[Federal Register: October 17, 2003 (Volume 68, Number 201)]
[Rules and Regulations]
[Page 59720-59727]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr17oc03-9]
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DEPARTMENT OF THE TREASURY
31 CFR Part 50
RIN 1505-AA98
Terrorism Risk Insurance Program; Disclosures and Mandatory
Availability Requirements
AGENCY: Departmental Offices, Treasury.
ACTION: Final rule.
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SUMMARY: The Department of the Treasury (Treasury) is issuing this
final rule concerning disclosures and mandatory availability
requirements as part of its implementation of Title I of the Terrorism
Risk Insurance Act of 2002 (Act). The final rule incorporates and
clarifies conditions for federal payment, set forth in section 103(b)
of the Act, that require insurers to make certain disclosures to
policyholders. It also incorporates and clarifies the section 103(c)
requirements that insurers ``make available'' in their commercial
property and casualty policies terrorism risk insurance coverage for
insured losses resulting from certified acts of terrorism under the
Act. Treasury issued an interim final rule and proposed rule with
request for comment. This final rule, which is the second in a series
of regulations that Treasury is issuing to implement the Program,
adopts the interim final rule with several modifications as discussed
below.
DATES: This final rule is effective October 17, 2003.
FOR FURTHER INFORMATION CONTACT: Mario Ugoletti, Deputy Director,
Office of Financial Institutions Policy (202) 622-2730, or Martha
Ellett or Cynthia Reese, Attorney-Advisors, Office of the Assistant
General Counsel (Banking & Finance), (202) 622-0480, or C. Christopher
Ledoux, Senior Attorney, Terrorism Risk Insurance Program (202) 622-
6770 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
I. Background
A. Terrorism Risk Insurance Act of 2002
On November 26, 2002, President Bush 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
[[Page 59721]]
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, including the issuance of regulations and
procedures. The Program will end on December 31, 2005.
Each entity that meets the Act's definition of ``insurer'' (well
over 2000 firms) must participate in the Program. The amount of federal
payment for an insured loss resulting from an act of terrorism is to be
determined, based upon the insurance company deductibles and excess
loss sharing with the Federal Government, as specified by the Act and
the implementing regulations. An insurer's deductible increases each
year of the Program, thereby reducing the Federal Government's
involvement prior to expiration of the Program. An insurer's deductible
is calculated based on the value of ``direct earned premiums''
collected over certain statutory periods. Once an insurer has met its
individual deductible, the federal payments cover 90 percent of the
insured losses above the deductible, subject to an industry-aggregate
limit of $100 billion.
The Program provides a federal reinsurance backstop for three
years. The Act gives Treasury authority to recoup federal payments made
under the Program through policyholder surcharges, up to a maximum
annual limit. The Act also prohibits duplicative federal payments for
insured losses that have been covered under any other federal program.
The mandatory availability or ``make available'' provisions in
section 103(c) of the Act require that, for Program Year 1 and Program
Year 2 and, if so determined by Treasury, in Program Year 3, all
entities that meet the Act's definition of insurer must make available,
in all of their property and casualty insurance policies, coverage for
insured losses resulting from an act of terrorism. This coverage can
not differ materially from the terms, amounts, and other coverage
limitations applicable to losses arising from events other than acts of
terrorism.
As conditions for federal payment under the Program, clear and
conspicuous disclosures must be provided by insurers to the
policyholders of the premium charged for insured losses covered by the
Program and the federal share of compensation for insured losses under
the Program. In addition, the Act requires that insurers submit a claim
to Treasury for federal payment as well as certain certifications.
Treasury will engage in rulemaking to prescribe claims procedures for
the Program at a later date.
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.
1. Three Year Program
The duration of the Program is three years. The Act was signed into
law on November 26, 2002 and section 108(a) of the Act provides that,
``[t]he Program shall terminate on December 31, 2005.'' Thereafter, the
Act provides Treasury with certain continuing authority to take actions
as necessary to ensure payment, recoupment, adjustments of compensation
and reimbursement for insured losses arising out of any act of
terrorism occurring during the period between November 26, 2002 and
December 31, 2005. The duration of the Program and the Program's
termination date should not be confused with the make available
requirements contained in section 103(c). As reflected in both the
interim final and final rules, the make available requirements in
section 103(c) of the Act apply to all insurers, through the end of
Program Year 2. However, the Secretary of the Treasury may determine,
not later than September 1, 2004, to extend the make available
requirements through Program Year 3, based on factors referenced in
section 108(d)(1) of the Act. Regardless of whether the make available
requirements of section 103 are extended, the Program and the Act's
federal backstop for insured losses for acts of terrorism continue
through December 31, 2005.
2. Program Implementation Goals
In implementing the Program, Treasury is guided by several goals.
First, Treasury strives to implement the Act in a transparent and
effective manner that treats comparably those insurers required to
participate in the Program and provides necessary information to
policyholders. Second, in accord with the Act's stated purposes,
Treasury seeks to rely as much as possible on the State insurance
regulatory structure. In that regard, Treasury has closely coordinated
its implementation of all aspects of the Program with the National
Association of Insurance Commissioners (NAIC). Third, to the extent
possible within statutory constraints, Treasury seeks to allow insurers
to participate in the Program in a manner consistent with procedures
used in their normal course of business. Finally, given the temporary
and transitional nature of the Program, Treasury is guided by the Act's
goal for insurers to develop their own capacity, resources, and
mechanisms for terrorism insurance coverage when the Program expires on
December 31, 2005.
