25 August 2006
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[Federal Register: August 25, 2006 (Volume 71, Number 165)]
[Rules and Regulations]
[Page 50341-50347]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr25au06-10]
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DEPARTMENT OF THE TREASURY
31 CFR Part 50
RIN 1505-AB67
Terrorism Risk Insurance Program; TRIA Extension Act
Implementation
AGENCY: Departmental Offices, Treasury.
ACTION: Final rule.
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SUMMARY: The Department of the Treasury (Treasury) is issuing this rule
in final form as part of its implementation of amendments made to Title
I of the Terrorism Risk Insurance Act of 2002 (TRIA or Act) by the
Terrorism Risk Insurance Extension Act of 2005 (Extension Act). The Act
established a temporary Terrorism Risk Insurance Program (Program) that
was scheduled to expire on December 31, 2005, under which the Federal
Government shared the risk of insured losses from certified acts of
terrorism with commercial property and casualty insurers. The Extension
Act extends the Program through December 31, 2007, and makes other
changes which are implemented by this rule. In particular, the rule
addresses changes to 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 the operation
of the new ``Program Trigger'' provision in section 103(e)(1)(B) of the
Act. Treasury published an interim final rule and a cross-referenced
proposed rule with a request for comment on May 11, 2006. This final
rule finalizes the proposed rule by adopting the text of the interim
final rule without revision.
DATES: This final rule is effective September 25, 2006.
FOR FURTHER INFORMATION CONTACT: Howard Leikin, Deputy Director,
Terrorism Risk Insurance Program, (202) 622-6770 (not a toll-free
number).
SUPPLEMENTARY INFORMATION:
I. Background
A. Terrorism Risk Insurance Act of 2002
On November 26, 2002, the President signed into law the Terrorism
Risk Insurance Act of 2002 (Pub. L. 107-297, 116 Stat. 2322). The Act
was effective immediately. The Act's purposes are to address market
disruptions, ensure the continued widespread availability and
affordability of commercial property and casualty insurance for
terrorism risk, and to allow for a transition period for the private
markets to stabilize and build capacity while preserving state
insurance regulation and consumer protections.
Title I of the Act establishes a temporary federal program of
shared public and private compensation for insured commercial property
and casualty losses resulting from an act of terrorism which, as
defined by the Act, is certified by the Secretary of the Treasury, in
concurrence with the Secretary of State and the Attorney General. The
Act authorizes Treasury to administer and implement the Terrorism Risk
Insurance Program (Program), including the issuance of regulations and
procedures.
Each entity that meets the Act's definition of insurer (well over
2,000 firms) must participate in the Program. The amount of federal
payment for an insured loss resulting from an act of terrorism is
determined by insurance company deductibles and excess loss sharing
with the Federal Government as specified in the Act and Treasury's
implementing regulations. An insurer's deductible increases each year
of the Program and in Program Year 5, so does its share of the losses
in excess of the deductible, thereby reducing the Federal Government's
share of compensation for insured losses each year until the Program
expires. An insurer's deductible is calculated based on the value of
direct earned premiums collected over certain prescribed calendar
periods. Once an insurer has met its individual deductible, the federal
payments cover a percentage of the insured losses above the deductible,
subject to an industry aggregate limit of $100 billion.
The Act gives Treasury authority to recoup federal payments made
under the Program through policyholder surcharges, up to a maximum
annual limit. The Act reduces the Federal share of compensation for
insured losses that have been covered under any other federal program.
The Act also contains provisions designed to manage litigation arising
from or relating to a certified act of terrorism. Section 107 of the
Act creates an exclusive federal cause of action, provides for claims
consolidation in federal court, and contains a prohibition on federal
payments for punitive damages under the Program. The Act provides the
United States with the right of subrogation with respect to any payment
or claim paid by the United States under the Program.
B. Terrorism Risk Insurance Extension Act of 2005
The Program was originally set to expire on December 31, 2005. On
December 22, 2005, the President signed into law the Terrorism Risk
Insurance Extension Act of 2005 (Pub. L. 109-144, 119 Stat. 2660),
which extends the Program 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 for
Program Year 4 and by 20 percent for Program Year 5.
