Carriers Scramble to Comply with Terrorism Risk Insurance Act

The Terrorism Risk Insurance Act finally became law Nov. 26 after more than a year of pitched congressional wrangling, and many insurers are finding themselves with remarkably little time in which to comply with the new law—namely, to resume offering coverage for acts of terrorism now that their exclusions have been effectively nullified.

At a recent conference held in New York City and hosted by Kaye Insurance Associates Inc., insurers and industry groups previewed the new law and examined how it would affect carriers that had stopped writing such coverage after Sept. 11. Bruce Guthart, chairman and CEO of Kaye Insurance Associates, opened the session, expressing optimism that the new law would go a long way toward jump-starting the New York real estate and construction sectors. “The insurance rates have gotten for many of you out of hand over the course of the last year,” he said. “This bill goes a long way toward providing further availability for the real estate industry when it comes to terrorism insurance, and should move toward renewed economic development in the major urban centers in the United States.”

The nitty-gritty
Council of Insurance Agents and Brokers (CIAB) senior vice president of Government Affairs Joel Wood described the essentials of what the new law will require of insurers. “This is a temporary program that calls for two years plus a one-year extension,” he said. “I do think that it will be a three-year program. There are two primary aspects to the act. First off, terrorism coverage must be made available to all commercial insureds, period. Second, it establishes an obligation from the federal government to pay 90 percent of the covered insureds’ losses after a certain threshold has been met.”

Going into more detail on the availability requirement, Wood stated, “Your requirement is that the availability has to be for 2004. The coverage has to be offered. If any policy is issued after 9:45 a.m. on Tuesday [Nov. 26], it must include terrorism in it. The coverage cannot differ materially from the terms announced in the limits that are applicable to other terms under terms of the policy.

“I expect that there will be immediate scrambling by the insurance industry because all terrorism exclusions are going to go away—nullification, as of the President’s signing,” he continued. “There’s no restriction on rates and forms that the insurer can charge—theoretically, the sky’s the limit. State pre-approval laws are preempted. However, there is no presumption that this would inhibit state insurance commissioners from determining that such rate that is offered is accepted and adequate or discriminatory. How that is defined, and how you determine what is an excessive rate, is going to be very interesting.”

Wood said further, “There must be clear and conspicuous disclosure of the premium for terrorism, if it has been included in the policy already. We know that insurers have in many instances rolled the dice, for whatever reason … and have underwritten terrorism coverage in many instances. They are given a 90-day window of time in which they can identify what the premium is that they’re charging for terrorism. The policies in force that already include terrorism—notices of disclosure must be accompanied by information on the federal program. You’ve got to describe the new federal law. That must go out no later than 90 days [after Nov. 26].”

He explained that the bill differs from most federal legislation because of the immediate ramifications for carriers once it was signed into law. “Here’s the thing that’s really fascinating about this—when Congress does things like the PATRIOT Act or HIPAA privacy law, you have this period of time ranging from six months to two or three years in which regulations are developed, and then they’re implemented,” he said. “This legislation … has an immediate impact—there are disclosure and notification requirements that have not been yet hashed out. There are no regulations by the Treasury Department on how this is all going to be implemented.

“All indications are that there are going to be safe harbors that will not be generous to the industry, but will be understanding of this very unusual situation,” Wood continued. “It’s very much unprecedented in the history of our industry to have a federal law to take place … Upon the enactment (of the act) that day, activities, behaviors, and policies are going to have to be issued in a different way than previously.”

Wood noted that the process he and other industry lobbyists underwent attempting to get legislation passed by Congress was tortuous and unpredictable. “In the 14 years that I’ve been a lobbyist for the insurance industry, I’ve certainly never seen an issue with this kind of obvious gravity,” Wood explained. “We operate in a world where politically, commercial property/casualty regulatory and tax-related issues barely ever make a passing, fleeting reference in The Wall Street Journal, much less emerge as what for the past six months has been the number one domestic economic priority of the President of the United States. It’s been gratifying. It’s also frightening—I tried to make a concerted effort during the communications over the past three or four weeks, communicating with our members to ramp down my enthusiasm for what a great political accomplishment this is only in the interest of self preservation.

“I know that the transition to this new law, as it became apparent that the leadership in the Senate and the House and the administration had struck the framework of a deal, that this transition could be quite chaotic,” Wood continued. “There are no guarantees—the reality is what Congress has done in this legislation, and what the President is going to sign, is a bill that’s based on attempting, on a temporary basis, to restore a marketplace. It is not a government solution—certainly there have been news accounts all over … characterizing this as an industry giveaway or sellout.”

Wood added that he had “never seen a piece of legislation that has been so up and down … I’ve probably on 12 different occasions over the course of the past 14 months pronounced to our membership definitively that the bill was either absolutely dead or absolutely going to occur within a week or two.”

Not the first choice
“As many of you know, one of the things that made this very difficult was the House and Senate had initially passed very different bills,” Wood said. “The House … in fairly short order passed a bill. It was not at all what the industry had come together on—we had all united in the property/casualty world behind a proposal that was styled after Pool Re, which was the British experience, which was basically a pooling mechanism that is a permanent governmental intervention, with no broker intermediation. That was created about a decade ago in response to I.R.A.-related bombings.

“We frankly hit a brick wall on that right away,” Wood explained, “because primarily the Treasury Department and congressional leaders—particularly Phil Gramm—did not want to see any program enacted that was permanent, or that created a new federal regulatory intervention into the insurance marketplace.”

Tort reform quickly became a divisive issue in separating the initial bills passed by the House and Senate, according to Wood. However, by the time the bill was finally adopted, the issue had lost steam. “What the House did, to the consternation of many in the insurance industry, was it adopted a proposal that had all kinds of assessments and surcharges—sort of a repayment scheme for the insurance industry,” he said. “But to … advance the ball, the industry united behind it to pass it out of the House of Representatives. Along the way, the tort reform issue reared its ugly head.

“The House Republican leadership … polarized the debate (once the bill reached the floor) by including much stiffer restrictions on legal liability,” Wood continued. “The reason why we’re sitting here now as opposed to a year ago is largely the result of how that (tort reform) issue became so politicized. It was a tangential issue that absolutely became radioactive. What they did was, they threw in the kitchen sink—limitations on attorney fees, a total ban on punitive damages. So the bill went over to the Senate, and there were attempts to move it. Republican leaders insisted on tort reform … Finally, the Senate passed a bill that was essentially more to the industry’s liking—a straightforward quota sharing, 90 percent government share, a 90/10 split, the federal government picking up the tab after an industry-wide deductible of $10 billion.”

After Republicans retook the Senate in the 2002 midterm elections, hesitant lawmakers signed on to a compromise bill omitting much of the legal restrictions they’d initially wanted after reassurances from the president that tort reform issues would be revisited next year.

To comment on this story, e-mail seisenhart@insurancejournal.com.

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