B. The Interim Final Rule
The interim final rule was published in the Federal Register at 68
FR 19302 (April 18, 2003). It added sections 50.10 through 50.14 and
50.17 through 50.19 to Subpart B, and sections 50.20, 50.21, 50.23, and
50.24 to Subpart C of Part 50 in Title 31, Code of Federal Regulations.
Subpart A of Part 50, which addresses the scope and purpose of the
Program, key definitions and certain general provisions, was finalized
and published in the Federal Register at 68 FR 41250 (July 11, 2003)
and subsequently revised at 68 FR 48280 (August 13, 2003). Subpart B
incorporates and clarifies certain conditions for federal payment
contained in section 103(b) of the Act that require insurers to make
certain clear and conspicuous disclosures to their policyholders with
regard to terrorism risk insurance for insured losses under the
Program. Subpart C incorporates and clarifies requirements in section
103(c) of the Act that insurers ``make available,'' in all of their
commercial property and casualty insurance policies, coverage for
insured losses resulting from an act of terrorism as defined by section
102(1) of the Act. In this regard, section 103(c) requires insurers to
make such terrorism risk coverage available at terms, amounts, and
other coverage limitations that do not differ materially from those
applicable to losses arising from events other than from acts of
terrorism.
[[Page 59722]]
This final rule (and the preceding interim final rule) reflect
earlier interim guidance, issued by Treasury in notices that were
published soon after the Act's enactment date, and were designed to
assist insurers, policyholders and other interested parties in
complying with immediately applicable and time-sensitive
requirements.\1\ In finalizing the interim final rule, Treasury
carefully considered the comments submitted and consulted with the
NAIC.
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\1\ These interim guidance notices were published in the Federal
Register at 67 FR 76206 (Dec. 11, 2002); 67 FR 78864 (Dec. 26, 2002)
and at 68 FR 4544 (Jan. 29, 2003). Treasury also issued a fourth
interim guidance at 68 FR 15039 (Mar. 27, 2003), which has
subsequently been superceded by a new provision in the final rule
for Subpart A, published at 68 FR 41250 (July 11, 2003). The interim
guidance and all regulations can also be located on Treasury's
Terrorism Risk Insurance Program Web site at http://www.treasury.gov/trip
.
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II. Summary of Comments and Final Rule
Treasury received 12 comments on the interim final rule. Comments
were submitted by individual insurance companies and their legal
counsel, by insurance and mortgage banker industry trade associations,
by a coalition of trade and professional associations and by the
American Academy of Actuaries. After review and careful consideration
of these comments, as well as additional research and consultation with
the NAIC, Treasury is now promulgating a final rule concerning the
Act's disclosure and make available requirements. The final rule makes
few changes to the interim final rule. Clarifications were made in
several areas based on comments received. These clarifications are
discussed in the summary of comments below.
A. Disclosures
1. General Disclosure Requirements (Section 50.10)
Section 103(b) of the Act requires insurers to make certain
disclosures to policyholders as a condition for federal payment under
the Act. The general disclosure requirements of section 50.10 of the
interim final rule incorporate the Act's requirements. This section of
the final rule is unchanged from the interim final rule. Section 50.10
states, in part, that an insurer must provide clear and conspicuous
disclosure to the policyholder of: (1) The premium charged for insured
losses covered by the Program; and (2) the federal share of
compensation for insured losses under the Program. As discussed below,
the disclosure provisions are a condition for federal payment under the
Act and a mechanism through which Congress sought to enhance
competition and comparison shopping in the purchase of terrorism risk
insurance and to increase awareness of the federal contribution to the
Program.
One commenter, a mortgage banking trade association, urged Treasury
to revise the interim final rule to specifically require insurers to
notify lenders, securitizers, and servicers of commercial mortgages
(collectively referred to in this preamble as mortgage finance
providers) of the terrorism coverage options offered under the Act. The
commenter also requested that the interim final rule be changed to
require insurers to provide notice to these mortgage finance providers
of their borrowers' acceptance or rejection of the terrorism risk
insurance coverage made available by the insurer. In support of these
suggested revisions, the commenter stated that mortgage finance
providers are having difficulty determining ``whether most of the
properties in their portfolios carry adequate terrorism risk insurance
as required by loan documents.'' The commenter also asserts that the
absence of these suggested extensions to the current regulatory
disclosure requirements produces inefficiencies in the commercial real
estate and capital markets, including information gaps that may have an
adverse effect on economic growth and on the condition of key financial
institutions.
In a careful evaluation of whether the suggested revisions to the
interim final rule were appropriate, Treasury first reviewed the scope
of the disclosure provisions of section 103(b) of the Act and then
considered the legislative history concerning those disclosure
requirements. Treasury also considered whether there were alternative
ways in which these mortgage finance providers may obtain the insurance
coverage information they seek from their borrowers. Treasury consulted
with the NAIC concerning definitions in various state laws and typical
industry business practices and standards. For the reasons discussed
below, Treasury is not extending the disclosure requirement in the
interim final rule as suggested by the commenter.
