The U.S. Department of the Treasury (“Treasury”) has issued an interim final rule implementing changes to the Terrorism Risk Insurance Act of 2002 (“TRIA”) enacted late last year by Congress under the Terrorism Risk Insurance Extension Act of 2005 (the “Extension Act”). The interim final rule is available on Treasury’s Web site and will be effective immediately upon publication in the Federal Register, which should occur within a few days (Treasury also will soon publish a proposed rule mirroring the interim final rule to begin the formal process of establishing a “final” rule implementing the changes made by the Extension Act. Public comment on the proposed rule will be accepted for 30 days following publication in theFederal Register.).
The interim final rule generally tracks the interim guidance published by Treasury on January 5, 2006 but also provides a few new clarifications (the interim guidance was published at 71 Fed. Reg. 648 (Jan. 5, 2006) and is available on Treasury's Web site. See note 1, supra.). For a discussion of the interim guidance published in January, please see our Client Advisory, “U.S. Department of Treasury Issues Interim Guidance on TRIA Extension" (January 2006).
Clarifications provided by the interim final rule include the following:
Excess and Umbrella Policies
Under the regulations implementing TRIA, only commercial “property and casualty insurance,” as defined by the regulations, is subject to TRIA’s requirements, including the requirement to “make available” coverage for losses resulting from a certified “act of terrorism.” The regulations generally define the various types of commercial insurance that are subject to TRIA by reference to the line-of-business definitions used by the National Association of Insurance Commissioners (“NAIC”) on the NAIC Annual Statement.
The lines of insurance subject to TRIA include Line 17—Other Liability, which is generally where premiums for commercial excess and umbrella policies are reported. In the preamble to the interim final rule, Treasury clarifies that an excess or umbrella policy is considered “property and casualty insurance” subject to TRIA only to the extent that it provides coverage above underlying coverage that is subject to TRIA. Thus, if an excess or umbrella policy provides an upper layer of coverage for a type of insurance that is excluded from TRIA—for example, commercial auto, professional liability or medical malpractice—the excess or umbrella policy also is excluded from TRIA. In this case, there would be no need to “make available” coverage for losses resulting from a certified “act of terrorism” in the excess or umbrella policy and the coverage would not be included in the insurer’s direct earned premiums for purposes of calculating the TRIA deductible. Only premiums received from commercial "property and casualty insurance" are included in an insurer's "direct earned premium" for purposes of calculating the insurer's TRIA deductible. See 31 CFR § 50.5(d).
The interim final rule further clarifies that in the case where an excess or umbrella policy is written over several underlying types of coverage, some of which are included in TRIA and some of which are not, the excess or umbrella policy is subject to the analysis that applies to other types of hybrid policies under Treasury regulations. For example, an excess or umbrella policy might be written over a general liability policy (which is generally included) and a commercial auto policy (which is excluded). If the portion of the excess or umbrella coverage that corresponds to the included underlying coverage is “incidental”—i.e., less than 25 percent of the total premium for the policy—the insurer may elect to treat the entire policy as excluded from TRIA. Otherwise, the insurer must treat the portion of the excess or umbrella policy corresponding to the primary included coverage as being subject to TRIA and must comply with TRIA with respect to that portion of the coverage.
Policies Covering Farm Risks
The Extension Act amended TRIA to exclude from TRIA “farm owners multiple peril insurance.” In the preamble to the interim final rule, Treasury takes the position that this exclusion is applicable only to multiple peril coverages insuring farm risks. Thus, single peril or monoline coverages insuring farm risks continue to be subject to TRIA. Treasury specifically solicits comment on the effect this result may have on smaller insurers, such as farm and county mutuals, and asks adversely affected entities to articulate any basis they may have for the position that Congress intended to exclude policies covering single peril farm risks from TRIA.
TRIA Disclosures for Certain Policies Processed in 2005
As a condition of federal compensation, TRIA requires that insurers make certain disclosures to policyholders regarding the premium charged for terrorism insurance and the federal share of compensation for insured losses. In the preamble to the interim final rule, Treasury notes that some insurers may have processed policies late in 2005 with coverage effective in 2006 without having provided the disclosures required to qualify for federal compensation. Treasury states that it expects insurers in this position will provide the necessary disclosures no later than 30 days following publication of the interim final rule in the Federal Register. Insurers that do not provide the disclosures by that date will be required to justify the delay if a claim for federal compensation is filed. The NAIC has revised its TRIA Model Disclosure Forms to reflect changes to TRIA made by the Extension Act. Insurers that use the NAIC Model Disclosure Forms to make the necessary disclosures will be deemed to have fulfilled the TRIA requirements. Use of the NAIC Model Disclosure Forms, however, is not required.