On November 26, 2002, President Bush signed into law the Terrorism Risk Insurance Act of 2002 (the "Act"). The Act, which took immediate effect, served as a financial backstop, enabling commercial insurers to provide affordable terrorism coverage to policyholders. It was scheduled to terminate in 2005, unless it was extended. In 2015, President Obama signed the Terrorism Risk Insurance Program Reauthorization Act of 2015 to extend the Terrorism Insurance Program and to revise the requirements of the program. The following is a summary of the orginal Act's key features and notations about any revisions from the 2015 Act.
The Act renders all existing policy terrorism exclusions null and void, and requires all property and casualty insurers to offer policyholders terrorism insurance for two years (which, at the Treasury Secretary's discretion, may be extended an additional year). The terrorism coverage offered must not "materially differ from the terms, amounts, and other coverage limitations applicable to losses arising from events other than acts of terrorism." When offered, the terrorism coverage premium and the existence of the federal backstop must be clearly and conspicuously disclosed to policyholders. Act, §§103 & 105.
The Act does not provide coverage pricing guidelines. States, however, can invalidate any rates determined to be excessive, inadequate or unfairly discriminatory. Act, § 106. Policyholders can decline the offered terrorism coverage. For an insurer to reinstate any terrorism exclusions, however, the insured must sign an authorization or decline to pay (within 30 days) the terrorism coverage premium. Act, § 105.
The Act establishes a program within the Treasury Department, under which the Federal government shares the risk of loss from future foreign terrorist attacks. If an act, certified to be a foreign act of terrorism by the Treasury Department and now after 2015 in conjunction with Secretary of Homeland Security, causes losses in excess of $5 million, participating insurers pay a certain amount in claims - a deductible - before Federal assistance becomes available. For losses above the deductible, the government covers 90%, while the insurer contributes 10%. Losses covered by the program are capped at $100 billion, and the program permits the government to recoup the amounts paid by virtue of a surcharge on all policyholders. The Act does not apply to last year's terrorist attacks (which generated approximately $40 billion in insured claims), and it terminates on December 31, 2005. Act, § 103. The act has been extended until 2020.
Participating Insurers
All insurers who provide property or casualty insurance are required to participate in the program. Act, § 103(a). The Act broadly defines "Insurer" as (but not limited to) licensed insurers; non-licensed insurers; surplus line carriers listed on the Quarterly Listing of Alien Insurers of the NAIC; insurers approved to offer commercial or casualty insurance by a federal agency that regulates maritime, energy or aviation activity; a state residual market insurance entity or a state workers' compensation fund; any insurer that meets reasonable criteria set forth by the Treasury Secretary; and any other insurer that receives premiums for commercial property or casualty insurance coverage. Act, § 102. If the Treasury Secretary determines it appropriate before any triggering foreign terrorist event, the Act also can be applied to captive insurers and other self-insurance arrangements. Act, § 103(f).
Covered Losses
The Act applies only to foreign acts of terrorism, resulting in covered property damage within the United States (and to damage outside the United States if to an air carrier or flag vessel or on the premises of a United States mission). The Act also applies only to acts perpetrated on behalf of a foreign person or interest as part of an effort to coerce United States citizens or influence the United States' policies. Terrorism committed during war generally is not covered by the Act. Act, §§ 102 & 103.
The Act does not eliminate all potential terrorism exclusions to coverage. Exclusions for losses to property outside the United States are expected to remain in force, as are exclusions for losses arising from civil commotion, domestic terrorism, vandalism and riots. See Act, §§ 102 & 103.
Deductibles
Before federal assistance is available, participating insurers must pay a deductible. During the "Transition Period" (i.e., from November 26, 2002 to December 31, 2002), the deductible is one percent of the value of the insurer's directly earned premiums during the year preceding the Act's enactment. During 2003, the deductible is seven percent of the insurer's directly earned premiums for the preceding year; it rises to ten percent during 2004. In 2005 (if the program is extended), the deductible is fifteen percent of the insurer's directly earned premiums during the preceding year. Act, § 102. In 2015, the deductible was set at 20%.
Coverage Limits
The aggregate industry insured losses resulting from certified acts of terror which will, beginning calendar years 2015-2019, trigger the federal share of compensation under the Program as: (1) $100 million for 2015; (2) $120 million for 2016; (3) $140 million for 2017; (4) $160 million for 2018, (5) $180 million for 2019; and (6) $200 million for 2020 and thereafter. 2015 Act § 103.
Retentions and Recoupments
The formula for determining the insurance marketplace aggregate retention amount (recoupment threshold) is the lesser of $27.5 billion, or the aggregate amount for all insurers, of insured losses during the calendar year. The 2015 Act requires annual increases of $2 billion until $27.5 billion becomes $37.5 billion. Prescribes a formula for further revisions of the threshold for years after it becomes $37.5 billion.. 2015 Act § 104.
The 2015 Act repealed the declaration "that there shall be no mandatory recoupment." Any mandatory recoupment amount for a terrorism loss risk-spreading premium (surcharge) collected for repayment of federal financial assistance is increased from 133% to 140%. 2015 Act § 104.
Commercial property and casualty insurers will collect (by policyholder surcharge) the mandatory and discretionary recoupments and remit them to the federal government. Surcharges cannot exceed three percent of any policy's annual premium. The Treasury Secretary, however, has discretion to make certain adjustments to the surcharge and its timing. Act, § 103(e).
State Law
The Act does not impact state insurance law except (1) to establish the definition of terrorism, and (2) to make terrorism coverage (and the forms and rates for it) effective without prior state approval or waiting period (until December 31, 2003). States, however, can invalidate any rates set as excessive, inadequate or unfairly discriminatory. Act, § 106.
The Act provides a federal cause of action -- generally governed by the substantive law of the state where the act of terrorism occurred -- as the exclusive remedy for claims arising out of or resulting from a terrorism act. The Judicial Panel on Multidistrict Litigation shall assign all claims to a single federal district court (or multiple district courts, if necessary), which has exclusive jurisdiction over them. Act, § 107.
Other Provisions
The Act applies only during the effective period of the program. It does not limit the liability of any government, organization or person who participated, conspired, aids and abets or commits an act of terrorism. It does not modify policyholders' and insurers' contractual rights, such as the right to arbitration. It also does not abrogate any provision of the Air Transportation Safety and System Stabilization Act. The Act excludes punitive damages from the calculation of insured losses.
Conclusion
The Act was designed (among other things) to ensure reasonable and predictably-priced terrorism coverage. By providing a temporary federal backstop, the government seeks to encourage insurers to offer affordable coverage for the unprecedented financial risks posed by foreign acts of terrorism. The Act simply requires participating insurers to make terrorism coverage available that "does not differ materially from the terms, amounts and other coverage limitations applicable to losses arising from events other than acts of terrorism." See Act, § 103(c). Policyholders must remain mindful of all policy terms, conditions and exclusions, as well as developments in implementation of the Act to meaningfully assess their insurance programs and future needs as they relate to terrorism coverage.