Section 103(b) requires that clear and conspicuous disclosure of
certain information be provided by insurers to ``policyholders.'' The
Conference Report to the Act states that Congress required the
disclosures in section 103(b) in order, ``to enhance the
competitiveness of the marketplace by better enabling consumers to
comparison shop for terrorism insurance coverage, and to make
policyholders better aware that the Federal government will be sharing
the costs of such coverage with insurers thereby reducing the insurers'
exposure.'' H.R. Conf. Rep. No. 107-779, at 24 (2002). Neither the
language in section 103(b) of the Act, nor the congressional intent of
these disclosures as explained in the Conference Report, requires that
these disclosures be made to mortgage finance providers or other
entities that are not policyholders. Similarly, there is no third party
notification requirement in the Act concerning whether a policyholder
has, or has not, elected to purchase terrorism risk insurance coverage.
The stated legislative intent of the disclosures is to enhance
comparison shopping and Program awareness by policyholders.
For purposes of the Program, policyholder refers to the ``person''
to whom the insurer issues a commercial property and casualty insurance
policy and who has apparent authority to negotiate, determine or modify
the terms of the insurance contract. In this regard, the Act and
Treasury's regulations require insurers to disclose information about
the premium and the federal share of compensation to policyholders at
the time of offer, purchase, and renewal.
In its comment, the association also expressed a concern that,
``under notice provisions to the mortgagee contained in existing
insurance policies, a partial cancellation of coverage for terrorism
(as opposed to a cancellation of the entire policy) may be deemed by
the insurers as an endorsement of the policy that does not require the
insurer to send notice to the mortgage lender.'' Thus, the commenter is
concerned that mortgage finance providers may not be notified if there
is a subsequent change in the policy with regard to terrorism risk
insurance. However, the commenter also acknowledges that the failure of
mortgage finance providers to obtain such notice appears to be due to
the drafting of notice provisions in policies.
Treasury considered whether there were other, perhaps more
appropriate ways, in which mortgage finance providers could obtain the
information they seek from their borrowers instead of through the
expansion of the statutory disclosure requirements under this temporary
Program. Treasury understands that mortgage finance providers generally
may obtain the information about the status of a borrower's coverage
for terrorism risks (whether the losses are those covered by the
Program or broader in scope) through their underwriting requirements
and/or by contract. For example, loan documents generally require that
borrowers provide appropriate insurance coverage
[[Page 59723]]
information to their mortgage finance providers, including information
on terrorism risk insurance coverage. In its comment, the association
acknowledged this, but stated that these requirements are frequently
ignored by borrowers and costly to enforce. In Treasury's view, the
issue appears to be one of contract negotiation, monitoring and
enforcement by the parties rather than of regulation under the Program.
In this regard, we also understand that ACORD, an independent,
nonprofit insurance group comprised of insurance company, reinsurance
company and financial service institution affiliated members that
assists in the cooperative development and implementation of insurance
(and related financial services) standards, has agreed to work with
mortgage finance providers to revise standard insurance certificates.
The goal of this market driven effort is to better facilitate access by
the mortgage finance providers to the insurance coverage information
concerning terrorism risk insurance and other types of insurance
coverage.
Based on our review of section 103(b) and of the legislative intent
of the disclosure requirements as described in the Conference Report,
and our understanding of industry practice and ongoing initiatives, as
indicated by the commenter and in consultations with NAIC, Treasury is
not expanding the reach of the disclosure to policyholder requirements
set forth in the interim final rule.
2. Clear and Conspicuous Disclosure (Section 50.12)
As stated above, section 50.10 reflects the requirement in section
103(b) of the Act that the insurer must provide ``clear and conspicuous
disclosure'' to the policyholder of the premium charged and the federal
share of payments for insured losses under the Program. Section 50.12
of the interim final rule addresses the meaning of ``clear and
conspicuous'' disclosure for purposes of the Program. Except as noted
below with respect to section 50.12(d), this final rule adopts interim
section 50.12 without change.
Section 50.12(a) of the interim final rule provides that whether a
disclosure is clear and conspicuous depends on the totality of the
facts and circumstances. Consistent with the Program implementation
goals, the interim final rule does not specify an exclusive form or
means of satisfying the statutory disclosure requirements, nor does it
prescribe precise language, typeface, or font for the disclosures. In
interim guidance issued by Treasury soon after enactment of the Act,
Treasury deemed certain NAIC model forms to be an acceptable,
nonexclusive way in which an insurer could satisfy the disclosure
requirement. (These model forms are available at the Program's Web
site: http://www.treasury.gov/trip). Treasury stated that insurers
could modify the NAIC model forms to meet individual circumstances, or
use other forms, as long as the modifications met the statutory
standards. This interim guidance was incorporated into the interim
final rule and is now in the final rule, which also provides a safe
harbor (see section 50.17). Insurers may continue to use certain NAIC
model forms if appropriate or they may develop other disclosure forms
that meet the requirements of the Act and the regulations. Treasury
received one comment on section 50.12(a) of the interim final rule,
which was supportive of Treasury's approach. Section 50.12(a) of the
interim final rule is adopted without change.
