Insurance Coverage
DECEMBER 2002
Terrorism Risk Insurance Act of 2002
On November 26, 2002, President Bush signed into
law the Terrorism Risk Insurance Act of 2002, which
requires that all commercial property and casualty
insurers offer terrorism coverage and also provides a
federal backstop for these insurers in the event of a
future terrorist strike. Coverage for terrorism had
been routinely provided until the September 11
terrorist attacks caused the insurance industry losses
reported to be more than $40 billion and prompted
insurers to withdraw terrorism coverage and seek
federal assistance. For over a year since the attacks,
insurers and businesses have sought, and lawmakers
have worked to craft, legislation providing a shortterm federal terrorism insurance program to address
the lack of terrorism insurance and related economic
considerations.
The Act establishes a federal Terrorism Insurance
Program, to be administered by the Secretary of the
Treasury, which:
■
requires that insurers make available to their
policyholders coverage for losses from acts of
terrorism;
■
temporarily nullifies terrorism exclusions in
existing property and casualty insurance policies;
■
requires that insurers disclose to policyholders
the premium charged for terrorism risk insurance;
and
■
allocates to the federal government a large share
of loss resulting from any future terrorist attacks.
This Alert highlights some of the significant
provisions of the Act and identifies a number of
issues raised by the Act.
HIGHLIGHTS OF THE ACT
Insurers Must Offer Terrorism Coverage. The Act
establishes a three-year Terrorism Insurance Program,
which requires that, effective November 26, 2002 and
continuing during the first two years of the program,
all commercial property and casualty insurers shall
make available insurance coverage for “insured
losses” resulting from an “act of terrorism” as
defined in the Act. See Sec. 103(c)(B). During this
two-year period, the required coverage must “not
differ materially from the terms, amounts, and other
coverage limitations applicable to losses arising from
events other than acts of terrorism.” Id. In addition,
the insurer must process claims consistent with its
usual business practices and any reasonable
procedures established by the Secretary of the
Treasury, which administers the Program. See Sec.
103(2)(b)(3). The Secretary of the Treasury has
discretionary authority to extend these requirements
into the third year of the program. See Sec. 103(c)(2).
Definitions Of “Insured Loss” And “Act Of
Terrorism.” The Act defines “insured loss” as any
loss resulting from an “act of terrorism” occurring
either within the United States or to certain U.S.
aircraft, vessels or diplomatic missions:
Kirkpatrick & Lockhart LLP
[A]ny loss resulting from an act of terrorism
(including an act of war, in the case of workers’
compensation) that is covered by primary or excess
property and casualty insurance issued by an insurer
if such loss— (A) occurs within the United States; or
(B) occurs to an air carrier (as defined in section
40102 of title 49, United States Code), to a United
States flag vessel (or a vessel based principally in the
United States, on which United States income tax is
paid and whose insurance coverage is subject to
regulation in the United States) regardless of where
the loss occurs, or at the premises of any United
States mission.
Sec. 102(5).
The Act defines an “act of terrorism” as any
particular action that is certified by the Secretary of
the Treasury, in concurrence with the U.S. Secretary
of State and the U.S. Attorney General, to meet the
following criteria:
(ii) property and casualty insurance losses resulting
from the act, in the aggregate, do not exceed
$5,000,000.
Sec. 101(1)(B).
The Act specifies that the determinations may not be
delegated, are final, and are not subject to judicial
review. See Sec. 102(1)(C), (D).
Nullification Of Existing Terrorism Exclusions.
Effective November 26, 2002, the Act provides for
nullification of existing contractual provisions to the
extent these provisions purport to exclude losses that
would otherwise be “insured losses” as defined in
the Act. See Sec. 105(a) (“Any terrorism exclusion in
a contract for property and casualty insurance that is
in force on the date of enactment of this Act shall be
void to the extent that it excludes losses that would
otherwise be insured losses.”).
