[Federal Register Volume 68, Number 201 (Friday, October 17, 2003)]
[Rules and Regulations]
[Pages 59720-59727]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-26251]


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DEPARTMENT OF THE TREASURY

31 CFR Part 50

RIN 1505-AA98


Terrorism Risk Insurance Program; Disclosures and Mandatory 
Availability Requirements

AGENCY: Departmental Offices, Treasury.

ACTION: Final rule.

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SUMMARY: The Department of the Treasury (Treasury) is issuing this 
final rule concerning disclosures and mandatory availability 
requirements as part of its implementation of Title I of the Terrorism 
Risk Insurance Act of 2002 (Act). The final rule incorporates and 
clarifies conditions for federal payment, set forth in section 103(b) 
of the Act, that require insurers to make certain disclosures to 
policyholders. It also incorporates and clarifies the section 103(c) 
requirements that insurers ``make available'' in their commercial 
property and casualty policies terrorism risk insurance coverage for 
insured losses resulting from certified acts of terrorism under the 
Act. Treasury issued an interim final rule and proposed rule with 
request for comment. This final rule, which is the second in a series 
of regulations that Treasury is issuing to implement the Program, 
adopts the interim final rule with several modifications as discussed 
below.

DATES: This final rule is effective October 17, 2003.

FOR FURTHER INFORMATION CONTACT: Mario Ugoletti, Deputy Director, 
Office of Financial Institutions Policy (202) 622-2730, or Martha 
Ellett or Cynthia Reese, Attorney-Advisors, Office of the Assistant 
General Counsel (Banking & Finance), (202) 622-0480, or C. Christopher 
Ledoux, Senior Attorney, Terrorism Risk Insurance Program (202) 622-
6770 (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 (Pub. L. 107-297, 116 Stat. 2322). The Act 
was effective immediately. The Act's purposes are to address market 
disruptions, ensure the continued widespread availability and

[[Page 59721]]

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.
    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 which, as 
defined by the Act, is 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 end on December 31, 2005.
    Each entity that meets the Act's definition of ``insurer'' (well 
over 2000 firms) must participate in the Program. 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 and 
the implementing regulations. An insurer's deductible increases each 
year of the Program, thereby reducing the Federal Government's 
involvement prior to expiration of the Program. An insurer's deductible 
is calculated based on the value of ``direct earned premiums'' 
collected over certain statutory periods. Once an insurer has met its 
individual deductible, the federal payments cover 90 percent of the 
insured losses above the deductible, subject to an industry-aggregate 
limit of $100 billion.
    The Program provides a federal reinsurance backstop for three 
years. The Act gives Treasury authority to recoup federal payments made 
under the Program through policyholder surcharges, up to a maximum 
annual limit. The Act also prohibits duplicative federal payments for 
insured losses that have been covered under any other federal program.
    The mandatory availability or ``make available'' provisions in 
section 103(c) of the Act require that, for Program Year 1 and Program 
Year 2 and, if so determined by Treasury, in Program Year 3, all 
entities that meet the Act's definition of insurer must make available, 
in all of their property and casualty insurance policies, coverage for 
insured losses resulting from an act of terrorism. This coverage can 
not differ materially from the terms, amounts, and other coverage 
limitations applicable to losses arising from events other than acts of 
terrorism.
    As conditions for federal payment under the Program, clear and 
conspicuous disclosures must be provided by insurers to the 
policyholders of the premium charged for insured losses covered by the 
Program and the federal share of compensation for insured losses under 
the Program. In addition, the Act requires that insurers submit a claim 
to Treasury for federal payment as well as certain certifications. 
Treasury will engage in rulemaking to prescribe claims procedures for 
the Program at a later date.
    The Act also contains provisions designed to manage litigation 
arising from or relating to a certified act of terrorism. Section 107 
of the Act 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. The Act 
provides the United States with the right of subrogation with respect 
to any payment or claim paid by the United States under the Program.
1. Three Year Program
    The duration of the Program is three years. The Act was signed into 
law on November 26, 2002 and section 108(a) of the Act provides that, 
``[t]he Program shall terminate on December 31, 2005.'' Thereafter, the 
Act provides Treasury with certain continuing authority to take actions 
as necessary to ensure payment, recoupment, adjustments of compensation 
and reimbursement for insured losses arising out of any act of 
terrorism occurring during the period between November 26, 2002 and 
December 31, 2005. The duration of the Program and the Program's 
termination date should not be confused with the make available 
requirements contained in section 103(c). As reflected in both the 
interim final and final rules, the make available requirements in 
section 103(c) of the Act apply to all insurers, through the end of 
Program Year 2. However, the Secretary of the Treasury may determine, 
not later than September 1, 2004, to extend the make available 
requirements through Program Year 3, based on factors referenced in 
section 108(d)(1) of the Act. Regardless of whether the make available 
requirements of section 103 are extended, the Program and the Act's 
federal backstop for insured losses for acts of terrorism continue 
through December 31, 2005.
2. Program Implementation Goals
    In implementing the Program, Treasury is guided by several goals. 
First, Treasury strives to implement the Act in a transparent and 
effective manner that treats comparably those insurers required to 
participate in the Program and provides necessary information to 
policyholders. Second, in accord with the Act's stated purposes, 
Treasury seeks to rely as much as possible on the State insurance 
regulatory structure. In that regard, Treasury has closely coordinated 
its implementation of all aspects of the Program with the National 
Association of Insurance Commissioners (NAIC). Third, to the extent 
possible within statutory constraints, Treasury seeks to allow insurers 
to participate in the Program in a manner consistent with procedures 
used in 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 insurance coverage when the Program expires on 
December 31, 2005.

