Insurers Counseled On Terror Act Ambiguities

If the private sector cannot find a way to spread terrorism risk before the federal insurance program sunsets, Mr. Campbell said, the industry will be right back to where it was on Sept. 12, 2001, where no one had a risk-spreading mechanism. That, he said, would be the "ultimate failure for everyone."

Under the legislation, insurance companies must offer commercial insureds terrorism coverage, disclose the existence of a federal government backstop, and identify separately the premium charged for terrorism coverage.

Insurance companies must demonstrate compliance with these requirements before their claims filed with the federal government can be certified. However, there are few specifics, either in the legislation or in the recently released interim guidelines from the Treasury Department, about how to comply.

Without specifics, Mr. Campbell said, insurance companies must be able to demonstrate they did the best they could to try and implement the legislations underlying principles. If companies are guided by these underlying principles, he said, it will make the disclosure obligation more manageable.

Jason Schupp, assistant general counsel with the Schaumberg, Ill.-based Zurich North America, added that in releasing its guidelines, Treasury spoke also in terms of principles. In fact, Treasury noted that its guidelines are not the only means of compliance with the legislations requirements, Mr. Schupp said.

Basically, he said, the communication to policyholders must be clear and explain what the Terrorism Risk Insurance Program is about. Essentially, Mr. Schupp said, it is an educational issue.

And educating policyholders also means that insurance companies will have to communicate with their producers, he said.

In order to certify claims filed with the federal government, Mr. Schupp added, the issue is not sending notices but proving that notices were sent. He added that it may not be necessary to match every claim with a piece of paper demonstrating compliance. Rather, Treasury may be satisfied if the insurance company can demonstrate a thorough compliance process.

Turning to the role of the states, Nat Shapo, the Illinois Insurance Commissioner at the time of the conference, noted that many observers say the terrorism insurance program is a test of state regulation. The question, he said, is whether the states will pass the test.

He said he believes the states will pass, in part, and fail, in part.

States will pass, Mr. Shapo said, in that they will work diligently to implement the program. But they will fail the test in some ways because the leeway allowed to states in the legislation assures that there will not be 100 percent uniformity.

Where federal legislation allows discretion, and where there are no specific requirements, history shows there will be state variations, Mr. Shapo said.

There will be a good faith effort at uniformity, he said. But there will always be political obstacles in some states to achieving uniformity, whether due to a philosophy of individuality or specific local concerns.

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, January 27, 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.