(i) to be an act of terrorism;
(ii) to be a violent act or an act that is dangerous
to—
(I) human life;
(II) property; or
(III) infrastructure;
(iii) to have resulted in damage within the United
States, or outside of the United States in the case
of—
(I) an air carrier or vessel described in
paragraph (5)(B) [this section refers “to an air
carrier (as defined in section 40102 of title 49,
United States Code)” and “to a United States flag
vessel (or a vessel based principally in the United
States, on which United States income tax is paid
and whose insurance coverage is subject to
regulation in the United States)”]; or
(II) the premises of a United States mission;
and
(iv) to have been committed by an individual or
individuals acting on behalf of any foreign person
or foreign interest, as part of an effort to coerce
the civilian population of the United States or to
influence the policy or affect the conduct of the
United States Government by coercion.
Sec. 102(1)(A).
The Act further provides that the Secretary shall not
certify a particular action as an “act of terrorism” if:
(i) the act is committed as part of the course of a war
declared by the Congress, except that this clause
shall not apply with respect to any coverage for
workers’ compensation; or
2
However, the Act allows insurers to reinstate
exclusions if the insurer complies with specific notice
and disclosure requirements, which are summarized
below.
Insurer Disclosure Requirements. Within 90 days
of the Act’s enactment, participating insurers must
provide “clear and conspicuous disclosure” to the
policyholder of: (1) the additional, prospective
premium charges for the terrorism coverage required
to be offered to the policyholder under the Act, and
(2) the existence of a federal program that will provide
a significant share of compensation for “insured
losses” under the program. See Sec. 103(2).
■
Existing Policies. Section 105(c) of the Act
provides that an insurer may reinstate terrorism
exclusions that are in force on the date of
enactment by providing a policyholder with
written notice that (1) discloses the additional,
prospective premium for providing the terrorism
coverage required by the Act; (2) explains the
rights of the policyholder with respect to the
terrorism coverage required by the Act;
(3) discloses the date that the terrorism exclusion
would be reinstated if the policyholder fails to pay
this additional premium; and (4) otherwise
complies with the disclosure requirements of
Section 103. The notice must give the
KIRKPATRICK & LOCKHART LLP INSURANCE COVERAGE ALERT
policyholder at least 30 days to consider the offer
to purchase terrorism coverage and the related
premium. The Act permits the insurer to reinstate
the exclusion only if a policyholder provides the
insurer with written authorization or the
policyholder fails to pay the additional premium
following proper notice and disclosure from the
insurer.
for any portion of amounts that exceed the $100
billion, provided the insurer has met its deductible
obligations. See Sec. 103(e)(2)(A)(ii).
On November 26, 2002, the National Association of
Insurance Commissioners membership adopted two
model disclosure forms to assist insurers in complying
with the Act’s disclosure requirements.
Preemption Of State Law. The Act provides that it
shall not affect any jurisdiction or regulatory
authority over insurers except as specifically
provided. See Sec. 106. The Act contains the
following significant provisions regarding
preemption:
■
If the federal government reimburses insurers for
“insured losses” during the course of a year, the
Secretary of the Treasury is required to recoup the
difference between the total insurance industry costs
(individual insurers’ losses up to their deductibles,
New And Renewal Business. Although
plus the industry’s 10% cost share above the
nullification of existing contractual language
deductibles) and a fixed dollar retention amount that
presumably will not be an issue with respect to new varies in each year of the program, starting at $10
and renewal business, the Section 103(b)(2)
billion for the first year, increasing to $12.5 billion for
disclosure requirements apply to new and renewal the second year, and increasing to $15 billion for the
business. The insurer must make the required
third year. See Sec. 103(e)(6), (7). There is no
disclosures at the time of offer, purchase, and
mandatory recoupment, however, if uncompensated
renewal of the policy. For policies issued more than “insured losses” exceed the retention amount. Any
90 days following enactment, the disclosures must mandatory recoupment is accomplished through a
be contained on a separate line item in the policy.
policyholder premium surcharge.
All information that policyholders receive from their
insurers concerning the Act should receive prompt
consideration.
