102(1)(A) states, "The term "act of terrorism" means any act that is certified by the Secretary of the Treasury, 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 of 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 acting on behalf of any foreign person or foreign interest, 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.
Mandatory Insurer Participation and Coverage Availability
All insurers, as defined in the Act, are required by the Act to participate in the Terrorism Insurance Program (the Program) and make available coverage for insured losses in all of their covered commercial lines policies. The term " insured loss" means any loss resulting from an act of terrorism (including an act of war, in the case of workers' compensation) 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 (as described in Section 40102 of Title 49, United States Code), 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, or on the premises of a United States mission. The Act also provides that insured loss excludes amounts awarded in a civil action that are attributable to punitive damages. The Act further requires insurers to make available property and casualty insurance coverage for insured losses, which does not differ, materially, from the terms, amounts, and other coverage limitations applicable to losses arising from events other than acts of terrorism.
Rates, Policy Forms and Disclosure Forms
The Act voids any preexisting terrorism exclusion in a contract for property and casualty insurance that is in force on the date of enactment of the Federal law. This nullification applies to all exclusions whether they are associated with contracts issued in the admitted market, the surplus lines market, or for an unregulated commercial line of insurance including certain inland marine and professional liability lines, aircraft insurance, marine insurance, or for "large risks" as defined in Insurance Code Article 5.13-2, Sec. 8(f). Please note that such exclusions are only void to the extent that they exclude coverage that is now provided by the Federal program.
The Act preserves the Texas Department of Insurance's (Department) jurisdiction and regulatory authority over rates and forms except for the period from the date of enactment of the Act through December 31, 2003, rates and forms for certain terrorism coverage shall not be subject to prior approval or a waiting period. However, it should be noted that this exception to Texas' filing laws applies only to coverage that is applicable to losses covered under the Federal program. As a means of providing policyholders with an option respecting the coverage made available under the Act, the Department will consider endorsements excluding coverage for acts of terrorism as defined by the Act. The Act preserves the Department's authority to disapprove any rates pertaining to such losses if it finds them to be excessive, inadequate or unfairly discriminatory.
Thus, a system is created where insurers can immediately implement prospective rate changes for coverage of insured losses related to acts of terrorism as defined in the Act. Proposed rate changes filed in Texas should reflect the reduction in ultimate exposure provided by the Federal program. Supporting documentation for such filings must be sufficient for the Department to determine if the rates are excessive, inadequate or unfairly discriminatory. 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.state.tx.us/company/rspceasy.html.
The Act requires that insurers provide "clear and conspicuous" disclosure to policyholders of the premium charged for insured losses covered by the program and the Federal share of compensation for insured losses under the Program. This requirement applies to new and renewal business. Model disclosures have been developed by the National Association of Insurance Commissioners for the convenience of insurers and can be found on the Department's website at www.tdi.state.tx.us. Such disclosure notices are not required to be filed with the Department. (Policyholder Disclosure #1 & Policyholder Disclosure #2)
In-force business receives special consideration under the Act. Section 105(a) voids any terrorism exclusion on existing policies to the extent that it excludes losses that would otherwise be insured losses as defined in the Act. It details a process for insurers and policyholders to reinstate the void exclusions. Under that process, an insurer may reinstate a preexisting provision in a contract that is in force on the date of enactment of the Act and that excludes coverage for an act of terrorism only if the insurer has received a written statement from the insured that affirmatively authorizes such reinstatement or if the insured fails to pay any increased premium charged by the insurer for providing such coverage and the insurer provided notice at least 30 days before any such reinstatement, as provided in Section 105 of the Act. Since Texas has not approved terrorism exclusions for use in the admitted market, the requirements outlined in this paragraph apply only to surplus lines, an unregulated commercial line of insurance including certain inland marine and professional liability lines, aircraft insurance, marine insurance, or to contracts issued for "large risks" as defined in Insurance Code Article 5.13-2, Sec. 8(f).
Effect on Workers' Compensation Insurance Coverage
Treatment of workers' compensation is slightly different than for other property and casualty insurance coverages. First, Section 102(1)(B)(i) provides 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. Under Texas law there is no exclusion for workers' compensation losses resulting from an act of war. There is no provision in the 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 Act as any other covered line of insurance. Therefore, the notice requirements of Section 103(b)(2) and the mandatory "make available" requirements of Section 103(c) apply to workers' compensation policies. In this connection, workers' compensation insurers are required 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. As Texas workers' compensation law does not have any exclusions for terrorism or war, neither insurers nor policyholders may create such an exclusion.
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 Division, 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.
Commissioner of Insurance