House Passes Terrorism Backstop Bill

Final approval of the oft-delayed legislation would be the culmination of a year-long effort by the Bush administration, the insurance industry and the construction industry to shore up a market, particularly for high-profile properties, which they say was shattered by the Sept. 11, 2001, terrorist attacks.

Consumer groups, such as the Washington-based Consumer Federation of America, however, continue to blast the legislation, calling it a taxpayer-financed giveaway to the insurance industry.

Sources told National Underwriter that the breakthrough came following a "full-court press" by President Bush, who personally lobbied some Republican leaders who remain unhappy with the liability provisions of the bill.

The measure they feel is unfair to businesses in failing to give them enough protection against lawsuits related to a terrorist attack.

Indeed, House Majority Whip Tom DeLay, R-Texas, who will be Majority Leader in the next Congress, promised to seek far tougher liability standards next year.

The primary concern is that American businesses that are hit by a terrorist attack could be held liable for punitive damages for negligence that caused death or injuries.

But despite the controversy over punitive damages, most Republicans hailed the legislation.

The legislation will provide for 300,000 jobs, boost construction and stimulate the economy while ensuring the availability and affordability of terrorism insurance, said House Financial Services Committee Chairman Mike Oxley, R-Ohio.

"It increases national preparedness against terrorism and puts Americans back to work on vital construction and development projects," he said in a statement.

All major insurance trade groups, representing both agents and companies, support the legislation.

Under the bill, the federal backstop would come into effect when the Treasury Secretary, in consultation with the Secretary of State and the Attorney General, certifies that a terrorist attack has occurred causing at least $5 million of insured losses.

The program would cover all commercial property-casualty lines, including workers' compensation and business interruption. For workers' compensation only, the program would cover both terrorism and war.

The Treasury Secretary is empowered to extend the program to group life without the need for additional legislation, if a mandated study identifies a need.

Separately, Treasury will study the need for a terrorism backstop for other lines, including individual life and personal lines, but the Secretary would not have authority to extend the program to these lines by regulation.

Insurance companies would not qualify for federal assistance unless they suffer losses above a deductible, which is based on a percentage of direct written premiums for commercial U.S. risks.

The deductibles are 7 percent in 2003, 10 percent in 2004, and 15 percent in 2005.

Thus, if an attack occurs in 2004, an insurer with $1 billion in direct premiums would have to pay the first $100 million in losses before the federal backstop would apply.

At that point, the federal government would pay 90 percent of insured losses, while the insurer would remain responsible for 10 percent.

The program is capped at $100 billion. For losses beyond that, Congress would again have to step in and determine how to respond.

The industry would have to repay the government for any assistance up to $10 billion in 2003, $12.5 billion in 2004 and $15 billion in 2005.

This would be accomplished by a surcharge on commercial policyholders of up to 3 percent of premium.

However, Treasury has discretion over the timing of the repayment.

The legislation also contains a variety of consumer protections. These include a requirement that insurance companies disclose the premiums they charge for terrorism insurance and the existence of a federal backstop.

In addition, insurers must submit premium and claim information to Treasury, which is authorized to investigate and audit all claims.

As for state regulation, prior approval rate and form regulations are temporarily preempted to allow insurance companies to make the changes necessary to implement the federal program.

After the preemption period, state authority, including rate and form regulation, is preserved.

Once the legislation is approved, the Treasury Department will have to engage in formal rulemaking to clarify how some of the provisions, such as the disclosure requirements, will work.

Details were not immediately available regarding a timetable for Treasury rulemaking.