Section 50.12(b) of the interim final rule provides that, in
describing the premium charged for insured losses covered by the
Program, an insurer may refer to it as a portion or percentage of an
annual premium, if consistent with normal business practice; but, may
not describe this premium in a manner that would be misleading in the
context of the Program, such as by characterizing it as a
``surcharge.'' It is inappropriate and misleading to use the term
``surcharge'' in the disclosures because surcharge is a term used in
section 103(e)(8) of the Act in connection with the statutorily
required recoupment.
Treasury received two comments on this provision. One commenter, an
association of insurance brokers and agents, strongly supported
Treasury's position. This commenter believed the use of the term
``surcharge'' in disclosing the premium, ``threatened both to undermine
the ability of consumers to properly evaluate their coverage needs and
to call into question the legitimacy of the Program.'' An insurance
industry association commented that the group had ``no objection'' to
this section in the interim final rule. Section 50.12(b) of the interim
final rule is adopted without change.
Section 50.12(c) of the interim final rule allows insurers to make
the required disclosures using normal business practices, including
forms and methods of communication used to communicate similar
policyholder information to policyholders. The comments generally
supported this approach, which is adopted without change.
Section 50.12(d) of the interim final rule provides further
guidance on the use of an agent to provide the required disclosures to
policyholders. The interim final rule refers to an insurance broker or
other intermediary acting as agent for the insurer, if the insurer
normally communicates with a policyholder in this fashion. An insurance
industry association commenter suggested that, in view of the diverse
treatment of the legal status of insurance brokers under the laws of
the various States, unnecessary confusion may result from the use of
terms such as ``agent'' and ``broker'' with varying implications in
different jurisdictions. The commenter suggested that the final rule
instead use the term ``producer.'' Treasury agrees with this
suggestion, but emphasizes that if the insurer elects to make the
required disclosure through a producer or other intermediary,
regardless of on whose behalf the producer or other intermediary is
acting, the insurer remains responsible for ensuring that the
disclosures are provided by the producer or other intermediary to
policyholders in accordance with the Act. Accordingly, Treasury is
modifying section 50.12(d) consistent with this comment.
Section 50.12(e) of the interim final rule provides generally that
an insurer may demonstrate that it has satisfied the requirement to
provide clear and conspicuous disclosure through use of appropriate
systems and normal business practices that demonstrate a practice of
compliance. Although no comments explicitly addressed this provision,
the comments generally supported the overall approach in section 50.12.
Section 50.12(e) is adopted without change.
Section 50.12(f) of the interim final rule provides that an insurer
must certify that it has complied with the requirement to provide
disclosure to the policyholder on all policies that form the basis for
the underlying claim(s) submitted by the insurer for federal payment
under the Program. One commenter believed the language of section
50.12(f) itself was clear, but stated that the corresponding discussion
in the preamble to the interim final rule was not as clear and
requested further clarification in the final rule.
This final rule adopts section 50.12(f) of the interim final rule
without change. Section 50.12(f) requires that, on all policies that
form the basis for any claim that the insurer submits for federal
payment for insured losses under the Program, an insurer must certify
that it has complied with requirements to make disclosures to
[[Page 59724]]
those policyholders covered by the policies. These insured losses are
used in determining whether an insurer has met its insurer deductible
under the Program. If an insurer chooses not to provide disclosures on
a block of policies covered by the Program, the insurer will not
receive federal payment for any claims it may submit to Treasury for
insured losses covered by such policies because the required
disclosures--a condition for federal payment--were not made. The
insurer could submit a claim for federal payment under the Program on
another block of policies, as long as the insurer made the required
disclosures to those policyholders, and otherwise met all other
conditions for payment of those insured losses. Treasury will initiate
a future rulemaking concerning claims and certification procedures for
purposes of the Program.
The following example provides further clarification of section
50.12(f). A surety insurer may satisfy the Act's make available
requirement by providing terrorism risk insurance coverage under the
Program to a block of notary public bond policyholders at no cost. The
surety insurer may decide not to provide disclosure notices to those
policyholders because it considers the expense of making the
disclosures as being greater than the benefit of receiving the federal
payments under the Program. Therefore, the insurer would be liable for
any insured losses on the notary public bonds, but would not be
eligible to receive any federal payment under the Program backstop on
such losses because a condition for federal payment (making the
requisite disclosures to policyholders) was not met. However, if the
insurer provides the required disclosures to policyholders insured
under a separate block of construction bond policies, the failure to
make disclosures to the notary public bond policyholders would not
prevent the insurer from certifying that it provided the required
disclosure to policyholders insured under the construction bond
policies for which the insurer was seeking federal payment for insured
losses under the Program. The insured losses under the construction
bond policies ``form the basis'' for a claim submitted for federal
payment; the insured losses under the notary public bonds do not.
