Nukes, Bio-, Chem-Terror May Get Exclusion: Treasury

The law requires insurance companies to "make available" terrorism insurance coverage to policyholders in a manner that does not differ materially from the terms, amounts and other coverage limitations offered for losses from events other than terrorism.

Treasury said this means that insurers must offer coverage for acts of terrorism at deductibles and limits that do not differ materially from the coverage provided for other perils.

But this does not mean that insurance companies must make coverage available for all types of risks, Treasury said.

An insurer that does not cover all types of risks, either because it is outside of direct state regulatory oversight or because the state permits exclusions, is not required to make terrorism coverage available.

This appears to mean that losses from nuclear, biological or chemical events, occurring in a state that permits exclusions, might not be covered by terrorism insurance.

But several industry sources who attended technical briefings with Treasury Department officials told National Underwriter that they were told the language will likely be clarified when the department drafts a formal rule.

The intent, said Julie Gackenbach, assistant vice president with the Des Plaines, Ill.-based National Association of Independent Insurers, is to assure that insurance companies that do not normally write NBC in states where an exclusion is allowed will not be forced to do so now.

Gary Karr, a representative of the Washington-based American Insurance Association, added that part of the intent of the legislation is to return the insurance market as close as possible to where it was prior to the Sept. 11 attacks.

Exclusions that existed before Sept. 11 will still be in effect, he said.

But David Farmer, senior vice president of federal affairs for the Downers Grove, Ill.-based Alliance of American Insurers, said this discussion is hypothetical. Each event is unique, he said, and it is difficult to know before the fact which claims will and will not be covered.

Turning to the disclosure notices, Treasury said that the model disclosure forms recently issued by the Kansas City, Mo.-based National Association of Insurance Commissioners, can be relied on by insurance companies as meeting the disclosure requirement.

The law requires insurance companies to disclose the premium charged for insured losses covered by the federal reinsurance program and the federal governments share of compensation.

However, Treasury said, while the NAIC forms represent a "safe harbor" for insurers, they are not the exclusive means to satisfy the disclosure requirement.

Treasury did not provide any information on other means to satisfy the disclosure requirement, saying only that the NAIC forms can be relied upon until regulations or further guidance is issued.

Treasury added that insurance companies may comply with the disclosure requirement through an agent or broker, but the responsibility for ensuring the disclosure is provided to the policyholder remains with the insurance company.

As for the actuarial soundness of the premium calculation, NAIC President Terri Vaughan, the Iowa commissioner, noted that insurance companies are working on the issue and the effort will be evolving.

Calculating a rate for terrorism insurance, Ms. Vaughan said, is not like calculating a rate for auto insurance, which has a long history.

But the legislation requires a premium disclosure, and it will be a challenge for both the industry and regulators to figure out a way to do it, she said.

Treasury said that during the course of the program, it will be monitoring the pricing and availability of terrorism insurance coverage, as mandated by the legislation, and compiling information on the premium rates of insurers.

Peter R. Fisher, Treasury Under Secretary for Domestic Finance, said that the next step for Treasury is to draft regulations based on the interim guidance.

In addition, he said at a press briefing, Treasury will provide guidance or regulations on other aspects of the program, including how it applies to the law of captive insurers and other self-insurance arrangements.

Treasury is also immediately initiating the mandated study assessing the effectiveness of the program and the likely capacity of property-casualty insurers to offer insurance for terrorism risk after the program is terminated.

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, December 8, 2002. Copyright 2002 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.