Senate Fails to Act on Federal Terrorism Reinsurance

During the first weeks of December, covering the story of whether or not Congress would pass a federal terrorism reinsurance bill before the year 2001 was out was pretty much a waiting game. At the time, most insurance industry representatives involved in the process seemed fairly sure, or at least hopeful, that the Senate would act on compromise legislation before adjourning. After all, the House had passed its own version, the Terrorism Risk Protection Act (HR 3210), in late November. That bill, while not deemed ideal by many industry analysts, was considered at least a step in the right direction.

On Dec. 4, the Independent Agents of America sent a letter to Senate Majority Leader Tom Daschle, who had assumed a major role in the attempt to forge a Senate bill. The letter stated in part, “It is clear that independent insurance agents and brokers and our national economy are facing a serious problem if coverage for acts of terrorism is not available after January 1…In the aftermath of the Sept. 11th terrorist attacks, virtually all reinsurers have stated that they will no longer be able to provide insurance companies with terrorism insurance. This will create a chain reaction that will affect not just the insurance industry, but our entire economy.”

The American Insurance Association also weighed in. Its Vice President, Northeast Region James T. Harrington, testified in mid-December before the New York State Assembly’s Insurance Committee that “[a]lthough the property/casualty insurance industry can deal with the incredible losses from September 11, we are very concerned about what will happen if there are additional, large-scale terrorist attacks in the future… We believe that the only course of action is immediate enactment of legislation to create a federal financial backstop for losses that result from future terrorist attacks.”

However, the closer it got to the end of December, speculation on the date when a Senate bill would reach the floor was pushed farther and farther forward, until time finally ran out, and the reality sank in that no such legislation would reach President Bush for his signature in 2001.

The reaction from many of the major insurance trade associations, which had been doing their utmost to urge the Senate to move forward with its terrorism insurance proposal, was immediate and decidedly not positive.

One example came on Dec. 20 from the Council of Insurance Agents + Brokers’ President Ken Crernr, whose statement read in part, “Congressional failure to pass a federal terrorism backstop this year is a disappointment for the entire industry, and for the thousands of clients and the brokers who represent them…Now we urge insurance companies to move through the current renewal period with caution. A disciplined approach to pricing along with sound underwriting standards for terms and conditions is critical.”

Perhaps one of the most succinct expressions of disappointment came from the Risk and Insurance Management Society Inc., whose President David Mair was quoted in a press release as saying, “The Senate dropped the ball.”

Where exactly did things go wrong? “The House had one approach and the Senate had a considerably different approach, but the House did at least go in and pass theirs,” said Carl Parks, senior vice president of government relations for the National Association of Independent Insurers (NAII). “Toward the end of the session it appeared there was a bipartisan consensus bill which seemed to be acceptable to the White House, the key leaders in the House and the Senate. But basically what it came down to…was the tort reform provisions, which had originally been agreed to by [Senators Sarbanes, Gramm, Enzi and Dodd].” According to Parks, that consensus Senate bipartisan bill had protections in it on punitive damages and protecting taxpayers from liability.

But, Parks continued, resistance came from trial lawyers who didn’t want any kind of restrictions at all. “At the end of the day, from what we heard from the House leadership… they were willing to basically accede to the Senate methodology…in terms of how they would do the backstop, rather than doing the loan/repay and all of that that was in the original House bill,” Parks said. “It was all a matter of bringing the bill to the Senate floor, and it would’ve passed with a very large number of votes. But apparently because the trial lawyers didn’t want to have any tort reform in there at all… the Senate leadership chose not to bring the bill to the floor.”

How serious of an issue is the failure to pass that consensus bill during 2001 going to be? According to Parks, “We’re finding that out right now…in the marketplace… There are a couple of different things from the insurance industry point of view…some very complicated situations for the companies.

“The states are aggressively trying to pick up the ball that was left on the ground by Congress when they left,” Parks continued. “The National Association of Insurance Commissioners [and] the various states are entertaining allowing the companies to have exclusions.”

The Los Angeles Times reported on Jan. 7 that California had decided to disallow insurers from using terrorism exclusion language. (For a recently released run-down of actions taken in this regard by five Western States, see Figure A on p. 9 and a complete state list on insurancejournal.com).

There is little doubt that the issue of a federal reinsurance terrorism legislation will be taken up again by Congress this year. “It would certainly have been preferable…if this had been dealt with prior to Jan. 1,” Parks said. “But since it has not been, we would certainly urge Congress to come back and pick up the ball and get it across the goal line. We think that the consensus bill that’s on the table on the Senate right now is the best and surest mechanism to resolve the concerns of the economy.”

The worst case scenario is, of course, that another devastating terrorist attack should strike the nation. In such a case, the thought of which is difficult to entertain, some have suggested the Senate might be visited with a grim reminder that it did not act when it could have.

“The stalemate that’s existed ever since October because of the trial bar position… is still there,” Parks said. “When Congress comes back in late January, the trial bar is still going be saying [it doesn’t] want any bill that has any tort liability, punitive damages restrictions at all. Then what do you do about it? If the response in the real world is serious enough, maybe that will get [their] attention.”

In a final twist to the 2001 legislative session on Capital Hill, Sen. Charles Schumer introduced an optional federal charter bill, referred to as the National Insurance Chartering and Supervision Act virtually at the last moment before the Senate adjourned for the year.

“It’s ironic that some in Congress are talking about federal regulation of the insurance industry when in this current matter of almost crisis situation, federal reinsurance, Congress…has not been able to respond and they’ve left it for the states to hopefully step forward and get the job done,” Parks said. “That’s not a ringing endorsement of federal regulation of the insurance business.”

With so much negotiation over the insurance industry being conducted at the federal level these days, is there some concern that at some point the federal government may gain too much of a stronghold in determining the operations of that industry?

“Absolutely,” Parks said. “[The NAII] strongly supports state regulation. We certainly recognize there are reforms that have to be addressed in the states.” But until there’s a clear picture of how the states will respond, “it seems that federal government should concentrate on those things that are clearly within its role. And that would include the federal reinsurance terrorism bill.”

Topics Catastrophe Natural Disasters Agencies Legislation Reinsurance Market