A revised definition of ``property and casualty
insurance'' that now excludes commercial automobile insurance; burglary
and theft insurance;
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surety insurance; professional liability insurance; and farmowners
multiple 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 Sec. 50.82 of title 31 of the
Code of Federal Regulations (as in effect on July 28, 2004), which
requires advance approval by Treasury of proposed settlements of
certain causes of action involving insured losses under the Program.
C. The Interim Final Rule
The interim final rule was published in the Federal Register at 71
FR 27564 (May 11, 2006) with a cross-referenced proposed rule published
at 71 FR 27573 that would adopt the text of the interim final rule as
final. References in the following discussion are to the interim final
rule. The interim final rule incorporated certain changes to 31 CFR
part 50 required by the amendments to TRIA in the Extension Act, which
extended the Program by two years, to December 31, 2007. The changes in
the rules included new insurer deductible amounts for each of those
Program Years, the extension of mandatory availability requirements,
the deletion of certain types of insurance from the definition of
property and casualty insurance, and a continued safe harbor for the
use of model disclosure forms. The interim final rule also incorporated
and clarified statutory changes to the determination of the Federal
share of compensation, taking into account the new Program Trigger.
This final rule, and the preceding interim final rule, reflect
interim guidance previously issued by Treasury in a notice published in
the Federal Register on January 5, 2006 (71 FR 648), in order to assist
insurers, policyholders, and other interested parties in complying with
immediately applicable requirements of the Extension Act. Treasury
consulted with the National Association of Insurance Commissioners
(NAIC) in developing the interim final rule and has carefully
considered the comments submitted in finalizing the interim final rule.
II. Summary of Comments and Final Rule
Treasury received four comments on the interim final rule.\1\
Comments were submitted by a farm mutual insurer, an insurance company,
a farm mutual reinsurer and an insurance industry trade association.
The comments raised issues in two areas--farm owners multiple peril
insurance and umbrella and excess policies. In addition, one comment
commended the Terrorism Risk Insurance Program for addressing issues in
the earlier interim guidance that had required clarification. After
review and consideration of the comments, Treasury is now promulgating
a final rule implementing the Extension Act changes to TRIA. The final
rule makes no changes to the interim final rule, but the preamble
provides some clarification in response to the issues raised in the
comments. The following discussion also summarizes the provisions of
the interim final, and now final, rule.\1\
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\1\ We also received one comment from a group of farm mutual
insurers after the close of the comment period. We note that this
comment raised the same issues contained in one of the four other
comments. These issues were addressed in this final rule.
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A. Definitions (Sec. 50.5)
The interim final rule incorporated revised definitions for insurer
deductible, Program Years, and property and casualty insurance. The
rule also added definitions for professional liability insurance and
Program Trigger event.
The revisions to the definitions for insurer deductible and Program
Years implemented the Extension Act's addition of Program Years 4
(calendar year 2006) and 5 (calendar year 2007) and the percentages to
be applied to an insurer's direct earned premium for the immediately
preceding calendar year in computing insurer deductibles for Program
Year 4 (17.5 percent) and Program Year 5 (20 percent).
Section 102(12) of TRIA was also amended to exclude additional
types of insurance from the definition of property and casualty
insurance under the Program. The Act now excludes from the definition
commercial automobile insurance, burglary and theft insurance, surety
insurance, professional liability insurance (but not directors and
officers insurance), and farmowners multiple peril insurance. To the
extent the newly excluded types of insurance represent specific lines
of business on the NAIC Annual Statement, Treasury is continuing to
utilize NAIC line of business definitions in implementing the Act. The
newly excluded types of insurance which may correspond to lines of
business on the NAIC Annual Statement are: 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; and Line
24--Surety. In addition, the interim final rule made clear that these
types of insurance are excluded from the definition of property
casualty insurance, regardless of how their premiums may be reported.
The only type of insurance that is newly excluded from the
definition of property and casualty insurance in the Act, but is not a
specific line of business on the NAIC Annual Statement, is professional
liability insurance, located in new section 102(12)(xi). In the interim
final rule, Treasury provided the following definition of
``professional liability insurance'':
Professional liability insurance means insurance coverage for
liability arising out of the performance of professional or business
duties related to a specific 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, stockbrokers and
veterinarians. For purposes of this definition, professional liability
insurance does not include directors and officers liability insurance.