Federal Backstop. The Act provides a federal
backstop by reimbursing insurers 90% of “insured
losses.” See Sec. 103(e). Each participating insurer is
responsible for paying a specific amount of insured
losses, essentially a deductible, before this federal
assistance kicks in. This insurer deductible is based
on a percentage of direct earned premiums from the
previous calendar year. The percentage varies in each
year of the program, starting at 7% in the first year,
increasing to 10% in the second year, and increasing
again to 15% in the third year. The Act provides that,
with respect to “insured losses” above the insurer’s
deductible, the federal government will reimburse 90%
of the “insured losses,” while the insurer is
responsible for the remaining 10%.
■
The Act preempts approvals of policy language
related to terrorism exclusions. See Sec. 103.
■
The Act provides that the definition of “acts of
terrorism” contained in Section 102 shall be the
exclusive definition of that term for purposes of
compensation under the Act. See Sec. 106.
■
The Act preempts state causes of action for claims
resulting from an act of terrorism; however, it
preserves the state law as the substantive law that
will be applied to a particular case. See Sec. 106.
December 31, 2005 Termination Date. The Act
provides that the program will terminate on December
31, 2005 and requires a report to Congress to assess
the effectiveness of the program and to evaluate the
insurance industry’s capacity to offer insurance
coverage for acts of terrorism after the program has
Insured losses reimbursable under the program are
capped at $100 billion. See Sec. 103(e)(2)(A). Insurers expired. See Sec. 108.
are not liable to provide policyholders with coverage
DECEMBER 2002
Kirkpatrick & Lockhart LLP
QUESTIONS GOING FORWARD
The Act leaves a number of unanswered questions
for insurers and policyholders. Perhaps most
importantly, the Act does not specify the price of
terrorism insurance, which may remain high. In
addition, it is unclear whether and how the Act may
impact policyholders that negotiated and paid for
terrorism coverage prior to the effective date of the
Act. For instance, policyholders that paid additional
premiums to have exclusions taken out of their
policies prior to the effective date of the Act may
consider seeking a refund or credit against any
additional premium their insurer requests for
coverage required under the Act.
cancelled with a pro rata return of premiums.
Moreover, the scope of terrorism insurance coverage
that insurers are required to offer under the Act is not
clear in certain respects. For example, it is unclear
whether and to what extent policy exclusions, such
as war exclusions or pollution exclusions, may apply
to this coverage.
Finally, it is unclear what type of terrorism coverage
will be available after December 31, 2004, after which
date the Act does not require coverage for insured
losses resulting from acts of terrorism.
ROBERTA D. ANDERSON
randerson@kl.com
412.355.6222
In addition, policyholders that have purchased
stand-alone terrorism coverage will be faced with a
number of questions, such as how the existing standalone coverage compares with the coverage required
under the Act. Because existing stand-alone
coverage may provide broader coverage, a full
comparison of coverages should be undertaken. The
Act, for example, does not address terrorist acts
committed outside of the United States (with limited
exception) or terrorist acts within the United States
that do not involve foreign terrorists. If a
policyholder determines that the coverage required
under the Act is sufficient, there may be issues
regarding whether the stand-alone coverage may be
The Insurance Coverage practice group at Kirkpatrick &
Lockhart Nicholson Graham LLP offers an international
policyholder-oriented practice on behalf of Fortune 500 and
numerous other policyholder clients. Its lawyers have
authored Policyholder’s Guide to the Law of Insurance
Coverage and edited the Journal of Insurance Coverage.
For further information, please consult our website at
www.klng.com.
FOR ADDITIONAL INFORMATION concerning this topic or
K&L’s insurance coverage practice, please consult the K&L
office contacts listed below:
Boston
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Newark
New York
Pittsburgh
San Francisco
Washington
John M. Edwards
Robert Everett Wolin
Raymond P. Pepe
David P. Schack
Daniel A. Casey
Anthony P. La Rocco
Peter J. Kalis
Peter J. Kalis
Edward P. Sangster
Matthew L. Jacobs
617.261.3123
214.939.4909
717.231.5988
310.552.5061
305.539.3324
973.848.4014
212.536.4828
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© 2002 KIRKPATRICK & LOCKHART LLP.
ALL RIGHTS RESERVED.