Regardless of whether disclosures are provided, direct earned premiums
on the notary public bonds would be included in the calculation of the
insurer deductible for purposes of the Program and such notary public
bond policyholders would be subject to any subsequent recoupment. The
insurer's calculation of insured losses under the Program for purposes
of meeting its insurer deductible would include only those losses on
the construction bonds.
Section 50.12(f) relates to other aspects of the Program in the
following ways. First, regardless of whether an insurer intends to
submit a claim for federal payment, all insurers must comply with the
make available requirements of section 103(c) of the Act and in the
regulations. Second, in calculating its direct earned premium and
insurer deductible under the Program, an insurer must include premium
income from all policies for commercial property and casualty insurance
for losses occurring at certain locations (see section 50.5(d)),
whether or not the insurer made the required disclosures. Third, an
insurer may submit a claim for federal payment only for those ``insured
losses'' on policies on which the insurer made required disclosures to
policyholders. Finally, all commercial property and casualty insurance
policies are subject to the Act's surcharge provisions, regardless of
whether the insurer made the disclosures. Accordingly, if an insurer
fails to provide the disclosure notices to its policyholders, the
insurer will not have met conditions for federal payment and will not
be eligible for federal payment for insured losses under those
policies. The insurer, however, will continue to be subject to the make
available requirements, and the insurer and its policyholders will
continue to be subject to the surcharge provisions under the Act and
the Program.
3. Separate Line Item (Section 50.14)
Section 50.14 of the interim final rule incorporates interim
guidance previously issued by Treasury that deems an insurer to be in
compliance with the requirement of providing disclosure on a ``separate
line item in the policy'' under section 50.10(d), and in compliance
with section 103(b)(2)(C) of the Act, if the insurer makes the
disclosure: (1) on the declarations page of the policy; (2) elsewhere
within the policy itself; or (3) in any rider or endorsement that is
made a part of the policy. In addition to the clear and conspicuous
requirement, the Act requires that the separate line item disclosure be
``in the policy.''
Rather than require insurers to rewrite all of their policies,
Treasury has determined that the disclosure is sufficient if made on
the declarations page or within any rider or endorsement that is made a
part of the policy. One commenter suggested revising the interim final
rule to clarify that other documents could be used. This commenter
contended this would make it clear that compliance is not dependent on
the name or title of the document, but rather on the fact that such
disclosure document is made part of the policy. Treasury agrees and is
amending section 50.14(c) accordingly.
B. Mandatory Availability
1. General Mandatory Availability Requirements (Sections 50.20 and
50.21)
Sections 103(c)(1)(A) and (B) of the Act require an insurer (as
defined by the Act and the implementing regulations) to make available,
in all of its property and casualty insurance policies, coverage for
insured losses; and to make available property and casualty insurance
coverage for insured losses that does not differ materially from the
terms, amounts, and other coverage limitations applicable to losses
arising from events other that acts of terrorism. The make available
requirements apply during the period beginning on the first day of the
Transition Period and ending on the last day of Program Year 2 unless
the make available requirements are extended by the Secretary through
Program Year 3. The duration and possible extension of the make
available requirements in section 103(c) should not be confused with
the established three-year duration of the Program as provided by
section 108 of the Act.
2. Policies in Existence on November 26, 2002
Section 50.21(a) of the interim final rule states, in part, that
the make available requirement of the Act applies to insurance policies
in existence on November 26, 2002 (the date of enactment of the Act).
One commenter suggested this provision may not be technically correct.
The commenter reasoned that the make available requirement applies at
the time of initial offer of coverage and that for policies in
existence on November 26, 2002, the initial offer of coverage had
already occurred, and, further, that only section 105 (voiding of
terrorism exclusions) is applicable for policies in existence at the
time of enactment.
It is Treasury's view that the make available requirement applies
to policies in existence on November 26, 2002. Section 103(c)(1)(A) of
the Act mandates that beginning on the first day of the Transition
Period (defined in section 102(11) as of the date of enactment), an
insurer shall make available coverage for insured losses in all of its
property and casualty insurance policies. Section 105 of the Act, in
effect, made coverage
[[Page 59725]]
available upon enactment of the Act by voiding any exclusions within
insurance policies that were in existence on November 26, 2002. Because
the make available requirement and the process in section 105 of the
Act for voiding terrorism risk insurance exclusions and offering
coverage are generally consistent for commercial property and casualty
policies in effect on November 26, 2002, Treasury has decided that no
additional clarification is needed. See below for a discussion of the
``initial offer of coverage'' provision in the rule.
3. Initial Offer of Coverage
Section 50.21(a) of the interim final rule provides that the make
available requirement also applies to new policies issued and renewals
of existing policies during the period beginning on November 26, 2002
and ending on December 31, 2004 (the last day of Program Year 2) and,
if the requirement is extended by the Secretary, to new policies issued
and renewals of existing policies in Program Year 3 (calendar year
2005). The last line of 50.21(a) states that the ``requirement applies
at the time an insurer makes the initial offer of coverage.''
One commenter, an insurance trade association, proposed revising
the interim final rule by adding language to the end of section 50.21
stating that the make available requirement applies at the time an
insurer makes the initial offer of coverage ``and at no other time.''