Insurers are to use this definition in identifying policies
excluded from the Program, as well as for satisfying the Act's ``make
available'' requirement and determining which policies have
[[Page 50343]]
premiums that should be subtracted from Line 17--Other Liability on the
NAIC Annual Statement when computing direct earned premium for Program
purposes.
This 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 NAIC.\2\ However, this
definition is not meant to limit insurers to the filing code (17.0019)
specified under SERFF for ``Professional Errors and Omissions
Liability''. Certainly, policies and coverages that employ the SERFF
filing code will meet the interim final rule definition of professional
liability insurance. Treasury acknowledges that many insurers and
insurance support organizations do not utilize the SERFF mechanism for
all their form filings. Thus, the definition in the interim final rule
was intended to have a broader application than the SERFF filing
process and should not be viewed as limited to one particular SERFF
filing code.
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\2\ The Matrix can be found on the NAIC Web site at http://www.naic.org/industry_home.htm
.
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Directors and officers liability insurance, which is sometimes
considered a type of professional liability insurance, is not included
in the definition of professional liability insurance. Section
102(12)(A) of the Act now explicitly includes directors and officers
liability insurance in the definition of property and casualty
insurance. This change 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 may be already included in
Line 17--Other Liability on the NAIC Annual Statement, one of the
commercial lines of business listed in Treasury's current regulations
defining property and casualty insurance (31 CFR 50.5(n)), if not
otherwise excluded. 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'' insurance.
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.\ 3\To implement this provision, the
interim final rule added a new definition for ``Program Trigger
event''. Such an event is ``a certified act of terrorism that occurs
after March 31, 2006, for which the aggregate industry insured losses
resulting from such act exceed $50 million with respect to such insured
losses occurring in 2006 and $100 million with respect to such insured
losses occurring in 2007.'' 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. The Program Trigger is
discussed further in ``E. Federal Share of Compensation'' below.
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\3\ Section 103(e)(1)(B) states: ``In the case of a certified
act of terrorism occuring 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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Farmowners Multiple Peril Insurance
The Extension Act revision to TRIA section 102(12) specifically
excludes ``farm owners multiple peril insurance'', a particular type of
insurance which is also a specific line of business on the NAIC Annual
Statement, from the definition of property and casualty insurance.
Prior to the issuance of the interim final rule, insurers asked whether
monoline farm insurance coverages are similarly excluded. With no clear
guidance in the legislative history of the Extension Act on this issue
and, guided by the plain meaning of the statute, Treasury issued the
interim final rule based on its interpretation that this exclusion is
applicable only to multiple peril coverages insuring farm risks. Single
peril or monoline coverages insuring farm risks generally would
continue to be evaluated based on the line of business on the NAIC
Annual Statement (or equivalent reporting system) where the premiums
for such coverages are reported. Thus, if the premiums for such
monoline coverages are usually reported, or otherwise allocated, to one
of the commercial lines of insurance on the NAIC Annual Statement (or
equivalent reporting system), unless otherwise excluded by the Act, the
monoline coverage would be treated as falling within the definition of
property and casualty insurance under Treasury's regulations.
Aware of some concerns with this result on the part of some smaller
insurance entities, such as farm and county mutuals, Treasury
specifically sought comments on the practical implications of this
issue and requested the articulation of a basis for any assertion that
monoline coverages are excluded from the Program as part of the
farmowners multiple peril exclusion.
Three commenters addressed the treatment of ``farm owners multiple
peril insurance'' in Treasury's interim final rule.
One Texas farm mutual insurer indicated it believed the monoline
fire policies the insurer issues for farm risks in Texas ``are
residential in nature and not commercial''. Texas farm mutuals
generally are precluded from writing commercial insurance. To the
extent a farm mutual insurer files an NAIC Annual Statement in Texas
(not all farm mutuals file an NAIC Annual Statement), the premium for
its monoline fire policies is reported on Line 1--Fire of the NAIC
Annual Statement (an included line). But the farm mutual insurer
explained that the ``Fire'' line of business in Texas includes both
personal and commercial lines. The insurer suggested that ``an argument
can be made'' that the Texas Department of Insurance looks upon farm
mutual policies as being residential policies and not commercial
policies, and that these policies should not be subject to TRIA simply
because of the line on which they are required to be reported.
