Terror Law Faces Growing Pains

As we get further into the new year, it's clear that implementing the Terrorism Risk Insurance Act is not going to be any picnic for insurers or corporate insurance buyers.

When Congress finally passed the bill, after over a year of stops and starts, the result was a skeletal law, with the U.S. Treasury Department expected to put regulatory meat on its bones. This isn't out of the ordinary.

However, this particular challenge is difficult for Treasury to pull off smoothly, given that implementation had to be almost immediate, as well as the fact that the U.S. government had very little, if any, experience regulating insurer market conduct issues.

A month into 2003, it's still not clear how the terrorism act will play out. The law requires commercial insurers to offer terrorism coverage, but there are no restrictions on pricing it, and therefore no certainty that the insurance will be any more affordable, even if it is universally available.

The key point right now is that insurers are legally required to be upfront and proactive in alerting corporate buyers that the coverage is indeed available if they want it, as well as exactly how much it will cost.

Basically, insurers are expected to have two separate “clear and conspicuous” disclosures as to the premium being proposed for terrorism coverage, as well as Washington's share of exposure should a terrorist claim arise. Insurers will have fulfilled their obligation if the disclosure appears on the declarations page, elsewhere in the policy, or in any rider or endorsement. (For more details, see Treasurys Web site at www.treas.gov/trip.)

The Treasury Department wants insurers to disclose this information no later than when coverage is first formally offered to a new policyholder, or when an existing insured is offered a renewal. In step two, when the transaction is completed, an insurer must refer back to the original disclosure as a reminder.

Insurers must be particularly careful to meet the disclosure standards, or else risk a lawsuit by a policyholder who claims not to have been aware of their terrorism coverage options. Agents and brokers must be front and center as well to make certain insurers are forthcoming about terrorism, or face errors and omissions exposures.

In the end, however, the true test will come when we see whether terrorism coverage is actually affordable under the new law, and whether insurers can actuarially justify whatever they end up charging.

We have a feeling Congress will not stand idly by if insurers meet the letter of the new law by meeting all disclosure standards, but fail to fulfill its spirit by making terrorism coverage widely unaffordable.

Reproduced from National Underwriter Edition, February 3, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.

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