The commenter suggested this revision because of a concern that a
policyholder may try to purchase terrorism risk insurance coverage
during a policy period (for example, upon a heightened state of terror
alert) despite having rejected an initial offer of coverage by an
insurer.
In context, Treasury believes the requirement in section 50.21(a)
is clear. It is Treasury's view that by offering the coverage at the
time of initial offer, the insurer has satisfied the make available
requirement. However, the commenter's suggested change would limit the
make available requirement more narrowly than intended by Treasury.
This is because the initial offer of coverage is not the only time when
the make available requirement applies. Treasury did not intend section
50.21 of the interim final rule to be read to mean that, as long as an
insurer makes coverage available through an initial offer, the insurer
has no further obligation to make coverage available to the
policyholder during the Program's duration (e.g., at initial offer of
renewal or in a new policy.) An insurer must make the coverage
available, not only at the time of initial offer, but also upon offer
of policy renewal.
It is Treasury's view that an insurer need not make coverage
available to a policyholder who did not accept an initial offer of
coverage and later demands the coverage be added to the same policy
during the policy period (i.e., through endorsement). In such a
situation, the policyholder is not left without options; a policyholder
can cancel its policy and solicit a new offer or proposal for
insurance. Treasury is modifying section 50.21(a) to clarify the make
available requirement applies at the time an insurer makes the initial
offer of coverage as well as at the time an insurer makes an initial
offer of renewal of an existing policy.
This insurance association commenter also suggested that Treasury
consider changing the rule to eliminate the requirement that an insurer
make available coverage through an initial offer. Instead, the
commenter proposed that an insurer only be required to simply disclose
that coverage is available for purchase and to invite policyholders to
contact the insurer for an offer or quote, if desired. The commenter
suggested that insurers could still make a formal offer of coverage if
consistent with their normal business practice, but an offer would not
be required. Treasury is not adopting this suggestion, which is
inconsistent with the purposes of the statutory provisions.
4. Umbrella-Type Policies
An insurance industry trade association commenter raised several
questions about the applicability of the make available requirement for
insured losses through commercial property and casualty umbrella
insurance. In response, Treasury emphasizes that commercial property
and casualty umbrella insurance is included in the Program because it
falls within the Program's definition of commercial property and
casualty insurance. Therefore, an insurer that offers such umbrella
insurance coverage is subject to the make available requirements.
Section 102(12) of the Act defines commercial lines of property and
casualty insurance to specifically include ``excess insurance.''
Section 50.5(l) of the regulations further defines commercial property
and casualty insurance with reference to certain lines of insurance
business reported on NAIC's Annual Statement's Exhibit of Premiums and
Losses, commonly known as Statutory Page 14. Commercial property and
casualty umbrella insurance is reported on Statutory Page 14 and not
otherwise excluded. Such umbrella policies are within the definition of
``commercial property and casualty insurance.'' If the umbrella policy
issuer is an insurer under the Act, it must participate in the Program
and it is subject to the Act's requirements.
Accordingly, insurers that issue commercial property and casualty
insurance through umbrella policies are subject to the make available
requirements of the Program. This means that they must (1) make
available in all of their commercial property and casualty insurance
policies coverage for insured losses and (2) make available such
coverage for insured losses that does not differ materially from the
terms, amounts, and other coverage limitations applicable to losses
arising from events other than acts of terrorism.
The commenter also stated that some policyholders have declined
insurance coverage for losses caused by an act of terrorism from their
primary insurance carriers, electing instead to have such losses
covered by the ``drop down'' coverage afforded through their
(presumably less expensive) umbrella insurance policies. To prevent
what the commenter characterizes as policyholder ``gaming,'' the
commenter suggests that ``Treasury permit an umbrella insurer, in
accordance with normal business practice, to refuse to drop down where
the insured intentionally elected to forego primary coverage for acts
of terrorism.''
Although Treasury understands that certain provisions of the Act
may not fit neatly with typical business practices of umbrella policy
underwriters and other insurers, Treasury has determined to not revise
the interim final rule as suggested because it may create a situation
that appears to excuse an insurer from fulfilling its contractual
obligation to pay a policyholder's claim for an insured loss that
otherwise may be covered by the terms and conditions of a policy
covered by the Program. Instead, it is Treasury's view that the
commenter's concern is more appropriately addressed by the insurer that
issues the umbrella policy, for example, through the insurer's
underwriting procedures, pricing, and/or policy drafting. Therefore, an
umbrella insurer could draft policy language that excludes from ``drop
down'' coverage any losses arising from perils for which insurance was
available from the primary or underlying insurer but was intentionally
not purchased by the policyholder, provided: (1) The language does not
differ materially from the terms and other coverage limitations
applicable to losses arising from events other than acts of terrorism
and (2) the
[[Page 59726]]
exclusion is otherwise permitted by State law.