A Midwest reinsurer of county and town mutuals also raised concerns
about Treasury's interpretation of the meaning of ``farm owners
multiple peril''. The reinsurer noted that ``the practical implication
of Treasury's interpretation is that inclusion of exposures in the
Program is made dependent upon the method by which premium is reported
and not with regard to the actual exposure being insured.'' The
reinsurer further suggested that Treasury's interpretation of the
Extension Act was inconsistent with Treasury's earlier treatment of
commercial property and casualty insurance \4\ that ``was based on the
exposure insured, not on the method of reporting premium.''
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\4\ See 68 FR 9810.
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The third commenter, which reports all farm policy premium under
the farm owners multiple peril line of its Annual Statement, even
premium for what might be considered monoline policies,
[[Page 50344]]
requested confirmation that under the rules, because of the way its
premium is reported, the policy form it uses would be considered farm
owners multiple peril insurance.
As noted previously, there is no clear guidance in the legislative
history of the Extension Act that suggests the meaning of ``farm owners
multiple peril insurance'' should be interpreted broadly to include
single peril, or monoline, farmowners insurance. Moreover, ``farm
owners multiple peril insurance'' is a specific line of business on the
NAIC Statement. Since the inception of the Program, Treasury has used
Statutory Page 14 of the NAIC Annual Statement as the ``best available
point of reference'' \5\ to define what constitutes commercial property
and casualty insurance, also applicable as guidance to insurers that do
not report via Statutory Page 14 to the NAIC. Treasury's rules
generally define property and casualty insurance in terms of specified
lines of business on the NAIC Annual Statement. Insurance for which
premiums are reported on an excluded line of business is not included
in the Program. Insurance for which premiums are reported on an
included line of business is included, unless the particular type of
insurance is otherwise excluded by the Act.
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\5\ See 68 FR 41257.
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Treasury believes that its earlier guidance on what constitutes
commercial property and casualty insurance is consistent with its more
recent interpretation of the Extension Act meaning of ``farm owners
multiple peril insurance''. However, the preamble discussion of this
issue in the interim final rule was fairly brief and we offer
additional discussion below.
Treasury has maintained that premium reported on the specified
commercial lines on Statutory Page 14 of the NAIC Annual Statement is
only considered to be commercial premium subject to the Act ``to the
extent coverage provided is for commercial property and casualty
exposures'' \6\ (and provided it is not otherwise excluded by the Act).
The definition of property and casualty insurance in Sec. 50.5(n)(1)
provides, in part, that it means ``commercial lines within'' certain
specified lines of insurance. We have specifically noted that personal
insurance (insurance primarily designed for personal, family or
household purposes) that is reported on one of the specified commercial
lines of Statutory Page 14 should be excluded from an insurer's
calculation of its direct earned premium.\7\ We have likewise applied
this analysis in clarifying what constitutes commercial property and
casualty insurance coverage for purposes of paying insured losses and
determining compliance with the ``make available'' provision of the
Act.
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\6\ See 68 FR 9810.
\7\ See Sec. 50.5(d)(1)(ii).
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In applying the foregoing to the farm risks described by the farm
mutual commenters, if the premium for a monoline policy written by such
insurers is reported on one of the specified commercial lines of
Statutory Page 14 of the NAIC Annual Statement (Fire, Allied Lines,
etc.), the monoline coverage as a general rule is subject to TRIA.
However, if the monoline policy only insures a personal insurance
exposure (residential dwelling), or is otherwise excluded by the Act,
the policy is not commercial property and casualty insurance within the
meaning of the Act and is not subject to the Act. To the extent a
monoline policy is a hybrid policy that insures both personal and
commercial exposures, farm mutual insurers should look to Treasury's
treatment of the direct earned premium for hybrid policies as a guide
for how to treat the hybrid policy for other purposes under TRIA
(determining claims for insured losses, complying with the ``make
available'' provision, etc.).\8\
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\8\ See Sec. 50.5(d).
