January 2006

In the "11th" hour, a bill to continue the Terrorism Risk Insurance Act of 2002 was passed and signed into law. This 2005 legislation extends TRIA until 12/31/07 with just a few slight modifications. What does this new legislation mean to you and your clients?

Quick look back ….
We know that the disaster of September 11, 2001 hit the insurance industry hard, and the industry feared a repeat performance. The reinsurance market did not want the terrorism exposure. As a result of the industry fears and lack of reinsurance coverage, complete war and terrorism exclusionary endorsements were added to all commercial lines policies … at least to the extent allowed by state law. The exclusionary endorsements had excluded all terrorism whether due to foreign interests, such as September 11th, or domestic interests, such as the bombing of Oklahoma City. The Government then passed legislation in an effort to provide a reinsurance program for the foreign interest terrorism risk or "certified act of terrorism."

... to the most salient portions of TRIA 2002
The definition of "certified act of terrorism" is the same under the 2005 TRIA extension as it was under the original law.

The TRIA law states:

(A) CERTIFICATION.-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 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. (B) LIMITATION.-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.

In order for an act to be "certified" it has to be a dangerous or violent act committed by a foreign person/power other than an act committed during a "declared war". An act will not be certified unless it causes more than $5,000,000 in aggregate losses.

This definition of "certified act of terrorism" remains the same under the Terrorism Risk Extension Act of 2005.

TRIA requirement to make coverage available for "certified acts" remains under the 2005 Extension
If the insurance company wants to participate in the federal terrorism reinsurance program, it must make coverage available on all new and renewal policies.

What about people who rejected terrorism coverage on their 2005 renewal? Do we have to make coverage available to them … again???
No .. It does not matter what reason the client chose NOT to purchase terrorism coverage on their 2005 renewal policies, the insurance company is NOT obligated to offer coverage again until the client's 2006 renewal.

Suppose the client had rejected terrorism coverage on their 12/1/05-12/1/06 renewal because the terrorism coverage was slated to terminate on 12/31/05? Again, it does not matter what reason the client chose not to purchase the coverage, the company has complied with the terms of TRIA and has no obligation to send another offer of terrorism coverage until the renewal date.

What about the clients who purchased terrorism coverage on the 2005 policy under the conditional endorsement stating that terrorism coverage ends on 12/31/05?
The insurance company must provide the client with a new offer of terrorism coverage for the remainder of their policy period. The Department of Treasury expects the insurance company to send this notification as quickly as possible. January 31, 2006 is the "latest reasonable date" for this notification. If the offer is not sent prior to January 31st, the company must explain the delay to the Treasury Department.

What about those 2006 renewals that were processed in 2005 BEFORE the TRIA extension?
If a 2006 policy that is subject to the act was renewed WITHOUT the offer of certified acts terrorism coverage, the company is required to send notice prior to 1/31/06. The government recognizes that a usual practice of the insurance industry is to send out coverage prior to the renewal date. The government also recognizes that the extension of TRIA coverage was late in coming. Insurance companies will have to explain their tardiness to the Department of the Treasury if the offer of terrorism coverage on these advance renewals is not sent by 1/31/06.

Who has to SEND the offers of coverage?
Ultimately, it is the responsibility of the insurance company to be able to prove that terrorism coverage was offered. However, if the insurance agent is the normal channel of communication between the insurance company and the client for all other policy related transactions, then the Treasury Department will allow the insurance company to use the independent agent for this correspondence also. Check with your companies regarding the procedure for the "mid-term" extension offer of terrorism coverage. If the insurance companies had you be the conduit for offering terrorism coverage in the past on new and renewal policies, just verify with them that the procedure will remain the same.

Whatever notices were used before can still be used for 2006 renewals. A slight modification to the form will be necessary for 2007 renewals.

Program extension ends 12/31/07 … so 2007 renewals will have the "conditional terrorism endorsements" again!
The client will "enjoy" a full year of uninterrupted coverage on the 2006 policy renewal … assuming the client buys coverage for "certified acts of terrorism." When the 2007 policy is up for renewal and the certified acts coverage is offered, it will be offered on a pro-rata basis if the policy extends beyond 12/31/07.