Another commenter raised similar questions with regard to
Difference-In-Conditions (DIC) commercial property and casualty
insurance. DIC insurance is included within the Program definition of
commercial property and casualty insurance. DIC insurance is reported
by insurers on commercial lines of Statutory Page 14 included in the
Program (see section 50.5(l)). DIC insurance policies generally provide
coverage for certain risks not covered by other policies. The commenter
suggested that DIC commercial property and casualty insurance should
not be included in the Program. The commenter contended that the Act
and section 50.23 mean that all underlying commercial property and
casualty policies must provide for--and cannot exclude--insured losses
caused by an act of terrorism, and thus DIC coverage will never be
triggered.
Treasury does not agree. As stated above with regard to umbrella
polices, the Act requires all insurers under the Program to make
available commercial property and casualty coverage for insured losses
under the Program. If the issuer of a DIC commercial property and
casualty insurance policy is an insurer as defined under the Program,
then the DIC insurer must comply with the requirements of the Act and
Treasury's implementing regulations, including those concerning the
make available requirements. Insurers can exclude coverage for insured
losses if the policyholder declines or elects not to purchase the
coverage. If a DIC insurer's policyholder declines or elects not to
purchase terrorism risk insurance coverage in an underlying policy, the
Act requires that the DIC insurer must make available terrorism risk
insurance for insured losses as part of the DIC policy. As with
umbrella policies, Treasury recognizes that certain provisions of the
Act may not fit neatly within typical business practices of DIC
insurers but it is Treasury's view that the commenter's concern is more
appropriately addressed through DIC underwriting procedures, pricing or
policy drafting. Thus, in the final rule, Treasury is making no change
to section 50.21 to provide special treatment to DIC or umbrella
insurance policies.
5. Limitations on Types of Risk (Section 50.23)
Section 103(c)(1)(B) of the Act provides that insurers under the
Program ``shall make available property and casualty insurance coverage
for insured losses that does not differ materially from the terms,
amounts, and other coverage limitations applicable to losses arising
from events other than acts of terrorism.'' Sections 50.20 through
50.24 of the interim final rule reflect the statutory language and
previously issued interim guidance. Section 50.23(b) addresses
limitations on types of risk and provides that if an insurer does not
cover all types of commercial property and casualty risks, then it is
not required to cover the excluded risks in satisfying the make
available requirements. For example, if an insurer does not cover all
types of commercial property and casualty risk, either because the
insurer is outside of direct State regulatory oversight, or because a
State permits certain exclusions for certain types of losses, such as
nuclear, biological, or chemical events, then the insurer is not
required to make such coverage available. In addition, Section 50.24
addresses the applicability of State law.
A comment, submitted by a coalition of trade and professional
associations expressed concern about the make available provisions in
the interim final regulation. The commenter contended that the interim
final rule's deference to State law exclusions for certain types of
losses is not consistent with the purposes of the Act. The commenter
also stated that the purpose of the Act was to put policyholders back
to the level of coverage (or availability) that existed prior to
September 11, 2001. Although acknowledging that whether a policyholder
purchases terrorism risk insurance may be related to the price of the
coverage, the commenter suggested that a lack of coverage for
biological and chemical perils may adversely affect the policyholder's
decision to purchase terrorism risk insurance.
After carefully considering the concerns expressed by the commenter
and reviewing the purposes of the Act, Treasury is not making any
change in the make available requirement as set forth in the interim
final rule for the following reasons. First, it is Treasury's view that
the make available requirement in the interim final rule, including the
deference to state law exclusions, is fully consistent with the
purposes of the Act. As stated in Section 101(b), the purposes of the
Act include establishment of a temporary federal Program to ``allow for
a transitional period for the private markets to stabilize, resume
pricing of such insurance and build capacity to absorb any future
losses, while preserving State insurance regulation and consumer
protections.'' In addition, other provisions of the Act, such as
section 106, generally support narrow State law preemption, consistent
with the McCarran Ferguson Act. Moreover, throughout the implementation
process, Treasury has followed Congress's direction to consult with the
NAIC, and in that regard, has relied to the greatest extent possible on
the existing State regulatory structure for this temporary Program.
Second, based on information provided by the NAIC, it is Treasury's
understanding that, even prior to September 11, 2001, insurers offered
limited coverage for nuclear reaction or radiation or radioactive
contamination, however caused, in commercial property and casualty
insurance. In addition, deference to existing State law as it relates
to the make available requirement does not mean that all losses
associated with a nuclear, biological or chemical event would be
excluded under the Program. Even with State exclusions, there may be
commercial property and casualty insurance coverage in certain
circumstances for certain biological, chemical or nuclear events.
Moreover, the make available requirements in the interim final rule do
not limit an insurer's ability to provide coverage for nuclear,
biological, or chemical exposures as part of the Program, if the
insurer chooses to offer such coverage. If an insurer provided such
coverage in a commercial property and casualty policy, and met its
insurer deductible and other conditions for federal payment, the
insurer would receive federal payment under the Program for a claim
filed based on that policy.
Third, the availability of terrorism risk insurance is affected by
the affordability of such insurance. Neither the Act nor the Program
mandates particular pricing. Therefore even if the ``make available''
requirement were applied in markets where exclusions are permitted,
insurers would be able to price the coverage as appropriate, within any
constraints, if any, imposed by the particular State. In such cases, if
insurers believed they had insufficient capacity or that they lacked
the ability to adequately evaluate the risks associated with a nuclear,
biological, or chemical event, the corresponding price for such
coverage along with the overall price for terrorism coverage could
remain relatively high as insurers sought to build greater capacity and
to account for greater uncertainty associated with these types of
events.