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Consistent with the Extension Act, the interim final rule excludes
farm owners multiple peril insurance from the definition of property
and casualty insurance. In response to the commenter that raised the
question about its policy form, we note that the interim final rule
does not directly address policy forms or how various state regulators
treat particular forms for NAIC Annual Statement reporting purposes.
Treasury assumes that the forms and reporting practices are appropriate
under applicable state law. Whatever treatment is afforded particular
policies by insurers in compliance with relevant state law is generally
the guide for how such policies are treated under Treasury's
regulations for what constitutes commercial property and casualty
insurance, unless expressly excluded by the Act. Farm policies for
which premiums are reported on the farmowners multiperil line are
excluded from the Program.
Since the concerns of the three commenters related to ``farm owners
multiple peril insurance'' are addressed by applying Treasury's
previous rulemaking and guidance, no changes have been made to the
definition of property and casualty insurance in section 50.5(n)(2) of
the interim final rule.
B. Interim Guidance Safe Harbors (Sec. 50.7)
Section 50.7 of the current regulations provides that ``[a]n
insurer will be deemed to be in compliance with the requirements of the
Act to the extent the insurer reasonably relied on Interim Guidance
prior to the effective date of applicable regulations.'' The interim
final rule added ``Interim Guidance IV issued by Treasury on December
29, 2005, and published at 71 FR 648 (January 5, 2006)'' to the list of
applicable Interim Guidances.
C. Disclosure (Sec. Sec. 50.12 and 50.17)
The interim final rule incorporated guidance on compliance with
disclosure requirements and revised safe harbor language with regard to
the use of NAIC model disclosure forms.
The Extension Act continues, as a condition for federal payments
under the Act, the existing requirements contained in section 103(b) to
provide disclosures ``at the time of offer, purchase, and renewal of
the policy''. Some insurers faced certain operational difficulties with
regard to policies processed in the latter part of Program Year 3
(2005) for issuance or renewal effective in 2006. In some cases,
policies were issued or renewed in 2006 in a form that already included
coverage for terrorism risks, whether or not TRIA was extended. Because
TRIA would have sunset as of December 31, 2005, disclosures were not
provided with these policies.
The Extension Act made no change to the requirement that
disclosures are required as a condition for payment of the Federal
share of compensation for insured losses. However, given the late date
of enactment of the Extension Act, the interim final rule provided in
section 50.12(e) that ``[i]f an insurer made available coverage for
insured losses in a new policy or policy renewal in Program Year 3 for
coverage becoming effective in Program Year 4, but did not provide a
disclosure at the time of offer, purchase or renewal, then the insurer
must be able to demonstrate to Treasury's satisfaction that it has
provided a disclosure as soon as possible following January 1, 2006.''
For an insurer to demonstrate to Treasury's satisfaction that it
has provided disclosures as soon as possible following January 1, 2006,
Treasury expects that an insurer will have provided disclosures by 30
days after publication of the interim final rule in the Federal
Register (June 10, 2006), barring unforeseen or unusual
[[Page 50345]]
circumstances. If not completed by that time, an insurer will be
expected, when submitting a claim for the Federal share of
compensation, to demonstrate why such disclosures could not be made by
that date and why the insurer should be deemed to be in compliance with
the Act's disclosure requirement.
Pursuant to 31 CFR 50.17, insurers that have used NAIC Model
Disclosure Forms that were in existence on April 18, 2003, were deemed
to satisfy 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 charged 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 required rewording of the NAIC Model Disclosure Forms.
The NAIC has since issued revised Model Disclosure Forms, dated January
26, 2006, which if used by insurers, will be deemed to satisfy
disclosure requirements of the Act and Treasury regulations. The
interim final rule continued the safe harbor approach for use of the
most current NAIC Model Disclosure forms deemed by Treasury to meet
Program requirements. Insurers may also continue to use other forms to
comply with the disclosure requirements.
D. Make Available (Sec. Sec. 50.20 and 50.21)
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 requirement
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, if they wish to have their insured loss claims
eligible for the Federal share of compensation in the extended Program
Years.
