[Federal Register Volume 68, Number 40 (Friday, February 28, 2003)]
[Rules and Regulations]
[Pages 9804-9814]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-4831]



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Part V





Department of the Treasury





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31 CFR Part 50



Departmental Offices; Terrorism Risk Insurance Program; Interim Final 
Rule and Proposed Rule

  Federal Register / Vol. 68, No. 40 / Friday, February 28, 2003 / 
Rules and Regulations  

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DEPARTMENT OF THE TREASURY

31 CFR Part 50

RIN 1505-AA96


Departmental Offices; Terrorism Risk Insurance Program

AGENCY: Departmental Offices, Treasury.

ACTION: Interim final rule with request for comments.

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SUMMARY: The Department of the Treasury (Treasury) is issuing this 
interim final rule as part of its implementation of Title I of the 
Terrorism Risk Insurance Act of 2002 (Act). That Act established a 
temporary Terrorism Risk Insurance Program (Program) under which the 
Federal Government will share the risk of insured loss from certified 
acts of terrorism with commercial property and casualty insurers until 
the Program sunsets on December 31, 2005. This interim final rule sets 
forth the purpose and scope of the Program and key definitions that 
Treasury will use in implementing the Program. In general, this interim 
final rule incorporates interim guidance previously issued by Treasury 
concerning these definitions. However, the preamble indicates those 
areas in which Treasury has modified the interim guidance. This interim 
final rule is the first of a series of regulations Treasury will issue 
to implement the Program.

DATES: This interim rule is effective February 28, 2003. Written 
comments on this interim final rule may be submitted to the Treasury 
Department on or before March 31, 2003.

ADDRESSES: Submit comments (if hard copy, preferably an original and 
two copies) to Office of Financial Institutions Policy, Attention: 
Terrorism Risk Insurance Program Public Comment Record, Room 3160 
Annex, Department of the Treasury, 1500 Pennsylvania Ave., NW., 
Washington, DC 20220. Because paper mail in the Washington, DC area may 
be subject to delay, it is recommended that comments be submitted by 
electronic mail to: [email protected]. Please include your 
name, affiliation, address, e-mail address and telephone number in your 
comment. All comments should be captioned with ``February 28, 2003 TRIA 
Comments.'' Comments will be available for public inspection by 
appointment only at the Reading Room of the Treasury Library. To make 
appointments, call (202) 622-0990 (not a toll-free number).

FOR FURTHER INFORMATION CONTACT: Mario Ugoletti, Deputy Director, 
Office of Financial Institutions Policy (202) 622-2730 or Martha 
Ellett, Attorney-Advisor, Office of the Assistant General Counsel 
(Banking & Finance), (202) 622-0480 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

I. Background

A. Terrorism Risk Insurance Act of 2002

    On November 26, 2002, President Bush signed into law the Terrorism 
Risk Insurance Act of 2002 (Public Law 107-297, 116 Stat. 2322). The 
Act was effective immediately. Title I of the Act establishes a 
temporary federal program of shared public and private compensation for 
insured commercial property and casualty losses resulting from an act 
of terrorism as defined in the Act and certified by the Secretary of 
the Treasury, in concurrence with the Secretary of State and the 
Attorney General. The Act authorizes Treasury to administer and 
implement the Terrorism Risk Insurance Program, including the issuance 
of regulations and procedures. The Program will sunset on December 31, 
2005.
    The Act's purposes are to address market disruptions, ensure the 
continued widespread availability and affordability of commercial 
property and casualty insurance for terrorism risk and to allow for a 
transition period for the private markets to stabilize and build 
capacity while preserving State insurance regulation and consumer 
protections.
    The amount of Federal payment for an insured loss resulting from an 
act of terrorism is to be determined based upon the insurance company 
deductibles and excess loss sharing with the Federal Government, as 
specified by the Act. Thus, the Program provides a Federal reinsurance 
backstop for a temporary period of time. The Act also provides Treasury 
with authority to recoup Federal payments made under the Program 
through policyholder surcharges, up to a maximum annual limit.
    Each entity that meets the definition of ``insurer''(well over 
2,000 firms) must participate in the Program. From the date of 
enactment of the Act through the last day of Program Year 2 (December 
31, 2004), insurers under the Program must ``make available'' terrorism 
risk insurance in their commercial property and casualty insurance 
policies and the coverage must not differ materially from the terms, 
amounts and other coverage limitations applicable to commercial 
property and casualty losses arising from events other than acts of 
terrorism. The Act permits Treasury to extend the ``make available'' 
requirement into Program Year 3, based on an analysis of factors 
referenced in the study required by section 108(d)(1) of the Act, and 
not later than September 1, 2004.
    An insurer's deductible increases each year of the Program, thereby 
reducing the Federal government's involvement prior to sunset of the 
Program. An insurer's deductible is based on ``direct earned premiums'' 
over a statutory Transition Period and the three Program Years. Once an 
insurer has met its deductible, the Federal payments cover 90 percent 
of insured losses above the deductible, subject to an aggregate annual 
cap of $100 billion. The Act prohibits duplicative payments for insured 
losses that have been covered under any other Federal program.
    As conditions for Federal payment under the Program, insurers must 
provide clear and conspicuous disclosure to the policyholders of the 
premium charged for insured losses covered by the Program, and must 
submit a claim and certain certifications to Treasury. Treasury will be 
prescribing claims procedures at a later date.
    The Act also contains specific provisions designed to manage 
litigation arising from or relating to a certified act of terrorism. 
Section 107 creates an exclusive Federal cause of action, provides for 
claims consolidation in Federal court and contains a prohibition on 
Federal payments for punitive damages under the Program. This section 
also provides the United States with the right of subrogation with 
respect to any payment or claim paid by the United States under the 
Program.

B. Previously Issued Interim Guidance

    To assist insurers, policyholders and other interested parties in 
complying with immediately applicable and time sensitive requirements 
of the Act prior to the issuance of these and future regulations, 
Treasury issued interim guidance in three separate notices. Treasury 
publicly released these interim guidance notices on its Program Web 
site, http://www.treasury.gov/trip, and published each notice in the 
Federal Register.
    Treasury released the first notice of Interim Guidance on December 
3, 2002, within a week of the Act's enactment (Interim Guidance I). 
Interim Guidance I was published at 67 FR 76206 on December 11, 2002 
and addressed several issues pertaining to immediately applicable 
provisions of the Act, including statutory disclosure obligations of 
insurers as conditions for Federal payment under the Program and the 
requirement that an insurer ``make

[[Page 9805]]

available'' terrorism risk insurance. The disclosure guidance in 
Interim Guidance I references certain model forms of the National 
Association of Insurance Commissioners (NAIC) and provides safe harbor 
for those insurers that make use of such forms prior to the issuance of 
regulations, but Interim Guidance I stated that these forms are not the 
exclusive means by which insurers could comply with the disclosure 
conditions prior to the issuance of regulations. Interim Guidance I 
also provided guidance concerning the ``direct earned premium'' on 
lines of property and casualty insurance to enable insurers to 
calculate their ``insurer deductible'' and enable insurers to price and 
disclose their premiums for terrorism risk insurance to policyholders 
within statutory time periods.
    On December 18, 2002, Treasury issued a second notice of interim 
guidance. This interim guidance was published at 67 FR 78864 on 
December 26, 2002 (Interim Guidance II). Interim Guidance II further 
addressed the statutory categories of ``insurers'' that are required to 
participate in the Program, including their ``affiliates''; provided 
clarification on the scope of ``insured loss'' covered by the Program 
and provided additional guidance to enable eligible surplus line 
carriers listed on the Quarterly Listing of Alien Insurers of the NAIC 
or federally approved insurers to calculate their insurer deductible 
for purposes of the Program.
    On January 22, 2003, Treasury issued a third notice of interim 
guidance, published at 68 FR 4544 on January 29, 2003 (Interim Guidance 
III). Interim Guidance III further clarified certain disclosure and 
certification questions, issues for non-U.S. insurers, and the scope of 
the term ``insured loss'' under the Act.
    In issuing each notice of Interim Guidance, Treasury stated that 
the Interim Guidance may be relied upon by insurers until superseded by 
regulations or a subsequent notice. Treasury provided safe harbors for 
actions by those insurers taken in accordance with, and in reliance on, 
the interim guidance for the time period prior to the issuance of 
regulations. Treasury now is issuing an interim final rule with request 
for comment. The interim final rule addresses certain general Program 
provisions and Program definitions. Treasury is also issuing a 
companion proposed rule with request for comment.