III. Procedural Requirements
The Act established a Program to provide for loss sharing payments
by the Federal Government for insured losses resulting from certified
acts of terrorism. The Act became effective immediately
[[Page 59727]]
upon the date of enactment (November 26, 2002). Preemptions of
terrorism risk exclusions in policies, mandatory participation
provisions, disclosure and other requirements, and conditions for
federal payment contained in the Act applied immediately to those
entities that came within the Act's definition of ``insurer.''
The disclosure requirements are statutory conditions for federal
payment under the Program. The disclosure requirements were effective
immediately upon enactment and remain ongoing requirements that apply
to new and renewed policies throughout the life of the Program. In the
event of an act of terrorism resulting in insured losses under the
Program, insurers must certify, and Treasury must ascertain, that these
disclosure requirements have been met before federal payment is made.
Similarly, the make available requirements are important elements of
the Act. These requirements were effective immediately upon enactment
and applied to policies in effect at that time. The make available
requirements will continue to apply to new and renewed policies through
the end of 2004 (and if the requirements are extended by the Secretary,
through 2005). Given the significance of the disclosure and make
available requirements to policyholders and insurers, there is an
urgent need to issue immediately effective regulations. This includes
the need to clarify, as necessary, the previously issued interim final
rule. Moreover, because the changes are in the nature of
clarifications, there should be no operational impact on insurers and
no need for a delayed effective date.
Accordingly, pursuant to 5 U.S.C. 553(d)(3), Treasury has
determined that there is good cause for this final rule to become
effective immediately upon publication.
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.
It is hereby certified that this final rule will not have a
significant economic impact on a substantial number of small entities.
The Act requires all licensed or admitted insurers to participate in
the Program. This includes all insurers regardless of size or
sophistication. The Act also defines property and casualty insurance
without any reference to the size or scope of the commercial entity.
The disclosure and make available requirements are required by the Act.
The final rule allows all insurers, whether large or small, to use
existing systems and business practices to demonstrate compliance.
Accordingly, any economic impact associated with the final rule flows
from the 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 insurers and
their policyholders and by spreading the risk of insured loss resulting
from an act of terrorism.
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 amending
Subparts B and C of 31 CFR Part 50, which was published at 68 FR 19302
on April 18, 2003, is adopted as a final rule with the following
changes:
PART 50--TERRORISM RISK INSURANCE PROGRAM
0
1. The authority citation for 31 CFR Part 50 continues to read as
follows:
Authority: 5 U.S.C. 301; 31 U.S.C. 321; Title I, Pub. L. 107-
297, 116 Stat. 2322 (15 U.S.C. 6701 note).
0
2. Section 50.12(d) of Subpart B is revised to read as follows:
Sec. 50.12 Clear and conspicuous disclosure.
* * * * *
(d) Use of producer. If an insurer normally communicates with a
policyholder through an insurance producer or other intermediary, an
insurer may provide disclosures through such producer or other
intermediary. If an insurer elects to make the disclosures through an
insurance producer or other intermediary, the insurer remains
responsible for ensuring that the disclosures are provided by the
insurance producer or other intermediary to policyholders in accordance
with the Act.
* * * * *
0
3. Section 50.14 of Subpart B is revised to read as follows:
Sec. 50.14 Separate line item.
An insurer is deemed to be in compliance with the requirement of
providing disclosure on a ``separate line item in the policy'' under
Sec. 50.10(d) if the insurer makes the disclosure:
(a) On the declarations page of the policy;
(b) Elsewhere within the policy itself; or
(c) In any rider or endorsement, or other document that is made a
part of the policy.
0
4. Section 50.18(b)(2) of Subpart B is revised to read as follows:
Sec. 50.18 Disclosure required by reinstatement provision
* * * * *
(b) * * *
(2) The insurer provided notice at least 30 days before any such
reinstatement of the increased premium for such terrorism coverage and
the rights of the insured with respect to such coverage, including the
date upon which the exclusion would be reinstated if no payment is
received, and the insured fails to pay any increased premium charged by
the insurer for providing such terrorism coverage.
0
5. Section 50.21(a) of Subpart C is revised to read as follows:
Sec. 50.21 Make available.
(a) General. The requirement to make available coverage as provided
in Sec. 50.20 applies to policies in existence on November 26, 2002,
new policies issued and renewals of existing policies during the period
beginning on November 26, 2002 and ending on December 31, 2004 (the
last day of Program Year 2), and if the requirement is extended by the
Secretary, to new policies issued and renewals of existing policies in
Program Year 3 (calendar year 2005). The requirement applies at the
time an insurer makes the initial offer of coverage as well as at the
time an insurer makes an initial offer of renewal of an existing
policy.
* * * * *
Dated: October 1, 2003.
Wayne A. Abernathy,
Assistant Secretary of the Treasury.
[FR Doc. 03-26251 Filed 10-16-03; 8:45 am]
BILLING CODE 4811-15-P