In its Interim Guidance IV published on January 5, 2006, Treasury
addressed the ``make available'' requirement with regard to the
transition from Program Year 3, originally the last year of the
Program, to the extended Program Years 4 and 5. In that issuance,
Treasury noted that the Extension Act made no changes to the ``make
available'' requirement for insurers. Treasury provided guidance on how
insurers could comply with Program requirements given operational
difficulties arising from the Extension Act passage late in the year.
In addition Treasury Interim Guidance IV clarified that 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. It also explained how an insurer could comply with
``make available'' requirements under the following scenarios where:
(1) A policy's terrorism coverage expired on December 31, 2005, but
the remainder of the policy continued in force in 2006,
(2) A policy did not provide terrorism coverage after December 31,
2005, but the policyholder had rejected an offer of terrorism coverage
for the portion of the policy term prior to December 31, and
(3) 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 interim final rule generally incorporated this interim guidance
into the TRIA ``make available'' provisions. Section 50.21(b) was added
to address the special Program Year 4 requirements for scenarios (1)
and (2) above. For scenarios (1) and (3), where an insurer must make an
offer of coverage, section 50.21(d) (formerly 50.21(c)) was amended to
provide that the insurer must be able to demonstrate to Treasury's
satisfaction that it has provided an offer of coverage for insured
losses by January 1, 2006, or as soon as possible following that date.
In demonstrating to Treasury's satisfaction that it has provided an
offer of coverage for insured losses as soon as possible after January
1, 2006, Treasury considers January 31, 2006, to be the latest
reasonable date for offers of coverage, barring unforeseen or unusual
circumstances. If not provided by January 31, 2006, Treasury would
expect an insurer to demonstrate why the offer could not be made by
that date when submitting a claim for Federal compensation under the
Program.
The interim final rule incorporated technical amendments to section
50.20 that extend the ``make available'' requirements into Program
Years 4 and 5. Section 50.20(c) also provided that ``property and
casualty insurance coverage for insured losses does not have to be made
available beyond December 31, 2007 (the last day of Program Year 5),
even if the policy period of insurance coverage for losses from events
other than acts of terrorism extends beyond that date''.
Umbrella and Excess Policies
In the Supplementary Information section of the preamble
accompanying the interim final rule, Treasury provided guidance
regarding the ``make available'' and disclosure requirements for excess
or umbrella liability policies in light of the Extension Act's deletion
of certain types of insurance from the definition of property and
casualty insurance. The guidance reflected earlier rulemaking and that
as a general rule, excess or umbrella liability policies are property
and casualty insurance within the meaning of TRIA. Section 102(12)(A)
of the Act defines the term ``property and casualty insurance'' as
meaning commercial lines of property and casualty insurance ``including
excess,'' unless otherwise excluded from the definition under Section
102(12)(B). Premiums for commercial excess and umbrella insurance
policies are normally reported on Line 17--Other Liability in the NAIC
Annual Statement.\9\ Although generally reported on a line which is
included in the Program, in interim guidance Treasury advised that
excess or umbrella insurance is commercial property and casualty
insurance only to the extent it provides coverage above primary or
underlying coverage that is a type of insurance included in the
Program, and not specifically excluded from the definition of property
and casualty insurance itself. However, where the commercial property
and casualty coverage segment of an excess or umbrella liability policy
is merely incidental to the remaining non-TRIA coverage under the
policy, an insurer may treat the entire policy as not providing
property and casualty insurance within the meaning of TRIA and
Treasury's regulations.\10\ In such elections, the TRIA ``make
available'' and disclosure requirements will not apply and no losses
from the commercial coverage segment of such policies will be paid by
Treasury.
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\9\ See 68 FR 59725.
\10\ See 31 CFR 50.5(d)(1)(iii): ``For purposes of the Program,
commercial coverage combined with coverages that otherwise do not
meet the definition of property and casualty insurance is incidental
if less than 25 percent of the total direct premium is for such
coverage.''