II. Analysis of the Interim Final Rule

    The interim final rule establishes a new Part 50 in Title 31 of the 
Code of Federal Regulations, 31 CFR Part 50. Part 50 eventually will 
include other regulations deemed necessary by Treasury to implement the 
Program. Subpart A of new Part 50 contains certain general provisions 
and definitions of Program terms.
    Some of the definitions are taken virtually verbatim from the Act 
because they do not need further clarification and are included in the 
interim final regulations primarily for ease of reference. In addition, 
the interim final rule generally incorporates the interim guidance 
provided previously by Treasury as it pertains to Program terms, for 
example, the terms ``insurer,'' ``affiliate'', ``property and casualty 
insurance'' and ``direct earned premium.'' In several areas, the 
interim final regulation makes clarifying modifications to, or 
supplements, the interim guidance. For example, the interim final rule 
clarifies and emphasizes that the Program covers only commercial lines 
of property and casualty insurance, subject to the inclusions and 
exclusions of certain lines of insurance as set forth in the definition 
of property and casualty insurance in section 102(12) of the Act. The 
Program does not cover personal lines of property and casualty 
insurance, even if the latter are reported by an insurer on the NAIC's 
Exhibit of Premiums and Losses (commonly known as Statutory Page 14).
    In implementing the Program, Treasury has been guided by several 
goals. First, we strive to implement the Act in a transparent and 
effective manner that, for example, treats comparably those insurers 
required to participate in the Program and that provides necessary 
information to policyholders in a useful and efficient manner. Second, 
Treasury seeks to rely as much as possible on the State insurance 
regulatory structure. In that regard, Treasury is closely coordinating 
with the NAIC in implementing definitions and other aspects of the 
Program. Third, to the extent possible within statutory constraints, 
Treasury seeks to allow insurers to participate in the Program in a 
manner consistent with their normal course of business. Finally, given 
the temporary and transitional nature of the Program, Treasury is 
guided by the Act's goal for insurers to develop their own capacity, 
resources and mechanisms for terrorism risk insurance coverage when the 
Program expires.
    Key Program definitions contained in the interim final regulation 
are analyzed below.

A. What is an ``Act of Terrorism'' Under the Program?

    The Program definition of ``act of terrorism'' in the interim final 
rule is the same definition that is contained in section 102(1) of the 
Act. Section 106(a)(2) of the Act provides that the Act's definition is 
the exclusive definition of the term ``act of terrorism'' for purposes 
of compensation for insured losses under the Act. The Act's definition 
requires a certification by the Treasury Secretary, in concurrence with 
the Secretary of State and the Attorney General of the United States, 
that an act is an act of terrorism within the statutory parameters. 
These parameters include an act that is violent or dangerous to human 
life, property or infrastructure; that has resulted in damage within 
the United States, or outside the United States in the case of certain 
air carriers or vessels or if on the premises of a U.S. mission; and 
that has been committed by individual(s) on behalf of any foreign 
person or foreign interest, as part of an effort to coerce the U.S. 
civilian population or to influence the policy or affect the conduct of 
the U.S. government by coercion.
    Thus, for example, acts of domestic civil disturbance would not be 
covered by the Act's definition of ``act of terrorism'' or therefore, 
by the Program. As in the Act, the interim final rule provides that the 
Secretary's determination or certification with regard to an act is 
final and is not subject to judicial review. An act of terrorism must 
meet a $5,000,000 de minimis aggregate loss requirement before it may 
be certified. The Act also provides that an act is not certifiable if 
committed as part of a course of war declared by Congress, except with 
respect to workers compensation coverage.

B. What Entities Must Participate in the Program (``Affiliate'', 
``Control'', ``Insurer'')?

1. Mandatory Participation of Insurers
    The general provisions of the interim final rule incorporate the 
Act's requirement in section 103(a)(3) that each entity meeting the 
definition of ``insurer'' under the Act must participate in the 
Program.
2. ``Insurer''
    The interim final rule incorporates the statutory definition of 
``insurer'' and generally incorporates the guidance set forth in 
Interim Guidance II concerning

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the categories of insurer and the definition of affiliate. To 
participate in the Program, an entity, including an affiliate of an 
insurer, must itself meet all of the requirements of section 102(6)(A), 
(B) and, as the Treasury may prescribe, (C). This means that to be an 
insurer, an entity must (1) fall within one of the categories in 
section 102(6)(A) described below, and (2) must receive direct earned 
premiums as required by section 102(6)(B) and (3) must meet any 
additional criteria established by Treasury pursuant to section 
102(6)(C).
    a. Must Fall Within a Category of Insurers in Section 102(6)(A)
    First, an insurer must fall within at least one of the following 
several categories set forth in section 102(6)(A):
    (i) Licensed or admitted to engage in the business of providing 
primary or excess insurance in any State (``State'' includes the 
District of Columbia and territories of the United States);
    (ii) Not so licensed or admitted, but is an eligible surplus line 
carrier listed on the Quarterly Listing of Alien Insurers of the 
National Association of Insurance Commissioners;
    (iii) Approved for the purpose of offering property and casualty 
insurance by a Federal agency in connection with maritime, energy or 
aviation activity; or
    (iv) A State residual market insurance entity or State workers' 
compensation fund.
    Consistent with Interim Guidance II, the interim final rule 
provides that an entity that falls within two categories will be 
considered by Treasury to fall within the first category it meets under 
section 102(6)(A)(i)-(v). Therefore, if an entity is a federally 
approved insurer under section 102(6)(A)(iii) and is licensed or 
admitted in any State, it will be treated under the Program as a State 
licensed or admitted insurer under section 102(6)(A)(i).
    In each of the categories of insurer in section 102(6)(A)(i)-(iv), 
the insurer has a pre-existing State or NAIC regulatory framework, or 
has a relationship with a Federal or State program. In developing this 
interim final rule, Treasury considers such a nexus between an insurer 
and a Federal or State program or regulatory authority to be extremely 
important to the effective and efficient administration of the Program. 
A pre-existing nexus between an insurer and a regulatory structure, for 
example, assists Treasury in ensuring the financial integrity of 
participating entities, in obtaining necessary data to implement and 
evaluate the Program and in carrying out Treasury's surcharge and 
recoupment, audit and enforcement responsibilities under the Act. 
Treasury's emphasis on such a nexus is also in accord with the 
temporary nature of the Program and other aspects of the Program's 
statutory structure.

``State Licensed or Admitted''

    Insurers under clause (i) of section 102(6)(A) include all entities 
that are licensed or admitted by a State's insurance regulatory 
authority. This group of insurers includes captive insurers, risk 
retention groups, and farm and county mutuals, if such entities are 
State licensed or admitted. The Program treats all State licensed or 
approved insurers consistently in accord with the plain language of 
section 102(6)(A)(i). This treatment also furthers other statutory 
objectives such as ensuring that policyholders have widespread access 
to the terrorism risk insurance benefits of Program, and spreading 
potential costs of the Program associated with any federal loss-sharing 
payments. (For example, see the cost spreading provisions in connection 
with recoupment as required by section 103(e)(7) and in connection with 
surcharges as required by section 103(e)(8) to be applied to all 
commercial property and casualty policyholders).

