"The insurance industry was able to absorb the losses from the September 11th attacks, but until now, future attacks raised the prospect of bankruptcy," says Tom Player, chairman of Morris, Manning & Martin's Insurance & Reinsurance Group. "This act establishes a federal backstop which allows the insurance industry to provide needed terrorism coverage while maintaining financial solvency."
"The Secretary of the Treasury is granted substantial authority to exercise discretion over the implementation of this program," adds Robert "Skip" Myers, head of Morris, Manning & Martin's Washington, D.C. office. "This could have a substantial impact on the business of insurance."
The law, which will take effect as soon as President George W. Bush signs the bill, is effective through the end of 2005. It establishes a Terrorism Insurance Program within the Treasury Department, which provides government backing for insurers if the country sustains another serious loss from an attack by foreign terrorists.
Insurers will be required to offer terrorism coverage, and the federal government will act as a backstop for severe losses. The provisions will be invoked only if the treasury secretary, attorney general and secretary of state declare an act of terrorism has taken place.
Once an attack is certified as terrorism, insurers must pay losses up to an amount based on each insurer's premiums earned the previous year. The federal government pays 90 percent of losses above the deductible, and the insurer pays the other 10 percent.
If the terrorism takes place after the president signs the bill, but before 2002 ends, insurers have a deductible equal to 1 percent of their direct earned premiums. Next year the deductible would be 7 percent, rising to 15 percent for the following year. Losses paid above the deductible would be capped at $100 billion a year, unless Congress authorizes a higher amount.
Following a loss, insurers must collect a surcharge on future property and casualty premiums to assist the government to recoup part of its payout. The insurance industry retains a limit of $10 billion in risk the first year, $12.5 billion the second year, and $15 billion in the third.
Property and casualty insurers must participate for the first two years of the program, and possibly a third. The secretary of state could extend the act to cover life insurance if needed.
Insurance-related torts resulting from terrorism would be handled in federal court. The program does not cover punitive damages.
For more information about the Terrorism Risk Insurance Act of 2002, contact Tom Player, chairman of Morris, Manning & Martin's Insurance & Reinsurance Group at (404) 233-7000.