Tort Issue Still Snagging Backstop Bill

By Steven Brostoff, Washington Editor

NU Online News Service, Oct. 15, 12:59 p.m. EST,Washington?The debate over the issue of punitive damageclaims related to terror attacks is continuing to ensnarl terrorisminsurance legislation as Congress moves ever closer to recessingfor the November 5 election.

At this writing, sources said that the White House and SenateDemocrats remain at odds over the extent to which punitive damagescould be awarded against American businesses in tort lawsuitsarising from a terrorist attack.

Industry sources say they hope to hear within the next 24 hourswhether a final agreement can be reached. The word that a dealmight be imminent led the Consumer Federation of America to issue adenunciation of what it said would be "a gift" to insurance andreal estate interests.

The crux of the dispute between legislators in Congress appearsto be whether juries would have any say in the amount of punitivedamage awards, or whether it would be up to the judge.

In addition, there is a disagreement over whether the award ofpunitive damages by the judge would be limited by statutoryguidelines.

As for the substance of the legislation, sources said that whilethere is still no final agreement, a consensus appears to bedeveloping around a three-year program.

Under the program, the insurance industry would retain apercentage of direct written premiums for losses caused byterrorism. The percentages would be 7.5 percent in the first year,11 percent in the second year, and 15 percent in the thirdyear.

For the first $10 billion in losses, the government would recoupany loans made to the industry by the Treasury Department through asurcharge on commercial policyholder premiums.

Above $10 billion in losses, the Treasury Secretary would havediscretion to determine whether to recoup industry assistance.

The Consumer Federation of America charged that the plan wouldleave taxpayers liable for billions in losses that the insuranceindustry could afford to repay.

J. Robert Hunter, director of insurance for CFA, announced that,"It's Christmas in October for the insurance and real estateindustries because this plan is a gift. Instead of helping therelatively few businesses that can't get terror coverage, Congressis poised to give away reinsurance to a rich insurance industrythat is poised for record profits."

CFA complained that, from reports it heard of the plan, insurerswould not be required to pay back any federal assistance "unlesstotal losses are quite low (ranging from $10 billion to $15billion)."

CFA called this approach "a taxpayer-financed hand out."

The group said most federal assistance would not be repaid, andin contrast to House legislation, which required insurancecompanies to pay back all federal assistance, "this proposal wouldnot require any payback if losses exceed $10 billion in the firstyear of the program, $12.5 billion in the second, and $15 billionin year three."

Even when payback is required, CFA called the amount "miniscule:insurers would only pay back the difference between the totalamount of retentions paid by individual insurers and the capsstated above.

The consumer group said that, under the reported plan, thetaxpayer share of a terrorist attack similar in size to that oftheWorld Trade Center would grow from the current $14 billion to$33 billion.

As CFA sees it, the taxpayer assistance would kick in at levelsthat insurers could easily afford to pay. The required retentionsthat individual insurers would have to pay are 7.5 percent of thetotal amount of a company's written premium in the first year ofthe program, followed by 11 and 15 percent in the second and thirdyear of the program, CFA said.

Taxpayer assistance, CFA said, would kick in "at ridiculouslylow levels for companies with low premiums. In some cases,taxpayers will be liable almost from the first dollar oflosses."

By CFA's calculations, industry-wide, the retentions equate to$14, $23, and $35 billion, based on direct written premium in 2001of just under $186.9 billion. The group said this is far below the$25 billion that insurers could afford for the first year of theprogram; about the size of the manageable 9/11 losses of theindustry. It noted that after federal tax write-offs of 35 percentare allowed.

CFA said insurance companies can afford to pay far more.

Describing the market, it said, the property-casualty insurancebusiness is booming. "These insurers reported a 66.4 percentincrease in profits in the first half of the year. They brought in$25 billion more in new premiums in 2001 than in 2000, and areexpected to report huge premium increases again this year. Inaddition, property-casualty insurers raised more capital in thewake of the Sept. 11th attacks than they lost because of theattacks (after federal tax write-offs.)"

A three-year program, CFA argued, will obstruct development ofthe private market for terrorism insurance. CFA said it hasrepeatedly documented that the growth of the private terrorinsurance market has made broad federal back-up legislationincreasingly unnecessary.

In the CFA's view, insurance is available to all but the highestrisks, such as skyscrapers that can't get full coverage, rates arefalling, and banks are lending freely.

A mandated three-year program that offers federal support at lowlevels "will undoubtedly impede the progress of thisfast-developing market. At the very least, a final proposal shouldgo no further than both the House and Senate bills (S. 2600,H.R.3210), which require only a one-year program with an option toextend the program for an additional year or two." CFA said.