Other Categories of Insurers

    The NAIC has established criteria for approval of eligible surplus 
line carriers for listing on the NAIC's Quarterly Listing of Alien 
Insurers. Federally approved insurers under section 102(6)(A)(iii) are 
addressed in detail below. Treasury intends to issue additional 
regulations to apply the provisions of the Act to insurers in clause 
(iv) of State residual market insurance entities and State workers' 
compensation funds pursuant to section 103(d).
    As described above, all State licensed or admitted captive insurers 
are insurers within the Program under section 102(6)(A)(i). Treasury 
may, in consultation with the NAIC or the appropriate State regulatory 
authority, apply the provisions of the Act to ``other classes or types 
of captive insurers and other self insurance arrangements'' pursuant to 
section 103(f) of the Act, but only if such an application is 
determined before the occurrence of an act of terrorism and all of the 
provisions of the Act are applied comparably to such entities. Treasury 
has engaged in consultations, but has not yet made a decision regarding 
the participation in the Program of captives and other self insurance 
arrangements that do not fall into other categories in clauses (i)-
(iv).
    b. Must Receive Direct Earned Premiums As Required by Section 
102(6)(B)
    The second criteria an entity must meet to be an insurer for 
purposes of the Program is prescribed by section 102(6)(B). In addition 
to falling within a category in section 102(6)(A), to be an ``insurer'' 
under the Act, an entity must receive ``direct earned premiums'' (as 
defined) on any type of commercial property and casualty insurance (as 
defined). The key aspect of this requirement in the statutory 
definition of insurer is the Act's specification of a direct measure of 
premium income as opposed, for example, to a net measure of premium 
income which accounts for reinsurance. Although the legislative history 
and design of the Act envision reinsurance arrangements as an important 
component of capacity within the insurance market, the Act excludes 
reinsurance from the Program. (Section 103(g) of the Act provides that 
the Act does not limit or prevent ``insurers'' from obtaining 
reinsurance coverage for ``insurer deductibles'' or ``insured losses'' 
retained by insurers.) Therefore, consistent with the Act and 
Treasury's Interim Guidance II, the interim final rule provides that, 
if an entity does not receive direct earned premiums as required by 
section 102(6)(B), and subject to statutory exceptions, then the entity 
is not an ``insurer'' under the Act. In that regard, Section 102(6)(B) 
excepts State residual market insurance entities from the direct earned 
premium requirement.
    c. Must Meet Additional Criteria Prescribed by Treasury Under 
Section 102(6)(C).
    In addition to the requirements of section 102(6)(A) and (B) 
described above, section 102(6)(C) of the Act requires that an insurer 
also meet ``any other criteria that the Secretary of the Treasury may 
reasonably prescribe.'' The interim final rule does not prescribe 
additional criteria under section 106(C). Published elsewhere in this 
separate part of the Federal Register is a notice of proposed 
rulemaking in which Treasury solicits public comment on whether the 
Secretary should prescribe other criteria for certain insurers pursuant 
to the authority provided by section 102(6)(C) and, if so, what 
criteria Treasury should prescribe. In this regard, in the notice of 
proposed rulemaking Treasury solicits comment on appropriate criteria 
to prevent participation in the Program by newly formed insurance 
companies deemed by Treasury to be established for the purpose of 
evading the insurer deductible requirements of the Act and the Program. 
As stated in the notice of proposed rulemaking, Treasury's objectives 
are to encourage new sources of capital in the market for terrorism

[[Page 9807]]

risk insurance, and at the same time, ensure the integrity of the 
Program and provide comparable treatment of Program participants. 
Accordingly, the intent of any additional criteria, if proposed, is not 
to discourage Program participation by newly formed commercial property 
and casualty insurance companies in their normal course of business, 
but to administer the Program effectively and fairly, including 
preventing evasion of insurer deductible requirements by special 
purpose entities formed to provide terrorism risk only coverage.
    Also in the notice of proposed rulemaking published elsewhere in 
this separate part of the Federal Register, Treasury solicits comment 
on appropriate additional criteria, including financial standards, that 
should be proposed for federally approved insurers under Treasury's 
authority in section 102(6)(C). One reason for imposing additional 
criteria on federally approved insurers is because there are no uniform 
requirements or standards for federal approval under various federal 
programs. Although some federal programs impose minimum financial 
standards, others do not. Therefore, Treasury is considering whether 
additional criteria for federally approved insurers should be proposed 
to promote the financial integrity of the Program and to otherwise 
effectively administer the Program. In addition, in the notice of 
proposed rulemaking published elsewhere in this separate part of the 
Federal Register, Treasury solicits comment on criteria that Treasury 
should propose and prescribe under section 102(6)(C) to ensure that 
payments under the Program do not benefit entities with connections to 
terrorist organizations.
    d. ``Federally Approved'' Insurer.
    If an entity does not fall within section 102(6)(A)(i) or (ii), but 
is approved or accepted by a Federal agency to offer property and 
casualty insurance in connection with maritime, energy or aviation 
activities; receives direct earned premiums for any type of commercial 
property and casualty insurance as required by 102(6)(B), and, if 
prescribed, meets any criteria established by Treasury under 102(6)(C), 
then, such an entity is considered by Treasury to be a federally 
approved ``insurer'' under section 102(6)(A)(iii).
    As reflected in Interim Guidance II, this interim final rule 
provides that the scope of insurance coverage (insured losses) under 
the Program for federally approved insurers under section 
102(6)(A)(iii) is only to the extent of federal approval of the 
commercial property and casualty insurance coverage approved by the 
Federal Agency in connection with maritime, energy or aviation 
activity. Insured losses under other insurance coverage that may be 
offered by a federally approved insurer under section 102(6)(A)(iii) is 
not covered by the Program. This treatment of federally approved 
insurers is in accord with the statutory language of the Act in section 
102(6)(A)(iii) (``approved for the purpose of offering property and 
casualty insurance by a Federal agency in connection with maritime, 
energy or aviation activity''). This treatment is also in accord with 
Treasury's consideration of a pre-existing nexus (for example, the 
nexus of State-licensing or NAIC approval for listing on the Quarterly 
Listing of Alien Insurers) as very important to the effective and 
efficient administration of the Program. This nexus is considered by 
Treasury to be an important aid in ensuring financial integrity of 
participants in the Program, in obtaining data, and in connection with 
recoupment, audit and enforcement responsibilities, among others. In 
addition, this treatment is consistent with the temporary nature and 
other statutory structure of the Program. Treasury recognizes that it 
is possible to interpret section 102(6)(A)(iii) more broadly, but for 
reasons stated above has determined that the narrower reading is not 
only in accord with the statutory language but serves other important 
purposes in the administration of the Program.
    Examples of federally approved insurers under section 
102(6)(A)(iii) are those insurers that do not fall within section 
102(6)(A)(i) or (ii), and are approved or accepted by a Federal agency 
under the following federal programs and statutes:
    [sbull] Approval of Underwriters for Marine Hull Insurance 
(Maritime Administration, U.S. Department of Transportation).
    [sbull] Aircraft Accident Liability Insurance (U.S. Department of 
Transportation).
    [sbull] Oil Spill Financial Responsibility for Offshore Facilities 
(Minerals Management Service, U.S. Department of the Interior).
    [sbull] Oil Spill Financial Responsibility for Vessels (United 
States Coast Guard, U.S. Department of Transportation).
    [sbull] Longshoremen's and Harbor Workers' Compensation Act 
(Employment Standards Administration, U.S. Department of Labor).
    [sbull] Price Anderson Act (Nuclear Regulatory Commission, U.S. 
Department of Energy).
    The above list of Federal insurance programs contains an addition 
to the list contained in Interim Guidance II through the express 
inclusion of insurers approved or accepted under the Price Anderson 
Act. This list is provided as a starting reference point and is not 
exclusive. Any entity that is approved or accepted by a U.S. agency to 
offer commercial property and casualty insurance in connection with 
maritime, energy or aviation activities by a program that is not listed 
above is particularly encouraged to advise the designated Treasury 
contacts provided by this rule with the name of the program and the 
name of the Federal agency that approved or accepted them.
    Treasury is not prescribing additional criteria under section 
102(6)(C) in the interim final rule for federally approved insurers, 
but solicits comments elsewhere in this separate part of the Federal 
Register on whether and what additional criteria should be prescribed 
for federally approved insurer.
3. ``Affiliates''
    The definition of ``insurer'' in section 102(6) includes ``any 
affiliate thereof.'' Section 102(2) of the Act defines ``affiliate'' to 
mean ``with respect to any insurer, any entity that controls, is 
controlled by or is under common control with the insurer'' (emphasis 
supplied). Any affiliate that does not meet the definition of insurer, 
for example, it does not fall into any of the categories in section 
102(6)(A) or does not receive direct earned premiums for commercial 
property and casualty insurance as required by section 102(6)(B), is 
not an ``insurer'' for purposes of the Program. Consistent with Interim 
Guidance II, and the definition of ``control'' discussed below, 
Treasury will treat the parent company, and all affiliates that meet 
the requirements of ``insurer'' in section 102(6)(A), (B) and (C), 
collectively as one ``insurer'' for purposes of calculating the direct 
earned premiums on which the insurer deductible is based under the 
Program. This consolidated treatment is also in accord with the 
Conference Report to accompany the Act, which states, in the 
explanation of section 102 of the Act, that ``the terms `affiliate' and 
`control' are meant to ensure that affiliated insurers are treated as a 
consolidated entity for calculating direct earned premiums.'' H.R. 
Conf. Rep. No. 107-779 (2002).
    For example, if an insurance company is licensed or admitted to 
engage in the