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One comment submitted by an insurance trade organization requested
that Treasury give ``due consideration to the possibility that property
casualty insurers, in good faith, might have treated commercial
umbrella and excess insurance policies differently under the TRIA
Extension than the Federal Register guidance''. As an example, the
comment states that, ``as premiums from
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these policies are reported on line 17 of the NAIC annual Statement (a
line that is included within the Federal program), insurers could have
reasonably assumed that those policies would either be included
entirely in the program or that the policies would be included unless
there was no possibility of a covered claim from the underlying
policy''.
Treasury acknowledges that, if an insurer, prior to the publication
of the interim final rule, relied on the assumptions in the above
example in carrying out its ``make available'' and disclosure
obligations (if any) the insurer would be considered to be reasonably
compliant with Program requirements. However, in no circumstance can
losses associated with an underlying coverage that is excluded from the
Program form the basis for a claim for the Federal share of
compensation.
Commenters asked Treasury to reconsider the position that ``excess
or umbrella insurance is commercial property and casualty insurance
included in the Program only to the extent it provides coverage above
primary or underlying coverage that is a type of insurance included in
the Program''. One of these comments suggests that ``this position
makes some sense within the insurance context of how umbrella/excess
and the underlying coverage are typically consistent, [but] one could
also make a case for commercial umbrella/excess being totally included
under TRIA--even when written over exempted coverages--if the goal was
to make the provisions of TRIA apply as broadly as the law will allow
and thus encouraging as much terrorism coverage as possible in the
marketplace''.
Treasury considered and rejected this alternative prior to issuing
the interim final rule. After reconsideration based on the comments, we
continue to believe that the better interpretation of the statutory
authority and intent, given that the Extension Act restricted the types
of insurance included under the Program, is as stated in the preamble
to the interim final rule. Therefore, no change is being made to the
final rule.
E. Federal Share of Compensation (Sec. 50.50)
The interim final rule added several provisions to section 50.50 to
reflect the addition of the new Program Trigger provision to the Act.
Under section 103(a) of TRIA, the Secretary is required to pay the
Federal share of compensation for insured losses in accordance with
section 103(e) of the Act. The Extension Act amended subsection (e) to
provide, in part, that no compensation shall be paid by the Secretary
under subsection (a) unless the aggregate industry insured losses from
a certified act of terrorism occurring after March 31, 2006, exceed
certain amounts. This provision was intended to ensure that there would
be no Federal compensation unless the aggregate industry losses from an
act of terrorism exceed these amounts.
The interim final rule incorporated a technical amendment to
renumbered Sec. 50.50(a) (formerly 50.50(d)) to provide that the
Federal share of compensation in Program Year 5 shall be ``85 percent
of that portion of the insurer's aggregate insured losses that exceed
its insurer deductible during Program Year 5,'' (subject to any
adjustments in Sec. 50.51 and the cap of $100 billion as provided in
section 103(e)(2) of the Act). A new provision was also added to
renumbered Sec. 50.50(d) (formerly 50.50(a)) that reiterates, as a
condition for Federal compensation for insured losses, a basic
insurance principle that, ``[t]he insurer offered the coverage for
insured losses and the offer was accepted by the insured prior to the
occurrence of the loss''.
New Sec. 50.50(b) incorporated the Program Trigger limitations on
the amount of Federal compensation payable under the Act. To implement
these limitations, Sec. 50.50(g) stated that Treasury will determine
the amount of aggregate industry insured losses, and that if the
aggregate industry insured losses exceed the applicable Program Trigger
amounts, Treasury will publish notice in the Federal Register that the
act of terrorism is a Program Trigger event. As noted in the previously
issued Interim Guidance, Treasury also expects to provide notification
through press releases and postings on the TRIP Web site.
Section 50.50(c) clarified that in the provisions dealing with
claims procedures, subpart F, insured losses or aggregate insured
losses for acts of terrorism after March 31, 2006 will be limited to
those insured losses resulting from Program Trigger events. This
limitation on insured losses controls any determinations of, or
calculations leading to, a Federal share of compensation under the Act
including any adjustments of the Federal share, and applies to
submissions of an insurer in conjunction with Initial Notices of Loss
and Certifications of Loss and payments of the Federal share.
The Program Trigger provision also has a direct bearing on which
insured losses count towards satisfaction of the insurer deductible. In
Program Year 4, and similarly, in Program Year 5, only an insurer's
insured losses resulting from Program Trigger events in the year will
count towards satisfaction of the insurer deductible.