Some lines of coverage have been REMOVED from the Terrorism Risk Insurance Act …
Terrorism coverage will not have to be offered on the following lines of insurance:

The "biggie" for most agents is the removal of commercial auto insurance from the need to offer terrorism
coverage.

TRIA trigger … does change under the Extension Act … but NOT the definition of what a "certified act" IS.
Under the TRIA 2002 the trigger of coverage coincides with the dollar value shown in the definition of certified acts …or $5,000,000. Actually there was no formal provision for trigger of coverage as we just relied on the definition of certified acts.

Under the Terrorism Risk Insurance Extension Act of 2005, the definition of certified act remains the same, but the point at where the government starts its reinsurance program changes. The 2005 act ADDS the provision of "program trigger" to distinguish WHEN insurance coverage kicks in V. when the government's reinsurance program kicks in.

(B) PROGRAM TRIGGER - 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

The program trigger does not matter a hill of beans to the client.
It IS an issue for an insurance company or the insurance industry as a whole. If the client buys coverage for certified acts of terrorism on his $1,000,000 building, and Osama Bin Laden blows up his building, he will have coverage.

On property coverage. the complete terrorism exclusions NEVER applied for other than nuclear, biological or chemical losses UNLESS "the total of insured damage to all types of property exceeds $25,000,000." On liability coverage the complete terrorism exclusion NEVER applied for other than nuclear, biological or chemical losses UNLESS "50 or more persons sustain death or serious physical injury."

Suppose your client's million dollar building is destroyed in an explosion set by Osama in July 2006. The explosion takes out a few buildings and the total damaged property for all is $35,000,000. If your client BOUGHT coverage for "certified acts" then he HAS coverage even though the entire loss does NOT trigger the Federal terrorism reinsurance program.

The program trigger values WILL make a difference to particular companies, especially smaller ones who concentrate coverage in a particular area. When there IS a certified act, each company must retain its deductible BEFORE it can count on Federal terrorism reinsurance. For a big company such as AIG the $50,000,000 trigger is a pittance compared to what its own deductible would be. For a small regional who concentrates coverage in a particular area this $50,000,000 reinsurance trigger could be LARGER than the company's deductible under the provisions of TRIA.

But honestly, this is not a concern of the client and probably not the agent. It MIGHT be a reason why smaller companies that write very little commercial coverage might file for an increased rate for terrorism coverage or non-renew clients where the area of concentration of coverage for them is too great.

Most of the changes in the program affect the insurance carriers…
The trigger at which the program "attaches" has increased per the discussion above. Also, in addition to there being individual company deductibles, the program also has a provision for overall industry yearly maximum participation/retention. Year One limited the overall industry retention to $10 billion, $12.5 billion in Year Two, $15 billion in Year Three; and now $25 billion in Year Four and $27.5 billion in Year 5. So, the program has the insurance industry accepting an increasingly larger portion of the risk over time.

Also, the Government's overall participation share will be reduced in 2007 (Year 5) to 85% from the current 90%. The Policyholder Disclosure Notice of Terrorism coverage will have to be modified to address this change.

These changes will most probably result in terrorism rate increase filings by insurance companies. And, justifiably so.

Bottomline…
If they have bought terrorism coverage in the past, they should continue to do so. Do NOT confuse the program trigger amounts of $50,000,000 or $100,000,000 with certified act coverage … it is NOT the same thing. Those high values DO NOT affect the coverage that is purchased by your client … other than in a premium rate
increase effect!

I've seen a few charts of changes in my travels over the last few weeks … so click here for what I think is a nice, short compilation of changes.

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As usual, if I can be of service to you, please call me, Irene Morrill, Vice President of Technical Affairs, at 800-870-7091 or email me at imorrill@massagent.com. You can fax me at 508-628-5443.

This article has been developed expressly for the members of MAIA. Reprint by other than members without the express permission of the author is not permitted.