[[Page 9808]]

business of providing primary or excess insurance in a State and 
receives direct earned premiums as required in section 102(6)(B), and 
three out of four of its affiliate insurance companies also are State 
licensed and meet the requirements of section 102(6)(B) and (C), then 
the parent company and the three affiliates that meet the definition of 
``insurer'' are, collectively, one insurer for purposes of calculating 
and consolidating direct earned premiums and calculating insurer 
deductibles under the Program. The affiliate that does not fall within 
one of the categories in section 102(6)(A) or fails to meet all the 
requirements to be an ``insurer'' under section 102(6) is not included 
in the Program.
    As discussed previously in Interim Guidance II, if an entity is 
``under common control with the insurer,'' and that entity meets the 
requirements to be an ``insurer'' in section 102(6)(A)-(C), Treasury 
will consider that entity collectively with the other insurer (its 
affiliate) as one ``insurer'' for the Program purposes of consolidating 
direct earned premiums and calculating the insurer deductible. For 
example, assume that two insurance companies are licensed to engage in 
the business of providing primary or excess insurance in any State 
(either in one State or in separate States) and both receive direct 
earned premiums as required by section 102(6)(B). Each company, would 
meet the definition of ``insurer.'' Assume additionally that the common 
parent of the two companies does not fall into any of the categories in 
section 102(6)(A). Treasury will consider the two affiliated companies 
to be, collectively, one insurer for purposes of calculating and 
consolidating direct earned premiums and their insurer deductible under 
the Program, but their parent company is not an insurer and not 
included in the Program.
4. ``Control''
    Related to the definition of insurer and affiliate is the 
definition of ``control'' in section 102(3)(A)-(C) of the Act. The 
definition and determination of ``control'' for purposes of the Program 
is used by Treasury to calculate the insurer deductible on a 
consolidated basis for an insurer ``including any affiliate 
thereof''(see discussion of affiliate above). Under the Act, an entity 
is in control of another entity if the statutory definition is met 
under section 102(3)(A) or (B), or if Treasury makes a determination 
under (C) that the entity directly or indirectly exercises a 
controlling influence over the management or policies of the other 
entity. Each category of control for purposes of the Program is 
described below with examples.
    a. ``Owns, Controls or has the Power to Vote'' 25 Percent of Voting 
Securities.
    Section 102(3)(A) provides that an entity has ``control'' over 
another if the entity directly or indirectly or acting through 1 or 
more other persons owns, controls or has power to vote, 25 percent or 
more of any class of voting securities of the other entity. For 
example, if Insurer X owns, or has the power to vote, 25 percent or 
more of any class of voting securities of Insurer Y, then Insurer X is 
in control of Insurer Y under section 102(3)(A). This control 
relationship means, among other things, that Treasury will consolidate 
the direct earned premiums of these two insurers under Insurer X for 
purposes of calculating the insurer deductible and evaluating a claim 
for federal payment.
    Published elsewhere in this separate part of the Federal Register 
is a notice of proposed rulemaking in which Treasury solicits comments 
on whether the definition of control contained in the interim final 
rule should be supplemented by proposing a rule to address situations 
in which a corporate insurance structure may contain multiple insurers 
that own, control or have the power to vote more than 25 percent of the 
voting shares of another insurer. Based on available information, such 
control arrangements exist but they do not appear to be common. In 
particular, Treasury is considering consolidating direct earned 
premiums for purposes of calculating the insurer deductible on a pro 
rata basis among the multiple controlling owners. For example, if 
Insurer Y owns 40 percent of the voting shares of Insurer Z and Insurer 
X owns 30 percent of the voting shares of Insurer Z, then a pro rata 
allocation of premium income and insured loss under the Program would 
be, respectively, 57 percent and 43 percent.
    b. Controls Election of Majority of Directors or Trustees.
    Pursuant to section 102(3)(B), an entity also is in control over 
another entity for purposes of the Program if the entity controls in 
any manner the election of a majority of the directors or trustees of 
the other entity. For example, even if Insurer A does not own or have 
the power to vote 25 percent or more of any class of voting securities 
of Insurer B, if Insurer A controls in any manner the election of a 
majority of the directors or trustees of Insurer B, then Insurer A 
``controls'' Insurer B under the Act. This means that, for purposes of 
the Program, Treasury will consolidate the direct earned premiums of 
these two insurers under Insurer A in calculating the insurer 
deductible and evaluating a claim for federal payment.
    c. Control Determination by Treasury under Section 102(3)(C).
    If no control relationship exists on the basis of either section 
102(3)(A) or (B), Treasury has authority, under section 102(3)(C), to 
determine, after notice and opportunity for hearing, that an insurer 
directly or indirectly exercises a controlling influence over the 
management or policies of another insurer. To provide further guidance 
for purposes of a control determination under this subsection (C), the 
interim final rule establishes several rebuttable presumptions. The 
first rebuttal presumption under section 102(3)(C) is that an entity is 
in control of another entity for purposes of the Program (including 
consolidation of direct earned premiums in calculating the insurer 
deductible) if a State has determined that a control relationship 
exists between the two entities. If a State has made such a control 
determination with regard to two insurers, and the affected insurers 
wish to rebut the presumption established in this interim final rule, 
then the insurers may request an informal hearing (e.g. exchange of 
documents) in which they will be given an opportunity by Treasury to 
present and support their position that no control relationship exists, 
prior to a final determination by Treasury.
    The second rebuttable presumption Treasury is establishing is that 
an insurer exercises directly or indirectly a controlling influence 
over the management or policies of another insurer under section 
102(3)(C) if 25 percent or more of capital of a stock insurer, 
policyholder surplus of a mutual insurer, or corporate capital of other 
entities qualifying as insurers is provided by another insurer, even in 
the absence of voting shares or of control of the election of a 
majority of the directors or trustees of the other insurer. The third 
rebuttable presumption is that an insurer exercises directly or 
indirectly a controlling influence over the management or policies of a 
syndicate insurer if, at any time during the Program Year, the insurer 
supplies 25 percent or more of the underwriting capacity for that year 
to the other insurer that is a syndicate consisting of a group 
including incorporated and individual unincorporated underwriters.
    If the affected insurers wish to rebut the presumptions described 
above and established by this interim final rule, then such insurers 
may request a hearing in which they will be given an opportunity to 
rebut the presumption of control by presenting and supporting

[[Page 9809]]

their position through written submissions to Treasury and, in 
Treasury's discretion, through informal oral presentation.
    Published elsewhere in this separate part of the Federal Register 
is a notice of proposed rulemaking in which Treasury solicits comment 
on a pro rata allocation method for control determinations under 
section 102(3)(C) of the Act, similar to the pro rata method under 
consideration for controlling insurers under section 102(3)(A), in 
situations in which multiple insurers each provide 25 percent or more 
of the capital of a stock insurer, policyholder surplus of a mutual 
insurer or corporate capital of other entities that meet the definition 
of insurer under the Act and in the interim final rule. The pro rata 
approach under consideration by Treasury would treat each insurer on a 
standalone basis for Program purposes such as calculation of direct 
earned premiums and the insurer deductible if no insurer provides 25 
percent or more of the capital of a stock insurer, policyholder surplus 
of a mutual insurer or corporate capital of other entities that meet 
the definition of insurer under the Act and the Program.
    At a later date, Treasury will be issuing claims procedures. In 
accordance with the consolidated treatment of direct earned premiums 
among insurer affiliates, Treasury anticipates that the controlling 
insurer will be the insurer that will be required to file any claim 
with Treasury for federal payment under the Program and that this 
insurer will receive the federal payment that is to be distributed 
within the consolidated insurer group in accordance with distribution 
of risk within the consolidated insurer group. Elsewhere in this 
separate part of the Federal Register, Treasury solicits comments on 
various means to ensure the prompt distribution of the federal payment 
as appropriate to ensure that the purposes of the Program are not 
thwarted or evaded, and that the ultimate risk bearing entities are 
treated in an equitable manner, within the Act's requirements.

C. What is the Scope of Insurance Coverage Under the Program? 
(``Insured Loss'', ``Property and Casualty Insurance'', ``Direct Earned 
Premium'' and Insurer Deductible'')

1. ``Insured Loss''
    The definition of ``insured loss'' in the interim final rule 
incorporates the statutory definition in section 102(5) supplemented by 
the guidance concerning scope of the term ``insured loss'' that is 
contained in Interim Guidance II and Interim Guidance III. Section 
102(5) of the Act defines insured loss to mean any loss resulting from 
a certified ``act of terrorism'' covered by primary or excess 
``property and casualty insurance,'' that is issued by an ``insurer,'' 
if such loss:
    [sbull] ``Occurs within the United States,'' or
    [sbull] Occurs to an ``air carrier''; a U.S. 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
    [sbull] Occurs ``at the premises of any United States mission.''
    In general, if the property and casualty insurance coverage is 
provided within the geographic and other statutory parameters of the 
definition of ``insured loss'' in the Act as described above, and is 
provided by an ``insurer'' as defined in section 102(6) of the Act 
(whether or not the insurer is non-U.S. based or owned), then such 
losses will be covered by the Program, subject to the conditions for 
payment and other requirements of the Act. However, if insurance 
coverage is provided by an entity that is not an ``insurer'' under the 
Act, then, even if a loss occurs within the United States, or otherwise 
meets the definitional parameters of ``insured loss,'' e.g. occurs to 
an air carrier or vessel or mission as defined in the Act, the loss 
would not be covered by the Program. In addition, if insurance is 
provided by a U.S. insurer, but the loss does not fall within the 
definition of ``insured loss,'' for example, it occurs on foreign soil 
and not to a U.S. mission or covered air carrier or vessel, then the 
loss would not be covered by the Program. Section 102(5)(A) provides 
that ``insured losses'' means any loss resulting from a certified act 
of terrorism and covered by primary or excess property and casualty 
insurance issued by an insurer if such loss occurs within the United 
States.
    As described in Interim Guidance III, insured losses under section 
102(5)(B) are only those losses that are incurred by covered air 
carriers or vessels, if the insured loss occurs beyond the geographic 
boundaries of the United States as described in Section 102(5)(A). 
Losses that are incurred by covered air carriers or vessels would 
include losses covered by insurance coverage provided to those entities 
(for example, property insurance coverage and liability coverage). Not 
included under section 102(5)(B) are losses that are not incurred by 
covered air carriers or vessels, such as losses covered by third party 
insurance contracts that are separate from the insurance coverage 
provided to covered air carriers or vessels.
2. ``Property and Casualty Insurance''
    Section 102(12) of the Act defines ``property and casualty 
insurance'' to mean commercial lines of property and casualty 
insurance. The statutory definition expressly includes ``excess 
insurance, workers compensation insurance and surety insurance.'' In 
addition, the Act specifically excludes (i) federal crop insurance 
issued or reinsured under the Federal Crop Insurance Act or any other 
type of crop or livestock insurance that is privately issued or 
reinsured; (ii) private mortgage insurance as defined in the Homeowners 
Protection Act of 1998 or title insurance; (iii) financial guaranty 
insurance issued by monoline financial guaranty insurance corporations; 
(iv) insurance for medical malpractice; (v) health or life insurance 
including group life insurance; (vi) flood insurance provided under the 
National Flood Insurance Act of 1968; and (vii) reinsurance or 
retrocessional reinsurance.
    Insurance is generally regulated by State law in the United States. 
There is no uniform or consistent definition of ``commercial property 
and casualty insurance'' among the States. In some States, a line of 
insurance may be considered commercial and in other States the same 
line of insurance is considered personal. However, as Program 
administrator, Treasury must designate types or lines of commercial 
property and casualty insurance on which direct earned premiums and 
insurer deductibles are to be calculated and for which federal payments 
will be made for ``insured losses'' under the Program. Direct earned 
premiums received by insurers for commercial property and casualty 
insurance under the Program are the basis for the Program's statutory 
reinsurance structure, for other terms and for federal payments. In 
developing a definition of property and casualty insurance for purposes 
of administrating and implementing the Program, Treasury considered the 
statutory definition, the Program structure, and effective 
administration of the Program. In this regard, Treasury also consulted 
with the NAIC and others regarding State law and premium reports filed 
with the NAIC.
    The interim final rule defines the scope of commercial property and 
casualty insurance for purposes of the Program to include commercial 
property and casualty insurance, including those lines of insurance 
expressly included in section 102(12) of the Act and excluding

[[Page 9810]]

those lines of insurance expressly excluded by the same statutory 
definition. Treasury's interim final rule incorporates the suggested 
guidance in Interim Guidance I that commercial lines within the 
following lines of insurance coverage that are reported on the NAIC 
Annual Statement of the Exhibit of Premiums and Losses--commonly known 
as Statutory Page 14 are included in the Program: Line 1--Fire; Line 
2.1--Allied Lines; Line 3--Farmowners Multiple Peril; Line 5.1--
Commercial Multiple Peril (non-liability portion); Line 5.2--Commercial 
Multiple Peril (liability portion); Line 8--Ocean Marine; Line 9--
Inland Marine; Line 16--Workers' Compensation; Line 17--Other 
Liability; Line 18--Products Liability; Line 19.3--Commercial Auto No-
Fault (personal injury protection); Line 19.4--Other Commercial Auto 
Liability; Line 21.2--Commercial Auto Physical Damage; Line 22--
Aircraft (all perils); Line 24--Surety; Line 26--Burglary and Theft; 
and Line 27--Boiler and Machinery.
    The interim final rule also clarifies that premium information on 
such lines of Statutory Page 14 should only be included in calculating 
an insurer's direct earned premium and insurer deductible to the extent 
that coverage is provided for commercial property and casualty 
exposures. In other words, personal insurance that is reported on the 
specified covered lines of Statutory Page 14 should be excluded from an 
insurer's calculation of its direct earned premium and insurer 
deductible. In making that determination for purposes of the Program, 
insurers may consider insurance coverage primarily designed to cover 
personal, family or household purposes to be personal insurance and, 
therefore, not covered by the Program. Personal insurance policies that 
include incidental coverage for commercial purposes would be considered 
to be primarily personal policies. For purposes of the Program, as 
reflected in this interim final rule, Treasury considers incidental 
commercial coverage to exist where less than 25 percent of total 
premium is attributable to commercial coverage.
    In contrast, commercial property and casualty insurance generally 
is designed to cover the commercial interests of business, civic, not-
for-profit or governmental entities, or other similar individuals, 
organizations, or professional practices. In cases where an insurance 
policy covers both commercial and personal exposures, and is not 
primarily a personal policy, insurers should allocate the proportion of 
risk between commercial and personal components in determining what 
portion of the policy falls under the Program. In suggesting this 
allocation, Treasury is not establishing a new reporting requirement at 
this time, but is suggesting a method by which insurers may calculate 
their deductibles and for Treasury to verify any claims under the 
Program.
    Insurers that do not report premiums to the NAIC on Statutory Page 
14 may use the guidance provided above as an analogy or reference point 
in determining whether and what lines of their commercial property and 
casualty insurance are included in the Program and in calculating their 
direct earned premium and insurer deductible. In this regard, as 
discussed earlier, the insurance coverage of federally approved 
insurers within the Program covers only those lines for which the 
insurer has received federal approval.
    3. ``Direct Earned Premium''
    Section 102(4) of the Act defines direct earned premium as a 
``direct earned premium for property and casualty insurance issued by 
any insurer for insurance against'' insured losses as defined in 
section 102(5). As discussed below, the term ``insurer deductible'' is 
based on direct earned premiums received by insurers during specified 
time periods. Interim Guidance I and II, provided guidance to 
concerning the term ``direct earned premium'' in relation to the terms 
``insurer deductible'', ``insured loss'' and ``property and casualty 
insurance''. The interim final rule reflects this previous guidance but 
contains further clarifications and supplementary guidance. For 
insurers that report premiums to the NAIC on Statutory Page 14, 
``direct earned premium'' is the information reported on column 2 for 
the lines of commercial property and casualty insurance referenced 
above, with the specified adjustments to remove personal insurance 
coverage. This interpretation of direct earned premium information is 
consistent with scope of ``insured loss'' as defined in the Act and 
will be used by Treasury to calculate the insurer deductible for these 
insurers.
    Other insurers that are required to participate in the Program but 
that do not report on Statutory Page 14 may use the discussion above 
with reference to Statutory Page 14 as an analogy in developing a 
comparable means by which they may calculate their direct earned 
premiums. Treasury will use similar premium information (compiled by 
these entities or their State regulators) to calculate an insurer's 
deductible. For county or town mutual insurers that do not report to 
the NAIC, for purposes of calculating direct earned premium, data that 
is reported to their State regulator or maintained by the insurer 
should be adjusted to: (1) Reflect an appropriate breakdown between 
commercial and personal risks as outlined above; and (2) if necessary, 
re-stated to reflect the accrual method of determining direct earned 
premium versus direct premium. In addition, such entities should also 
consider other types of payments that compensate an insurer for the 
risk of loss (for example, assessments, contributions, or other similar 
concepts) as being equivalent to premium income for purposes of the 
Program.
    Eligible surplus line carrier insurers may determine the scope of 
insurance coverage and their insurer deductible under the Program for 
policies that are in-force as of the date of enactment or that are 
entered into prior to January 1, 2003, with reference to the geographic 
scope in the definition of ``insured loss,'' and with reference to the 
covered commercial property and casualty lines of insurance described 
above. For policies issued by eligible surplus line carriers after 
January 1, 2003, as stated in Interim Guidance II, the premium for 
insurance coverage within the geographic scope of ``insured loss'' must 
be priced separately by eligible surplus line carrier insurers.
    In calculating the appropriate measure of direct earned premium to 
determine the deductible for Program Year 1, eligible surplus line 
carriers may use and rely on the same allocation methodologies 
contained within the NAIC's ``Allocation of Surplus Lines and 
Independently Procured Insurance Premium Tax on Multi-State Risks Model 
Regulation'' for allocating premium between coverage within the 
geographic scope of ``insured loss'' and all other coverage to estimate 
the appropriate percentage of premium income for such policies that 
applies to such risks.
    Similarly, consistent with the scope of insurance coverage under 
the Program and other limitations that apply to federally approved 
insurers, such insurers should a use methodology similar to that used 
by eligible surplus line carriers in calculating the appropriate 
measure of their direct earned premium.
4. ``Insurer Deductible''
    The Act defines an ``Insurer Deductible'' in Section 102(7) for the 
various ``Program Years'' and other periods covered by the Program. For 
example, Section 102(7)(B) defines the insurer deductible for Program 
Year 1 (January 1, 2003 through December 31, 2003) as ``the value of an 
insurer's direct

[[Page 9811]]

earned premiums over the calendar year immediately preceding Program 
Year 1 multiplied by 7 percent''. A State licensed or admitted insurer 
may estimate its insurer deductible by multiplying the applicable 
percentage (listed in the Act for each of the Program Years) by the 
direct earned premium information for commercial lines of property and 
casualty insurance reported on Statutory Page 14 with the appropriate 
adjustments as described above. Other entities should follow a similar 
methodology based the definitions of ``insured loss,'' ``property and 
casualty insurance,'' and ``direct earned premium.''
    Section 102(7)(E) provides Treasury with authority to determine the 
appropriate methodology for measuring the direct earned premium if an 
insurer has not had a full year of operations during the calendar year 
immediately preceding the Program Year.
    Because new companies have only had limited business operations, it 
is likely that their premium income will be somewhat volatile. Such 
volatility could persist throughout the life of the three-year Program. 
Thus, to treat these newly formed insurers in a manner that is 
consistent with other insurers under the Program and to prevent newly 
formed insurers from having the unfair advantage of lower relative 
deductibles, this interim final rule specifies that the deductible 
measure for new companies formed after the date of enactment (November 
26) will be based on contemporaneous data for direct earned premium 
that corresponds to the current Program Year. If a newly formed insurer 
does not have a full year of operations within a particular Program 
year, this interim final rule provides that an insurer's direct earned 
premium for Program year will be annualized to determine an insurer's 
deductible.

III. Procedural Requirements

    The Act established a Program to provide for loss sharing payments 
by the Federal Government for insured losses resulting from certified 
acts of terrorism. The Act became effective immediately upon the date 
of enactment (November 26, 2002). Preemptions of terrorism risk 
exclusions in policies, mandatory participation provisions, disclosure 
and other requirements and conditions for federal payment contained in 
the Act applied immediately to those entities that come within the 
Act's definition of ``insurer.'' In the near term, Treasury will be 
issuing additional regulations to implement the Program. This interim 
final regulation provides critical information concerning the 
definitions of Program terms that lays the groundwork for Treasury's 
implementation of the Program. No one can predict if, or when, an act 
of terrorism may occur. There is an urgent need for Treasury, as 
Program administrator, to lay the groundwork for Program implementation 
through interim final regulations to provide clarity and certainty 
concerning which entities are required to participate in the Program; 
the scope and conditions of Program coverage; and other implementation 
issues that immediately affect insurers, their policyholders, State 
regulators and other interested parties. This includes the need to 
supplement, or modify as necessary, previously issued interim guidance.
    Accordingly, pursuant to 5 U.S.C. 553(b)(B), Treasury has 
determined that it would be contrary to the public interest to delay 
the publication of this rule in final form during the pendency of an 
opportunity for public comment. For the same reasons, pursuant to 5 
U.S.C. 553(d)(3), Treasury has determined that there is good cause for 
the interim final rule to become effective immediately upon 
publication. While this regulation is effective immediately upon 
publication, Treasury is seeking public comment on the regulation and 
will consider all comments in developing a final rule.
    This interim final rule is a significant regulatory action and has 
been reviewed by the Office of Management and Budget under the terms of 
Executive Order 12866.
    Because no notice of proposed rulemaking is required, the 
provisions of the Regulatory Flexibility Act (5 U.S.C. chapter 6) do 
not apply. However, the Act and the Program are intended to provide 
benefits to the U.S. economy and all businesses, including small 
businesses, by providing a federal reinsurance backstop to commercial 
property and casualty policyholders and spreading the risk of insured 
loss resulting from an act of terrorism.

List of Subjects in 31 CFR Part 50

    Terrorism risk insurance.

Authority and Issuance

    For the reasons set forth above, 31 CFR Subtitle A is amended by 
adding Part 50 to read as follows:

PART 50--TERRORISM RISK INSURANCE PROGRAM

Subpart A--General Provisions

Sec.
50.1 Authority, purpose and scope.
50.4 Mandatory participation in Program.
50.5 Definitions.
50.6 Rules of construction for dates.
50.7 Special rules for Interim Guidance safe harbors.

Subpart B--Disclosures as Conditions for Federal Payment [Reserved]

Subpart C--Mandatory Availability [Reserved]

Subpart D--State Residual Market Insurance Entities; Workers' 
Compensation Funds [Reserved]

Subpart E--Self-Insurance Arrangements; Captives [Reserved]

Subpart F--Claims Procedures [Reserved]

Subpart G--Audit, Investigative and Civil Money Penalty Procedures 
[Reserved]

Subpart H--Recoupment and Surcharge Procedures [Reserved]

    Authority: 5 U.S.C. 301; 31 U.S.C. 321; Title I, Pub. L. 107-
297, 116 Stat. 2322 (15 U.S.C 6701 note).

Subpart A--General Provisions


Sec.  50.1  Authority, purpose and scope.

    (a) Authority. This Part is issued pursuant to authority in Title I 
of the Terrorism Risk Insurance Act of 2002, Pub. L. 107-297, 116 Stat. 
2322.
    (b) Purpose. This Part contains rules prescribed by the Department 
of the Treasury to implement and administer the Terrorism Risk 
Insurance Program.
    (c) Scope. This Part applies to insurers subject to the Act and 
their policyholders.


Sec.  50.4  Mandatory participation in Program.

    Any entity that meets the definition of an insurer under the Act is 
required to participate in the Program.


Sec.  50.5  Definitions.

    For purposes of this Part:
    (a) Act means the Terrorism Risk Insurance Act of 2002.
    (b) Act of terrorism. (1) In general. The term act of terrorism 
means any act that is certified by the Secretary, in concurrence with 
the Secretary of State and the Attorney General of the United States:
    (i) To be an act of terrorism;
    (ii) To be a violent act or an act that is dangerous to human life, 
property, or infrastructure;
    (iii) To have resulted in damage within the United States, or 
outside of the United States in the case of:
    (A) An air carrier (as defined in 49 U.S.C. 40102) or 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
    (B) The premises of a United States mission; and
    (iv) To have been committed by an individual or individuals acting 
on

[[Page 9812]]

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.
    (2) Limitations. The Secretary is not authorized to certify an act 
as an act of terrorism if:
    (i) The act is committed as part of the course of a war declared by 
the Congress (except with respect to any coverage for workers' 
compensation); or
    (ii) property and casualty losses resulting from the act, in the 
aggregate, do not exceed $5,000,000.
    (3) Judicial review precluded. The Secretary's certification of an 
act of terrorism, or determination not to certify an act as an act of 
terrorism, is final and is not subject to judicial review.
    (c)(1) Affiliate means, with respect to an insurer, any entity that 
controls, is controlled by, or is under common control with the 
insurer. An affiliate must itself meet the definition of insurer to 
participate in the Program.
    (2) For purposes of paragraph (c)(1) of this section, an insurer 
has control over another insurer for purposes of the Program if:
    (i) An insurer directly or indirectly or acting through one or more 
other persons owns, controls, or has power to vote 25 percent or more 
of any class of voting securities of the other insurer;
    (ii) An insurer controls in any manner the election of a majority 
of the directors or trustees of the other insurer; or
    (iii) The Secretary determines, after notice and opportunity for 
hearing, that an insurer directly or indirectly exercises a controlling 
influence over the management or policies of the other insurer, even if 
there is no control as defined in paragraph (c)(2)(i) or (c)(2)(ii) of 
this section.
    (3) For purposes of a determination of controlling influence under 
paragraph (c)(2)(iii) of this section, the following rebuttable 
presumptions will apply:
    (i) If a State has determined that an insurer controls another 
insurer, there is a rebuttable presumption that the insurer that is 
determined by the State to control another insurer exercises a 
controlling influence over the management or policies of the other 
insurer for purposes of paragraph (c)(2)(iii) of this section; and
    (ii) If an insurer provides 25 percent or more of another insurer's 
capital (in the case of a stock insurer), policyholder surplus (in the 
case of a mutual insurer), or corporate capital (in the case of other 
entities that qualify as insurers), there is a rebuttable presumption 
that the insurer providing such capital, policyholder surplus, or 
corporate capital exercises a controlling influence over the management 
or policies of the receiving insurer for purposes of paragraph 
(c)(2)(iii) of this section.
    (iii) If an insurer, at anytime during a Program Year, supplies 25 
percent or more of the underwriting capacity for that year to an 
insurer that is a syndicate consisting of a group including 
incorporated and individual unincorporated underwriters, there is a 
rebuttable presumption that the insurer exercises a controlling 
influence over the syndicate for purposes of paragraph (c)(2)(iii) of 
this section.
    (4) An insurer deemed to be in a control relationship pursuant to 
paragraph (c)(2)(iii) of this section as a result of the rebuttable 
presumption in paragraph (c)(3)(i), (ii) or (iii) of this section may 
request a hearing in which the insurer will be given an opportunity to 
rebut the presumption of control by presenting and supporting its 
position through written submissions to Treasury and, in Treasury's 
discretion, through informal oral presentations.
    (d) Direct earned premium means the direct earned premium(s) 
received by an insurer for commercial property and casualty insurance 
issued by the insurer against insured losses under the Program.
    (1) State licensed or admitted insurers. For a State licensed or 
admitted insurer that reports to the NAIC, direct earned premium is the 
premium information for commercial property and casualty insurance 
coverage reported by the insurer on column 2 of the NAIC Exhibit of 
Premiums and Losses of the Annual Statement (commonly known as 
Statutory Page 14). (See definition of property and casualty 
insurance).
    (i) Premium information as reported to the NAIC is included in the 
calculation of direct earned premiums for purposes of the Program only 
for commercial property and casualty coverage issued by the insurer.
    (ii) Premiums for personal property and casualty insurance coverage 
(coverage primarily designed to cover personal, family or household 
risk exposures) are excluded in the calculation of direct earned 
premiums for purposes of the Program.
    (iii) Personal property and casualty insurance coverage that 
includes incidental coverage for commercial purposes is primarily 
personal coverage, and therefore premiums are excluded from the 
calculation of direct earned premium. For purposes of the Program, 
commercial coverage is incidental if less than 25 percent of the total 
direct earned premium is attributable to commercial coverage.
    (iv) If a property and casualty insurance policy covers both 
commercial and personal risk exposures and is not primarily a personal 
insurance policy, insurers may allocate the premiums in accordance with 
the proportion of risk between commercial and personal components in 
order to ascertain direct earned premium.
    (2) Insurers that do not report to NAIC. An insurer that does not 
report to the NAIC, but that is licensed or admitted by any State (such 
as certain farm or county mutual insurers), should use the guidance 
provided in paragraph (d)(1) of this section to assist in ascertaining 
its direct earned premium.
    (i) Direct earned premium may be ascertained by adjusting data 
maintained by such insurer or reported by such insurer to its State 
regulator to reflect a breakdown of premiums for commercial and 
personal property and casualty exposure risk as described in paragraph 
(d)(1) of this section and, if necessary, re-stated to reflect the 
accrual method of determining direct earned premium versus direct 
premium.
    (ii) Such an insurer should consider other types of payments that 
compensate the insurer for risk of loss (contributions, assessments, 
etc.) as part of its direct earned premium.
    (3) Certain eligible surplus line carrier insurers. An eligible 
surplus line carrier insurer listed on the NAIC Quarterly Listing of 
Alien Insurers must ascertain its direct earned premium as follows:
    (i) For policies that were in-force as of November 26, 2002, or 
entered into prior to January 1, 2003, direct earned premiums are to be 
determined with reference to the definitions of insured loss and 
property and casualty insurance by allocating the appropriate portion 
of premium income that falls within the definition of insured loss. The 
same allocation methodologies contained within the NAIC's ``Allocation 
of Surplus Lines and Independently Procured Insurance Premium Tax on 
Multi-State Risks Model Regulation'' for allocating premium between 
coverage within the definition of insured loss and all other coverage 
to ascertain the appropriate percentage of premium income to be 
included in direct earned premium may be used; and
    (ii) For policies issued after January 1, 2003, premium for insured 
losses covered by property and casualty insurance under the Program 
must be priced separately by such eligible surplus line carrier 
insurers.
    (4) Federally approved insurers. A federally approved insurer under 
section 102(6)(A)(iii) of the Act should use a methodology similar to 
that

[[Page 9813]]

specified for eligible surplus line carrier insurers in paragraph 
(d)(3) of this section to calculate its direct earned premium. Such 
calculation should be adjusted to reflect the limitations on scope of 
insurance coverage under the Program (i.e. to the extent of federal 
approval of commercial property and casualty insurance in connection 
with maritime, energy or aviation activities).
    (e) Insured loss. (1) The term insured loss means any 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 the loss:
    (i) Occurs within the United States;
    (ii) Occurs to an air carrier (as defined in 49 U.S.C. 40102), 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
    (iii) Occurs at the premises of any United States mission.
    (2)(i) A loss that occurs to an air carrier (as defined in 49 
U.S.C. 40102), 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, is not an insured loss under section 102(5)(B) of the 
Act unless it is incurred by the air carrier or vessel outside the 
United States.
    (ii) An insured loss to an air carrier or vessel outside the United 
States under section 102(5)(B) of the Act does not include losses 
covered by third party insurance contracts that are separate from the 
insurance coverage provided to the air carrier or vessel.
    (f) Insurer means any entity, including any affiliate of the 
entity, that meets the following requirements:
    (1)(i) The entity must fall within at least one of the following 
categories:
    (A) It is licensed or admitted to engage in the business of 
providing primary or excess insurance in any State (including, but not 
limited to, State licensed captive insurance companies, State licensed 
or admitted risk retention groups, and State licensed or admitted farm 
and county mutuals);
    (B) It is not licensed or admitted to engage in the business of 
providing primary or excess insurance in any State, but is an eligible 
surplus line carrier listed on the Quarterly Listing of Alien Insurers 
of the NAIC, or any successor to the NAIC;
    (C) It is approved or accepted for the purpose of offering property 
and casualty insurance by a Federal agency in connection with maritime, 
energy, or aviation activity, but only to the extent of such federal 
approval of commercial property and casualty insurance coverage offered 
by the insurer in connection with maritime, energy or aviation 
activity;
    (D) It is a State residual market insurance entity or State 
workers' compensation fund; or
    (E) As determined by the Secretary, it falls within any other class 
or type of captive insurer or other self-insurance arrangement by a 
municipality or other entity, to the extent provided in Treasury 
regulations issued under section 103(f) of the Act.
    (ii) If an entity falls within more than one category described in 
paragraph (f)(1)(i) of this section, the entity is considered to fall 
within the first category within which it falls for purposes of the 
Program;
    (2) The entity must receive direct earned premiums for any type of 
commercial property and casualty insurance coverage, except in the case 
of:
    (i) State residual market insurance entities and State workers' 
compensation funds, to the extent provided in Treasury regulations; and
    (ii) Other classes or types of captive insurers and other self-
insurance arrangements by municipalities and other entities, if such 
entities are included in the Program by Treasury under regulations in 
this Part.
    (3) The entity must meet any other criteria as prescribed by 
Treasury.
    (g) Insurer deductible means:
    (1) For an insurer that was in existence on November 26, 2002 and 
has had a full year of operations during the calendar year immediately 
preceding the applicable Program Year:
    (i) For the Transition Period (November 26, 2002 through December 
31, 2002), the value of an insurer's direct earned premiums over 
calendar 2001, multiplied by 1 percent;
    (ii) For Program Year 1 (January 1, 2003 through December 31, 
2003), the value of an insurer's direct earned premiums over calendar 
year 2002, multiplied by 7 percent;
    (iii) For Program Year 2 (January 1, 2004 through December 31, 
2004), the value of an insurer's direct earned premiums over calendar 
year 2003, multiplied by 10 percent;
    (iv) For Program Year 3 (January 1, 2005 through December 31, 
2005), the value of an insurer's direct earned premiums over calendar 
year 2004, multiplied by 15 percent; and
    (2) For an insurer that came into existence after November 26, 
2002, the insurer deductible will be based on data for direct earned 
premiums for the current Program Year. If the insurer has not had a 
full year of operations during the applicable Program Year, the direct 
earned premiums for the current Program Year will be annualized to 
determine the insurer deductible.
    (h) NAIC means the National Association of Insurance Commissioners.
    (i) Person means any individual, business or nonprofit entity 
(including those organized in the form of a partnership, limited 
liability company, corporation, or association), trust or estate, or a 
State or political subdivision of a State or other governmental unit.
    (j) Program means the Terrorism Risk Insurance Program established 
by the Act.
    (k) Program Years means the Transition Period (November 26, 2002 
through December 31, 2002), Program Year 1 (January 1, 2003 through 
December 31, 2003), Program Year 2 (January 1, 2004 through December 
31, 2004), and Program Year 3 (January 1, 2005 through December 31, 
2005).
    (l) Property and casualty insurance means commercial lines of 
property and casualty insurance, including excess insurance, workers' 
compensation insurance, and surety insurance. Property and casualty 
insurance:
    (1) Includes commercial lines within the following lines of 
insurance from the NAIC's Exhibit of Premiums and Losses (commonly 
known as Statutory Page 14): Line 1--Fire; Line 2.1--Allied Lines; Line 
3--Farmowners Multiple Peril; Line 5.1--Commercial Multiple Peril (non-
liability portion); Line 5.2--Commercial Multiple Peril (liability 
portion); Line 8--Ocean Marine; Line 9--Inland Marine; Line 16--
Workers' Compensation; Line 17--Other Liability; Line 18--Products 
Liability; Line 19.3--Commercial Auto No-Fault (personal injury 
protection); Line 19.4--Other Commercial Auto Liability; Line 21.2--
Commercial Auto Physical Damage; Line 22--Aircraft (all perils); Line 
24--Surety; Line 26--Burglary and Theft; and Line 27--Boiler and 
Machinery; and
    (2) Does not include:
    (i) Federal crop insurance issued or reinsured under the Federal 
Crop Insurance Act (7 U.S.C. 1501 et seq.), or Multiple Peril Crop 
insurance reported on Line 2.2 of the NAIC's Exhibit of Premiums and 
Losses (commonly known as Statutory Page 14);
    (ii) Private mortgage insurance (as defined in section 2 of the 
Homeowners Protection Act of 1988 (12 U.S.C. 4901)) or title insurance;

[[Page 9814]]

    (iii) Financial guaranty insurance issued by monoline financial 
guaranty insurance corporations;
    (iv) Insurance for medical malpractice;
    (v) Health or life insurance, including group life insurance;
    (vi) Flood insurance provided under the National Flood Insurance 
Act of 1968 (42 U.S.C. 4001 et seq.); or
    (vii) Reinsurance or retrocessional reinsurance.
    (m) Secretary means the Secretary of the Treasury.
    (n) State means any State of the United States, the District of 
Columbia, the Commonwealth of Puerto Rico, the Commonwealth of the 
Northern Mariana Islands, American Samoa, Guam, each of the United 
States Virgin Islands, and any territory or possession of the United 
States.
    (o) Treasury means the United States Department of the Treasury.
    (p) United States means the several States, and includes the 
territorial sea and the continental shelf of the United States, as 
those terms are defined in the Violent Crime Control and Law 
Enforcement Act of 1994 (18 U.S.C. 2280 and 2281).


Sec.  50.6  Rule of construction for dates.

    Unless otherwise expressly provided in the regulation, any date in 
these regulations is intended to be applied so that the day begins at 
12:01 a.m. and ends at midnight on that date.


Sec.  50.7  Special rules for Interim Guidance safe harbors.

    (a) An insurer will be deemed to be in compliance with the 
requirements of the Act to the extent the insurer reasonably relied on 
Interim Guidance prior to the effective date of applicable regulations.
    (b) For purposes of this section, Interim Guidance means the 
following documents, which are also available from the Department of 
the Treasury at http://www.treasury.gov/trip:
    (1) Interim Guidance I issued by Treasury on December 3, 2002, and 
published at 67 FR 76206 (December 11, 2002);
    (2) Interim Guidance II issued by Treasury on December 18, 2002, 
and published at 67 FR 78864 (December 26, 2002); and
    (3) Interim Guidance III issued by Treasury on January 22, 2003, 
and published at 68 FR 4544 (January 29, 2003).

Subpart B--Disclosures as Conditions for Federal Payment [Reserved]

Subpart C--Mandatory Availability [Reserved]

Subpart D--State Residual Market Insurance Entities; Workers' 
Compensation Funds [Reserved]

Subpart E--Self-Insurance Arrangements; Captives [Reserved]

Subpart F--Claims Procedures [Reserved]

Subpart G--Audit, Investigative and Civil Money Penalty Procedures 
[Reserved]

Subpart H--Recoupment and Surcharge Procedures [Reserved]

    Dated: February 25, 2003.
Wayne A. Abernathy,
Assistant Secretary of the Treasury.
[FR Doc. 03-4831 Filed 2-27-03; 8:45 am]
BILLING CODE 4810-25-P