F. Determination of Affiliations (Sec. 50.55)
Section 50.55 provides that for the purposes of claims procedures
and the determination of the Federal share of compensation ``an
insurer's affiliates for any Program Year shall be determined by the
circumstances existing on the date of occurrence of the act of
terrorism that is the first act of terrorism in a Program Year to be
certified by the Secretary for that Program Year.'' The purpose of this
regulation, when promulgated in 2005, was to clarify the point in time
when insurer affiliations would be determined in order to facilitate
the calculation of insurer deductibles and the payments of the Federal
share of compensation for Program Years in which affiliations could
change over time. Since this has meaning only if there is a potential
Federal share of compensation, the interim final rule incorporated an
amendment clarifying that if the first certified act of terrorism
occurs after March 31, 2006, it must also be a Program Trigger event to
be used for determining affiliations under the rule.
G. Federal Cause of Action; Approval of Settlements
The Extension Act added section 107(a)(6) to TRIA, which provides
that procedures and requirements established by the Secretary under 31
CFR 50.82, as in effect on the date of issuance of that section in
final form [July 28, 2004], shall apply to any Federal cause of action
described in section 107(a)(1). This provision was added to new Sec.
50.85 of the interim final rule.
Section 50.82 of the regulations requires insurers to submit to
Treasury for advance approval certain proposed settlements involving an
insured loss, any part of the payment of which the insurer intends to
submit as part of its claim for federal payment under the Program.
Thus, Treasury would not expect insurers to submit any proposed
settlement if the insured losses would not be eligible for payment, as
would be the case if the losses resulted from a post-March 31, 2006
certified act that was not a Program Trigger event. However, if there
is uncertainty whether or not a certified act will become a Program
Trigger event, an insurer may wish to err on the side of caution and
submit a proposed settlement for prior approval in order to preserve
any subsequent eligibility for Federal compensation for insured losses
under the Program. Otherwise the insured will
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be ineligible for later payment if the Program Trigger is reached.
III. Procedural Requirements
Executive Order 12866, ``Regulatory Planning and Review''
This final rule is a significant regulatory action and has been
reviewed by the Office of Management and Budget under the terms of
Executive Order 12866.
Regulatory Flexibility Act
Pursuant to the Regulatory Flexibility Act, 5 U.S.C. 601 et seq.,
it is hereby certified that the final rule will not have a significant
economic impact on a substantial number of small entities. The final
rule implements changes prescribed or authorized by the Extension Act.
The Act itself requires all insurers receiving direct earned premium
for any type of property and casualty insurance, as defined in the
Extension Act, to participate in the Program. This includes all
insurers regardless of size or sophistication. The Extension Act also
defines property and casualty insurance to mean commercial lines of
insurance without any reference to size or scope of the insurer or the
insured. The disclosure and ``make available'' requirements are
required by the Act. The rule allows all insurers, whether large or
small, to use existing systems and business practices to demonstrate
compliance. Treasury is required to pay the Federal share of
compensation to insurers for insured losses subject to the new Program
Trigger provisions in the Act. The requirement that insurers seek
advance approval of certain settlements is now required by the Act. Any
economic impact associated with the final rule flows from the Extension
Act and not the final rule. However, the Act and the Program are
intended to provide benefits to the U.S. economy and all businesses,
including small businesses, by providing a federal reinsurance backstop
to commercial property and casualty insurance policyholders and
spreading the risk of insured losses resulting from an act of
terrorism. Accordingly, a regulatory flexibility analysis is not
required.
List of Subjects in 31 CFR Part 50
Terrorism risk insurance.
Authority and Issuance
0
For the reasons set forth above, the interim final rule revising
subparts A, B, C, F, and I of 31 CFR part 50, which was published at 71
FR 27564 on May 11, 2006, is adopted as a final rule without change.
Dated: August 9, 2006.
Emil W. Henry, Jr.,
Assistant Secretary of the Treasury.
[FR Doc. E6-14180 Filed 8-24-06; 8:45 am]
BILLING CODE 4811-37-P