You are here:HomeIssuesTerrorism Insurance2002Congress Passes Terrorism Insurance Bill

Congress Passes Terrorism Insurance Bill

The insurance industry and the business and consumer communities won a major victory this month with the passage of the Terrorism Risk Insurance Act...
November 28, 2002

By Peter Bizzozero
Assistant Vice President, Federal Affairs
PIA National

The insurance industry and the business and consumer communities won a major victory this month with the passage of the Terrorism Risk Insurance Act of 2002 by both the United States House of Representatives and Senate. The House passed the measure by voice vote on November 14. The Senate quickly followed suit, passing the measure on November 19 by a vote of 86-11. President Bush signed the bill into law on November 26, 2002.

The program outlined will assist the marketplace in its need for capacity and risk sharing. It includes most of the workable features of the original House and Senate passed bills. The program will be run within the Department of the Treasury and will end December 31, 2005. Following are the basic tenets of the bill, however, the specifics of the law will be worked out through the regulatory process in the Department of the Treasury.

The bill includes a cost sharing mechanism. Before any federal assistance becomes available, carriers will need to meet a deductible based on a percentage of direct written premiums from the previous calendar year. Deductibles will be seven percent of those premiums during the first year of the program, ten percent in the second year and 15 percent in the third. The federal government would then cover 90 percent of any losses above the individual company retention levels.

The Department of the Treasury is able to recoup losses incurred by the federal government. Under the formula, the government could recoup the difference between total industry costs (individual insurers' losses up to their deductibles plus the industry's ten percent cost share above the deductible) and certain fixed dollar amounts. These fixed dollar amounts are $10 billion for the first year, $12.5 billion for the second year, and $15 billion in the third year. Recoupment would be accomplished through a surcharge on all policyholders of not more than 3 percent of the premium paid for a policy in a given year.Losses for the program would be capped at $100 billion.

Any primary property and casualty insurer providing commercial lines coverage, to include WC, is required to participate in the program. Such carriers must disclose to policyholders the premiums they charge for coverage and the existence of a federal backstop. Personal lines will most likely not be covered.

For the most part state insurance statutes are preserved. However, the final law creates a uniform preemptive definition of terrorism. Immediately, insurers are permitted to make rate and form changes. However, changes that go beyond pure compliance with the federal law are subject to state review and rejection based upon state rate or form laws. These provisions apply until the end of 2003.

The tort reform provisions contained in the bill are significant. The provisions include an exclusive federal cause of action with consolidation of lawsuits/claims into a single federal district court. This eliminates competing lawsuits/claims against affected property owners. The law also governs how state law for punitive damages will apply, but the federal government will not be responsible for punitive damage payments.

"This bill is good for our country, good for the economy, and good for PIA members whose clients need available and affordable insurance," said PIA National Executive Vice President Gary W. Eberhart. "It will protect our nation from the potential financial devastation of another terrorist attack. It also provides a level of financial certainty needed for our nation's economy to move forward."

Passage of this legislation brings to a close PIA's yearlong campaign to enact a terrorism insurance backstop that began shortly after the September 11, 2001 terrorist attacks. During that time, PIA has conducted a series of grassroots action campaigns to help move a terrorism insurance bill through Congress. Passage of this legislation was a focus of PIA's March 2002 annual Federal Legislative Summit. Also, in June 2002, PIA leaders met with Speaker of the House J. Dennis Hastert (R-IL) to reaffirm their support of the legislation. Clearly our efforts on behalf of this legislation did not fall on deaf ears. The efforts of PIA members over the past year played an important role in getting this legislation passed. Congratulations!

This article originally appeared in the November/December 2002 PIA Connection.

Filed under: