[Federal Register: December 1, 2003 (Volume 68, Number 230)]
[Proposed Rules]
[Page 67100-67106]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr01de03-25]
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DEPARTMENT OF THE TREASURY
31 CFR Part 50
RIN 1505-AB07
Terrorism Risk Insurance Program; Initial Claims Procedures
AGENCY: Departmental Offices, Treasury.
ACTION: Notice of proposed rulemaking.
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SUMMARY: The Department of the Treasury (Treasury) is issuing this
proposed rule as part of its implementation of Title I of the Terrorism
Risk Insurance Act of 2002 (the Act). That Act established a temporary
Terrorism Risk Insurance Program (Program) under which the Federal
Government will share the risk of insured loss from certified acts of
terrorism with commercial property and casualty insurers until the
Program sunsets on December 31, 2005. This proposed rule contains
procedures for filing claims for payment of the federal share of
compensation for insured losses under the Program and incorporates
statutory conditions for federal payment. In particular, the proposed
rule addresses requirements for loss certification and associated
recordkeeping requirements; provides guidance on what is payable as the
federal share of insured losses; and sets forth requirements for
investigating and auditing claims under the Program. The rule generally
builds upon previous interim guidances and final rules issued by
Treasury, particularly in areas involving definitions and disclosure
requirements. This proposed rule is the fourth in a series of
regulations Treasury has issued to implement the Act.
DATES: Written comments may be submitted on or before December 31,
2003.
ADDRESSES: Submit comments by e-mail to triacomments@do.treas.gov or by
mail (if hard copy, preferably an original and two copies) to:
Terrorism Risk Insurance Program, Public Comment Record, Suite 2100,
Department of the Treasury, 1425 New York Ave., NW., Washington, DC
20220. All comments should be captioned with ``Proposed Rule on Claim
Procedures''. Please include your name, affiliation, address, e-mail
address and telephone number in your comment. Comments will be
available for public inspection by appointment only at the Reading Room
of the Treasury Library. To make appointments, call (202) 622-0990 (not
a toll-free number).
FOR FURTHER INFORMATION CONTACT: David Brummond, Legal Counsel; Howard
Leikin, Senior Insurance Advisor; C. Christopher Ledoux, Senior
Attorney; Terrorism Risk Insurance Program (202) 622-6770 (not a toll-
free number).
SUPPLEMENTARY INFORMATION:
I. Background
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).
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 (the Program), including the issuance of regulations
and procedures. The Program provides a three-year federal reinsurance
backstop for insured losses from an act of terrorism until the Program
ends 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 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 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 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.
II. Previous Rulemaking
This proposed rule is the latest in a series of rules issued by
Treasury under the Act. In implementing the Program, Treasury has
sought to achieve several goals. First, an effort has been made to
implement the Act in a transparent and effective manner that treats
comparably those insurers required to participate in the Program and
that provides necessary information to policyholders in a useful and
efficient manner. Second, Treasury seeks to rely as much as possible on
the State insurance regulatory structure. In that regard, Treasury is
closely coordinating with the National Association of Insurance
Commissioners (NAIC) in implementing all aspects of the Program. Third,
to the extent possible within statutory constraints, Treasury seeks to
allow insurers to participate in the Program in a manner consistent
with 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 risk insurance coverage when the Program
expires.
To assist insurers, policyholders and other interested parties in
complying with immediately applicable and time-sensitive requirements
of the Act prior to the issuance of regulations, Treasury issued
interim guidance in four separate notices on December 3 and 18, 2002
and on January 22 and March 25, 2003. Treasury publicly released these
interim guidance notices on its Program Web site http://www.Treasury.gov/trip
and published each notice in the Federal Register
[67 FR 76206 (December 11,
[[Page 67101]]
2002); 67 FR 78864 (Dec. 18, 2002); 68 FR 4544 (Jan. 29, 2003); 68 FR
15039 (Mar. 27, 2003)]. The interim guidances addressed several issues
requiring clarification of immediately applicable provisions, including
provisions dealing with statutory disclosure obligations of insurers;
requirements to make available terrorism risk insurance; the meaning of
direct earned premium for commercial property and casualty insurance;
categories of insurers required to participate in the Program; and the
scope of the term insured loss under the Act.
In addition to interim guidance, Treasury has published two interim
final rules and a proposed rule that have now been issued as final
rules. Treasury published the first regulation implementing the Act on
February 28, 2003 (68 FR 9804) as an interim final rule. That interim
final rule was revised and published as a final regulation on July 11,
2003 (68 FR 41250). Now Subpart A of part 50 in Title 31 of the Code of
Federal Regulations, this rulemaking covers the purpose and scope of
the Program, key definitions and certain general provisions. A
technical revision to the final rule dealing with the definition of
direct earned premium was subsequently published on August 13, 2003 (68
FR 48280).
On April 18, 2002 (68 FR 19302) Treasury published a second interim
final rule. Among other things, this rule dealt with requirements
governing disclosures that insurers must make to policyholders as a
condition for federal payment under the Act and requirements that
insurers make available terrorism coverage in their commercial property
and casualty insurance policies. The interim final rule created new
Subparts B and C of 31 CFR part 50. The interim final rule was revised
and published as a final rule on October 17, 2003 (68 FR 59720).
Finally, Treasury published a proposed rule on April 18, 2003 to
address issues involving State residual market insurance entities and
State workers compensation funds as required by section 103(d)(1) of
the Act (68 FR 19309). The proposed rule clarified characteristics of a
residual market mechanism that define it as an ``insurer'', established
guidelines for computing ``direct earned premium'' and continued the
waiver of the Act's requirements related to disclosure. The proposed
rule was revised and published as a final rule on October 17, 2003 (68
FR 59715). The final rule made minor revisions to the proposed rule and
set forth disclosure requirements for residual market mechanisms.
III. The Proposed Rule
This proposed rule would add Subparts F and G to Part 50, which
comprises Treasury's regulations implementing the Act. It also proposes
to amend the definition of ``insured loss'' in Sec. 50.5(e) of Subpart
A.
A. Overview
Section 103(a)(2) of the Act requires the Secretary of the Treasury
to administer the Program and pay the Federal share of compensation for
insured losses. The proposed rule would establish requirements for
insurers to follow in obtaining payment of the Federal share of
compensation for insured losses from a terrorist event. The proposed
rule is designed to reflect best practices of reinsurers, where
applicable, in the context of the Act's text, goals and purposes. In
general, the proposed rule describes what is payable to insurers as the
Federal share of compensation and then follows the sequence of the
process for paying reinsurance claims. Essentially, the process
involves gathering information about insured losses of insurers as
defined by the Act; requiring proof, or certification, that an insurer
has met the requirements of the Act as a condition to payment of the
Federal share; and making payment to insurers for the Federal share of
compensation for their insured losses. The proposed rule is modeled on
customary business practices and procedures of the reinsurance industry
while implementing the statutory requirements of the Act. Treasury
seeks comment on all aspects of the proposed rule from interested
persons and entities.
In outlining proposed requirements for insurers to obtain payment
for insured losses, Treasury seeks to establish operational procedures
that emulate, as appropriate, the best practices of a reinsurer. In
this proposed rule, Treasury's goal is to be able to respond quickly to
insurer claims for payment while maintaining appropriate financial
controls so that taxpayer funds are protected. To the extent possible,
the information that will be required from insurers already exists as
part of their current process for administering and managing insurance
claims. In certain instances, however, the Act requires certifications
of insurer actions that may be different from customary industry
business practices. It is Treasury's objective to obtain the
information and documentation needed to administer the Program, while
avoiding undue burdens on insurers.
The proposed rule seeks to clarify the amount of the Federal share
of compensation payable by Treasury and establish certain basic
operational requirements to implement payment. Accordingly, the
previous definition of ``insured loss'' is amended to facilitate
clarification of items compensable as part of the Federal share. In
addition to this proposed rulemaking, more detailed operating
procedures will be developed as required. Such procedures will be
posted on the Treasury Web site http://www.Treasury.gov/trip. For the
present time, Treasury is concentrating on regulations that are
important to the initial and supplementary reporting and certification
of insured losses and the filing of claims for payment of the Federal
share of compensation. This is being done so that Treasury and insurers
can proceed expeditiously should a certified act of terrorism occur.
There are other issues, typically those arising at later stages of the
claims payment process, that are not addressed in the proposed rule.
For example, payment priorities when aggregate losses constituting the
Federal share of compensation approach the statutory maximum of $100
billion are not included as part of this rulemaking. These and other
issues will be the subject of subsequent rulemaking.
B. Description of Proposed Rule
The major provisions of the proposed rule are as follows:
1. The Federal Share of Compensation. The proposed rule generally
outlines the Act's requirements and conditions for federal payment. A
critical component of the calculation of the Federal share of
compensation is the amount of insured losses of an insurer. The
proposed rule thus clarifies elements of insured losses that are
compensable by amending the current definition of ``insured loss'' in
Sec. 50.5(e). Following customary business practices in the insurance
industry, Treasury is proposing that loss adjustment expenses allocable
to a specific underlying loss be payable as part of insured losses.
Treasury has not included losses in excess of policy limits (known
commonly as XPL) as insured losses. However, comments on why the
Federal Government should consider including XPL losses are solicited
by Treasury. Since the Act specifically excludes compensation for
punitive or exemplary damages, these are also not included as insured
loss items.
The Federal share of compensation payable to an insurer under the
Program is described by the proposed rule as 90 percent of that portion
of the insurer's
[[Page 67102]]
insured losses that exceed its insurer deductible during a Program
Year, subject to specified adjustments and the cap of $100 billion as
provided in the Act. The proposed rule stipulates several adjustments
in calculating the Federal share of compensation. First, the proposed
rule reduces aggregate insured losses by amounts recovered by insurers
for salvage and subrogation. Treasury expects that as normal good
business practice, insurers will pursue salvage and subrogation
recoveries. The proposed rule sets forth that the amount of insured
losses upon which the Federal share of compensation is calculated be
reduced by such recoveries. The benefits of insurer recoveries for
salvage and subrogation thus inure to both the insurer and to the
Program.
The proposed rule also specifies two other adjustments that will be
made to reduce the Federal share of compensation otherwise due for the
insured losses. The Act requires that the Federal share of compensation
for insured losses be reduced by any duplicate amount of compensation
otherwise provided by the Federal Government for those insured losses.
The Act recognizes that insurers may have other sources of recovery for
their insured losses, particularly reinsurance agreements. Should the
amount of an insurer's Federal share of compensation from the Program
and the amount of recoveries from other sources exceed the aggregate
amount of its insured losses in a Program Year, then any excess
recovery must be returned to Treasury. Excluded from this requirement
are recoveries from a reinsurer pursuant to an agreement whereby an
insurer's obligation to repay its reinsurer takes priority over its
obligation to repay Treasury.
2. Information Gathering. The next stage of the claims process
under the proposed rule involves the submission of information about
insured losses so that Treasury can determine the extent of its
obligation to pay individual insurers under the Act.
a. Initial Notice. As the ``payer'' of Federal compensation for
insured losses from acts of terrorism, Treasury is proposing an early
notification requirement when an insurer obtains information indicating
its insured losses will exceed 50% of its insurer deductible as defined
by the Act. At that time Treasury expects the insurer to submit, on a
form prescribed by Treasury, estimates of aggregate losses for the
Program Year, its insurer deductible and the Federal share of aggregate
losses, as well as to designate the person who will make required
certifications and receive Federal payments. Such information will
assist in anticipating funding and operational requirements. Because
the insurer deductible applies collectively to all insurers in an
affiliated group, the notice must include the designation of a single
insurance entity to coordinate the submission of required reports and
documentation (including the Initial Notice), make required
certifications and receive Federal payments on behalf of the affiliated
group.
b. Loss Reporting. The proposed rule addresses the type of loss
information that will be required to document insured losses when an
insurer seeks reimbursement from Treasury for the Federal share of
compensation. An Initial Certification of Loss, on a form prescribed by
Treasury, is required when insured losses first exceed the insurer's
deductible. If the insurer sustains ongoing, additional insured losses,
periodic Supplementary Certifications of Loss, on a form prescribed by
Treasury, must be submitted. These Certifications of Loss will be used
by Treasury to assess payment eligibility for the Federal share of
compensation and compliance with the Act's prerequisites for payment.
(i) Loss Bordereau. The primary vehicle for gathering information
about the insured losses of an insurer is a summary report of loss data
commonly known in the reinsurance industry as a ``bordereau''. A
bordereau is a management report of basic information about an
insurer's underlying claims that, in the aggregate, constitute the
insured losses of the insurer. The bordereau is used within the
reinsurance industry to track insured losses and otherwise establish
the reinsurer's obligation to pay under a reinsurance agreement. The
proposed rule would require insurers to provide Treasury with a
bordereau that identifies insured losses by Program Year, by industry
catastrophe code and by line of business. If an industry catastrophe
code is not issued, Treasury will issue a code for insurer use. It is
Treasury's intent to coordinate this code with appropriate industry
reporting organizations.
In the future, Treasury will issue operating procedures and a
prescribed format for the bordereau in its implementation of these
regulations. For each underlying claim, Treasury contemplates the
submission of information that is typical of a reinsurer's
requirements. Such basic information will allow Treasury to
expeditiously handle and provide payment for claims under the Program.
Certain data will be sought for claim identification and coverage
determination, such as claim number, insured name, state code for the
location of the loss, date of loss, policy effective date and length of
term. Other data will assist in the assessment of the insurer's claim,
such as policy limits. And finally, certain data are simply basic to
the insurer's claim, such as the loss and allocated loss adjustment
expenses paid, amounts reserved for those expenses and amounts
recovered through salvage and subrogation.
(ii) Other Information. The forms to be prescribed by Treasury will
also seek loss-related information that is required by specific
provisions of the Act. As previously noted, section 103(g)(2) of the
Act recognizes that insurers may have other reinsurance recoveries for
their insured losses. However, the Act requires that the Federal share
of compensation from Treasury and amounts recovered from other sources
cannot exceed the aggregate amount of the insurer's insured losses in
any Program Year. Thus, Treasury will require insurers to indicate on
the bordereau whether an underlying claim could or does have other
reinsurance recoverable. As part of the loss certification and
bordereau information reported, an insurer would also report total
reinsurance recoveries from other sources. This will provide the
Treasury with an early notification that other reinsurance exists.
Section 107(a)(5) of the Act provides that punitive damage amounts
may not be included as insured losses. Thus, Treasury will require such
amounts to be reported with an underlying claim on the bordereau for
appropriate adjustment of the amount claimed from the Program.
Finally, section 103(e)(1)(B) of the Act requires the reduction of
the Federal share of compensation for insured losses under the Program
by the amounts provided by the Federal Government through any other
program for those same losses. Accordingly, insurers will be required
to inquire of each of their claimants whether or not the claimant
received any duplicate recovery from any other Federal source and to
report that amount on the bordereau with the underlying claim.
3. Compliance Certifications. The proposed rule also addresses
various written certifications the Act requires as a condition for
payment of the Federal share. Specific statements certifying actions by
the insurer as required by the Act will be included as part of each
Certification of Loss. Section 103(b)(2) of the Act states that no
payment may be made to an insurer for a covered insured loss unless
``the insurer
[[Page 67103]]
provides clear and conspicuous disclosure to the policyholder of the
premium charged for insured losses covered by the Program and the
Federal share of compensation for insured losses under the Program.''
This requirement has been addressed in the previously issued Treasury
regulations at Sec. Sec. 50.10 through 50.19 and will be a formal
requirement in submitting a claim for the Federal share of compensation
for an insured loss. Treasury anticipates that an executive officer of
the insurer will provide this written certification for all underlying
claims submitted on the bordereau, both with the Initial Certification
of Loss and with any Supplementary Certifications of Loss.
Section 103(c) of the Act also requires that through December 31,
2004, an entity meeting the definition of an insurer under this Program
``(A) shall make available, in all of its commercial property and
casualty insurance policies, coverage for insured losses; and (B) 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''. This requirement has also been
addressed in the previously issued Treasury regulations at Sec. Sec.
50.20 through 50.24. The Initial and each Supplementary Certification
of Loss will include a certification that this availability requirement
has been met. Although this is not a statutory condition for payment,
Treasury believes it is necessary to effectively administer and
implement the Program.
Finally, the Act requires that insurers absorb a specified level of
insured losses, or an insurer deductible, before receiving
reimbursement for the Federal share of compensation for insured losses.
To facilitate the administration of this provision, the Initial
Certification of Loss requires an insurer to certify the amount of its
direct earned premium, along with the calculation of its insurer
deductible. The proposed rule provides that, at the option of the
insurer, this statement and supporting documentation can be submitted
along with the Initial Notice of Insured Loss instead of being provided
in conjunction with the Initial Certification of Loss. This is allowed
so that the amount of the insurer's deductible can be on file with the
Program to expedite the processing of the insurer's Initial
Certification of Loss. Treasury will prescribe a schedule or attachment
to the Initial Notice of Insured Loss and the Initial Certification of
Loss forms for the calculation and certification by an insurer of its
direct earned premium and resulting insurer deductible based on its
reporting to the NAIC, or as otherwise appropriately reported.
4. Paying the Federal Share. The final stage in the claim process
addressed by Treasury in the proposed rule is to make payment as
provided by the Act. Once again, the proposed rule generally follows
payment practices and procedures used in the reinsurance industry.
a. Payment Process. Treasury is proposing that it will, upon
receiving the required documentation, promptly provide payment. If
Treasury makes payments before the total amount of insured losses are
known, such payments will be subject later to adjustment based on any
overpayment or underpayment. If the total amount of insured losses to
be paid by the insurer or the amount of Federal compensation payable by
Treasury has not been finally determined when the Initial Certification
of Loss has been filed, the normal procedure to be followed is that the
insurer will file Supplementary Certifications of Loss on a monthly
basis. If monthly reporting is inappropriate in a particular case, then
Treasury may determine a more suitable schedule to be worked out with
the insurer. In either situation, on the basis of each Supplementary
Certification of Loss thereafter, Treasury or the insurer, as the case
may be, shall pay the balance due. It is proposed that any overpayment
to an insurer will either be offset from future payments or due to
Treasury within 45 days of the reporting of the overpayment.
Because the Act requires insurance entities within an affiliated
group to be treated as a single entity in determining the insurer
deductible, Treasury is proposing that all payments will be made to a
single insurance entity within an affiliated group. This entity will be
identified by the affiliated group and designated on the Initial Notice
of Loss. The proposed rule also requires that insurers within the
affiliated group assign their rights to payment from Treasury to the
single insurance entity. Failure to make such assignment may be grounds
for Treasury withholding an affiliate insurer's share of Federal
compensation under the Program.
b. Audits and Records. If a certified act of terrorism occurs, it
will be the objective of the Treasury to reimburse insurers according
to the Act as soon as possible following receipt of the Initial
Certification of Loss and supporting documentation. The proposed rule
requires insurers to retain all records and files pertaining to the
handling and settlement of claims, including electronic documents and
data, for subsequent financial and claims audits. This is because
Treasury and/or its appointed designee(s) will need to have access to
pertinent books, files, agreements and records which support the
Certifications of Loss previously submitted. Insurer records should be
retained for a minimum of three years following the conclusion of the
policy year for premium information and for a minimum of five years
following the final adjustment of each individual claim.
c. Fraud and Civil Penalties. One of the conditions for Federal
payment under section 103(b) of the Act is that the insurer ``processes
the claim for the insured loss in accordance with appropriate business
practices, and any reasonable procedures that the Secretary may
prescribe.'' The proposed rule provides that Treasury may deny
eligibility for payment of the Federal share of insured losses should
an insurer intentionally conceal or misrepresent any material fact or
circumstance, engage in fraudulent conduct, or make false statements
relating to participation under the Act. Fines, civil penalties and
imprisonment under applicable Federal laws may also apply.
IV. Procedural Requirements
Executive Order 12866, ``Regulatory Planning and Review''. This
rule is a significant regulatory action for purposes of Executive Order
12866, ``Regulatory Planning and Review,'' and has been reviewed by the
Office of Management and Budget.
Regulatory Flexibility Act. Pursuant to the Regulatory Flexibility
Act, 5 U.S.C. 601 et. seq., it is hereby certified that this proposed
rule will not have a significant economic impact on a substantial
number of small entities. Treasury is required to pay the Federal share
of compensation to insurers for insured losses in accordance with the
Act. A condition of Federal payment is that the insurer must submit to
Treasury, in accordance with procedures established by Treasury, a
claim for payment and certain certifications. The proposed rule seeks
to emulate loss reporting practices in the reinsurance industry, which
insurers already follow in order to get payment for reinsurance, thus
minimizing the impact on all insurers. The Act itself requires all
insurers receiving direct earned premium for any type of property and
casualty insurance, as defined in the Act, to participate in the
Program. This includes all insurers regardless of size or
sophistication. The Act also defines property and casualty insurance to
mean commercial lines
[[Page 67104]]
insurance without any reference to the size or scope of the insurer or
the insured. Accordingly, any economic impact associated with the
proposed rule flows from the Act and not the proposed rule. A
regulatory flexibility analysis is thus not required.
Paperwork Reduction Act. The collection of information
(recordkeeping requirement) contained in this proposed rule has been
submitted to the Office of Management and Budget (OMB) for review under
the requirements of the Paperwork Reduction Act, 44 U.S.C. 3507(d). The
forms to be prescribed by Treasury will be the subject of a separate
submission to OMB on which the public will be provided an opportunity
to comment. An agency may not conduct or sponsor, and a person is not
required to respond to, a collection of information unless it displays
a valid control number assigned by OMB.
Organizations and individuals desiring to submit comments
concerning the collection of information in the proposed rule should
direct them to the Desk Officer for the Department of the Treasury,
Office of Information and Regulatory Affairs, Office of Management and
Budget, Washington, DC 20503 (preferably by Fax to 202-395-6974, or by e-mail to jlackeyj@omb.eop.gov). A copy of the comments should also be
sent to Treasury at the addresses previously specified. Comments on the
collection of information should be received by December 31, 2003.
Treasury specifically invites comments on: (a) Whether the proposed
collection of information is necessary for the proper performance of
the mission of Treasury, and whether the information will have
practical utility; (b) the accuracy of the estimate of the burden of
the collections of information (see below); (c) ways to enhance the
quality, utility, and clarity of the information collection; (d) ways
to minimize the burden of the information collection, including through
the use of automated collection techniques or other forms of
information technology; and (e) estimates of capital or start-up costs
and costs of operation, maintenance, and purchase of services to
maintain the information.
The collection of information in the proposed rule is the
recordkeeping requirement in Sec. 50.61. The information will be used
by Treasury (or its designees) to audit or examine claims for Federal
payments submitted by insurers. The recordkeeping requirement is
mandatory for any insurer that seeks payment of a Federal share of
compensation.
If an act of terrorism is certified under the Act, the number of
respondents, if any, will be determined by the size and nature of the
certified act of terrorism. Because of the extreme uncertainty
regarding any such event, a ``best estimate'' has been developed based
on the considered judgment of Treasury. This estimate has 100 insurers
sustaining insured losses; each of these insurers would be required to
retain records concerning 100 claims. Treasury believes that the
records that insurers would be required to retain under Sec. 50.61
largely duplicate the records that insurers would normally retain in
the course of processing and administering claims, and that the burden
associated with the proposed rule therefore is minimal. Accordingly,
Treasury estimates that the proposed rule will impose 5 minutes of
burden with respect to each claim; the estimated annual burden per
recordkeeper is therefore 8.33 hours (100 claims x 5 minutes) and the
estimated total annual burden is 833 hours (8.33 hours x 100 insurers).
List of Subjects in 31 CFR Part 50
Terrorism risk insurance.
For the reasons stated above, 31 CFR part 50 is proposed to be
amended as follows:
PART 50--TERRORISM RISK INSURANCE PROGRAM
1. The authority citation for 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).
2. Revise Sec. 50.5(e) to read as follows:
Sec. 50.5 Definitions.
* * * * *
(e) Insured loss. (1) The term insured loss means any loss
resulting from an act of terrorism (including an act of war, in the
case of workers' compensation) that is covered by primary or excess
property and casualty insurance issued by an insurer if the loss:
(i) Occurs within the United States;
(ii) Occurs to an air carrier (as defined in 49 U.S.C. 40102), to a
United States flag vessel (or a vessel based principally in the United
States, on which United States income tax is paid and whose insurance
coverage is subject to regulation in the United States), regardless of
where the loss occurs; or
(iii) Occurs at the premises of any United States mission.
(2)(i) A loss that occurs to an air carrier (as defined in 49
U.S.C. 40102), to a United States flag vessel, or a vessel based
principally in the United States, on which United States income tax is
paid and whose insurance coverage is subject to regulation in the
United States, is not an insured loss under section 102(5)(B) of the
Act unless it is incurred by the air carrier or vessel outside the
United States.
(ii) An insured loss to an air carrier or vessel outside the United
States under section 102(5)(B) of the Act does not include losses
covered by third party insurance contracts that are separate from the
insurance coverage provided to the air carrier or vessel.
(3) The term insured loss includes loss adjustment expenses
incurred by an insurer in connection with insured losses that are
allocated and identified by claim file in insurer records, including
expenses incurred in the investigation, adjustment and defense of
claims, but excluding staff adjuster salaries and any allocations of
other internal insurer expenses.
(4) The term insured loss does not include:
(i) Punitive or exemplary damages awarded or paid in connection
with the Federal cause of action specified in section 107(a)(1) of the
Act. The term ``punitive or exemplary damages'' means damages that are
not compensatory but are an award of money made to a claimant solely to
punish or deter; or
(ii) Extra contractual damages awarded, or obligations paid by an
insurer, including but not limited to, punitive, exemplary, or special
damages, or damages in excess of policy limits.
* * * * *
3. New Subparts F and G of Part 50 are added to read as follows:
Subpart F--Claims Procedures
Sec.
50.50 Federal share of compensation.
50.51 Adjustments to the Federal share of compensation.
50.52 Initial Notice of Insured Loss.
50.53 Loss certifications.
50.54 Payment of Federal share of compensation.
Subpart F--Claims Procedures
Sec. 50.50 Federal share of compensation.
(a) General. The Treasury will pay to insurers the Federal share of
compensation for insured losses resulting from acts of terrorism as
provided in section 103 of the Act. Treasury shall determine the amount
of payment of the Federal share of compensation based upon a
determination by Treasury, or upon Treasury's reservation of rights and
a later determination, that:
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(1) The insurer is an entity meeting the requirements of Sec.
50.5(f);
(2) The insurer's insured losses as defined in Sec. 50.5(e) have
exceeded its insurer deductible as defined in Sec. 50.5(g);
(3) The insurer has made payment of an underlying insured loss to a
person who had suffered the insured loss, or to a person acting on
behalf of such person, and who had filed a claim that was not
fraudulent, collusive, made in bad faith or otherwise dishonest;
(4) The insurer had provided a clear and conspicuous disclosure as
required by Sec. Sec. 50.10 through 50.19;
(5) The insurer took all steps reasonably necessary to properly and
carefully investigate the underlying insured loss and otherwise
processed the underlying loss using appropriate insurance business
practices;
(6) The insured losses submitted for payment are within the scope
of coverage issued by the insurer for commercial property and casualty
insurance as defined in Sec. 50.5(l); and
(7) The procedures specified in this subpart have been followed and
all conditions to payment have been met.
(b) Amount payable. The Federal share of compensation payable to an
insurer under the Program shall be 90 percent of that portion of the
insurer's aggregate insured losses that exceed its insurer deductible
during a Program Year, subject to any adjustments in Sec. 50.51 and
the cap of $100 billion as provided in section 103(e)(2) of the Act.
Sec. 50.51 Adjustments to the Federal share of compensation.
(a) Aggregate amount of insured losses. The aggregate amount of
insured losses of an insurer in a Program Year used to calculate the
Federal share of compensation shall be reduced by any amounts recovered
by the insurer as salvage or subrogation for its insured losses in the
Program Year.
(b) Amount of Federal share of compensation. The Federal share of
compensation shall be adjusted as follows:
(1) No excess recoveries. For any Program Year, the sum of the
Federal share of compensation paid by Treasury to an insurer and the
insurer's recoveries for insured losses from other sources shall not be
greater than the insurer's aggregate amount of insured losses for acts
of terrorism in that Program Year. Amounts recovered for insured losses
in excess of an insurer's aggregate amount of insured losses in a
Program Year shall be repaid to Treasury within 45 days after the end
of the month when such amounts are received by the insurer. For
purposes of this paragraph, amounts recovered from a reinsurer pursuant
to an agreement whereby the reinsurer's right to any excess recovery
has priority over the rights of Treasury shall not be considered a
recovery subject to repayment to Treasury.
(2) Reduction of amount payable. The Federal share of compensation
due an insurer for insured losses shall be reduced by any amounts
received by the insurer or an insured or a third party suffering the
underlying loss from any other Federal programs as compensation for
those insured losses, including, but not limited to, insurance,
assistance, grants or disaster relief from the Federal Government. Each
insurer shall inquire of each of its claimants whether or not duplicate
payments for insured losses have been paid from other Federal sources.
Such amounts shall be reported with each underlying claim on the
bordereau specified in Sec. 50.53(b)(1) and the total amount
subtracted from the aggregate amount claimed as the Federal share of
compensation for insured losses.
Sec. 50.52 Initial Notice of Insured Loss.
Each insurer shall submit to Treasury an Initial Notice of Insured
Loss, on a form prescribed by Treasury, whenever the insurer's
aggregate insured losses (including reserves for ``incurred but not
reported'' losses) within a Program Year exceed an amount equal to 50
percent of the insurer's deductible as specified in Sec. 50.5(g).
Insurers are advised the form for the Initial Notice of Insured Loss
will include an initial estimate of aggregate losses for the Program
Year, the amount of the insurer deductible and an estimate of the
Federal share of compensation for the insurer's aggregate insured
losses. In the case of an affiliated group of insurers, the form for
the Initial Notice of Insured Loss will include the name and address of
a single insurance entity within the affiliated group that will serve
as the single point of contact for the purpose of providing loss and
compliance certifications as required in Sec. 50.53 and for receiving
payments of the Federal share of compensation in accordance with Sec.
50.54(b). An insurer, at its option, may elect to include with its
Initial Notice of Insured Loss the certification of direct earned
premium required by Sec. 50.53(b)(3).
Sec. 50.53 Loss certifications.
(a) General. When an insurer has paid aggregate insured losses that
exceed its insurer deductible, the insurer may make claim upon Treasury
for the payment of the Federal share of compensation for its insured
losses. The insurer shall file an Initial Certification of Loss, on a
form prescribed by Treasury, and thereafter such Supplementary
Certifications of Loss, on a form prescribed by Treasury, as may be
necessary to receive payment for the Federal share of compensation for
its insured losses.
(b) Initial Certification of Loss. An insurer shall use its best
efforts to file the Initial Certification of Loss with Treasury within
45 days following the last calendar day of the month when an insurer's
aggregate insured losses exceed its insurer deductible. Insurers are
advised the Initial Certification of Loss will include the following:
(1) A bordereau, on a form prescribed by Treasury, that includes
basic information about each underlying insured loss. The bordereau
will include, but may not be limited to:
(i) A listing of each underlying insured loss by catastrophe code
and line of business;
(ii) The total amount of reinsurance recovered from other sources;
(iii) A calculation of the aggregate insured losses sustained by
the insurer above its insurer deductible for the Program Year; and
(iv) The amount the insurer claims as the Federal share of
compensation for its aggregate insured losses.
(2) A certification that the insurer is in compliance with the
provisions of section 103(b) of the Act and this part, including
certifications that:
(i) The insurer has paid all underlying claims comprising the
insured losses listed in the bordereau provided pursuant to Sec.
50.53(b)(1);
(ii) The underlying claims for insured losses were filed by persons
who suffered an insured loss, or by persons acting on behalf of such
persons;
(iii) The underlying claims for insured losses were processed in
accordance with appropriate business practices and the procedures
specified in this subpart;
(iv) The insurer has complied with the disclosure requirements of
Sec. Sec. 50.10 through 50.19 for each underlying insured loss that is
included in the amount of the insurer's aggregate insured losses; and
(v) The insurer has complied with the mandatory availability
requirements of Sec. Sec. 50.20 through 50.24.
(3) A certification of the amount of the insurer's ``direct earned
premium'' as defined in Sec. 50.5(d), together with the calculation of
its ``insurer deductible'' as defined in Sec. 50.5(g) (provided this
certification was not submitted previously with Initial Notice of
Insured Loss specified in Sec. 50.52).
(c) Supplementary Certification of Loss. If the total amount of the
Federal
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share of compensation due an insurer for insured losses under the Act
has not been determined at the time an Initial Certification of Loss
has been filed, the insurer shall file monthly, or on a schedule
otherwise determined by Treasury, Supplementary Certifications of Loss
updating the amount of the Federal share of compensation owed for the
insurer's insured losses. Supplementary Certifications of Loss will
include the following:
(1) A bordereau described in Sec. 50.53(b)(1); and
(2) A certification as described in Sec. 50.53(b)(2).
(d) Supplementary information. In addition to the information
required in paragraphs (b) and (c) of this section, Treasury may
require such additional supporting documentation as required to
ascertain the Federal share of compensation for the insured losses of
any insurer.
(e) Bordereau defined. For purposes of this section, a
``bordereau'' is a report of basic information about an insurer's
underlying claims that, in the aggregate, constitute the insured losses
of the insurer.
Sec. 50.54 Payment of Federal share of compensation.
(a) Timing. Treasury will promptly pay to an insurer the Federal
share of compensation due the insurer for its insured losses. Payment
shall be made in such installments and on such conditions as determined
by the Treasury to be appropriate. Any overpayments by Treasury of the
Federal share of compensation will be offset from future payments to
the insurer or returned to Treasury within 45 days.
(b) Payee. Payment of the Federal share of compensation for insured
losses will be made to the insurer filing the Initial Notice of Loss
required by Sec. 50.52. In the case of an affiliated group of
insurers, payment of the Federal share of compensation for the insured
losses of the affiliated group will be made to the single insurance
entity designated in the Initial Notice of Loss to receive payment on
behalf of the affiliated group. It shall be the responsibility of the
single insurance entity to distribute payments of the Federal share of
compensation as appropriate to affiliated insurers in the group.
(c) Assignment of payments. To facilitate a single point of contact
for payment of the Federal share of compensation to an affiliated
group, an insurer within an affiliated group shall assign its rights to
be paid amounts due or to become due from Treasury to the single
insurance entity designated to receive payment on behalf of the
affiliated group. The failure to make such an assignment may be grounds
for Treasury to withhold, in whole or in part, payment of the Federal
share of compensation due an insurer.
Subpart G--Audit and Investigative Procedures
50.60 Audit authority.
50.61 Recordkeeping.
50.62 Eligibility for Federal share of compensation.
Subpart G--Audit and Investigative Procedures
Sec. 50.60 Audit authority.
The Secretary of the Treasury, or an authorized representative,
shall have access to all books, documents, papers and records of an
insurer that are pertinent to amounts paid to the insurer as the
Federal share of compensation for insured losses for the purpose of
investigation, confirmation, audit and examination.
Sec. 50.61 Recordkeeping.
Each insurer that seeks payment of a Federal share of compensation
under subpart F of this part shall retain such records as are necessary
to fully disclose all material matters pertinent to insured losses and
the Federal share of compensation sought under the Program, including,
but not limited to, records regarding premiums and insured losses for
all commercial property and casualty insurance issued by the insurer
and information relating to any adjustment in the amount of the Federal
share of compensation payable. Insurers shall maintain detailed records
for not less than 5 years from the termination dates of all reinsurance
agreements involving commercial property and casualty insurance subject
to the Act. Records relating to premiums shall be retained and
available for review for not less than 3 years following the conclusion
of the policy year. Records relating to underlying claims shall be
retained for not less than 5 years following the final adjustment of
the claim.
Sec. 50.62 Eligibility for Federal share of compensation.
(a) An insurer may be ineligible to receive payment for the Federal
share of compensation for insured losses under the Act upon a
determination by Treasury that the insurer:
(1) Intentionally concealed or misrepresented any material fact or
circumstance;
(2) Engaged in fraudulent conduct; or
(3) Made false statements relating to participation under the Act
or this Part.
(b) An insurer's ineligibility for payment of the Federal share of
compensation shall be effective as of the date any act described in
paragraph (a) of this section was committed.
(c) Fines, civil penalties and imprisonment under applicable
Federal laws may apply in addition to ineligibility for payment of the
Federal share of compensation.
Dated: November 12, 2003.
Wayne A. Abernathy,
Assistant Secretary of the Treasury.
[FR Doc. 03-29729 Filed 11-28-03; 8:45 am]
BILLING CODE 4830-01-P