B. The Interim Final Rule

    The interim final rule was published in the Federal Register at 68 
FR 19302 (April 18, 2003). It added sections 50.10 through 50.14 and 
50.17 through 50.19 to Subpart B, and sections 50.20, 50.21, 50.23, and 
50.24 to Subpart C of Part 50 in Title 31, Code of Federal Regulations. 
Subpart A of Part 50, which addresses the scope and purpose of the 
Program, key definitions and certain general provisions, was finalized 
and published in the Federal Register at 68 FR 41250 (July 11, 2003) 
and subsequently revised at 68 FR 48280 (August 13, 2003). Subpart B 
incorporates and clarifies certain conditions for federal payment 
contained in section 103(b) of the Act that require insurers to make 
certain clear and conspicuous disclosures to their policyholders with 
regard to terrorism risk insurance for insured losses under the 
Program. Subpart C incorporates and clarifies requirements in section 
103(c) of the Act that insurers ``make available,'' in all of their 
commercial property and casualty insurance policies, coverage for 
insured losses resulting from an act of terrorism as defined by section 
102(1) of the Act. In this regard, section 103(c) requires insurers to 
make such terrorism risk coverage available at terms, amounts, and 
other coverage limitations that do not differ materially from those 
applicable to losses arising from events other than from acts of 
terrorism.

[[Page 59722]]

    This final rule (and the preceding interim final rule) reflect 
earlier interim guidance, issued by Treasury in notices that were 
published soon after the Act's enactment date, and were designed to 
assist insurers, policyholders and other interested parties in 
complying with immediately applicable and time-sensitive 
requirements.\1\ In finalizing the interim final rule, Treasury 
carefully considered the comments submitted and consulted with the 
NAIC.
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    \1\ These interim guidance notices were published in the Federal 
Register at 67 FR 76206 (Dec. 11, 2002); 67 FR 78864 (Dec. 26, 2002) 
and at 68 FR 4544 (Jan. 29, 2003). Treasury also issued a fourth 
interim guidance at 68 FR 15039 (Mar. 27, 2003), which has 
subsequently been superceded by a new provision in the final rule 
for Subpart A, published at 68 FR 41250 (July 11, 2003). The interim 
guidance and all regulations can also be located on Treasury's 
Terrorism Risk Insurance Program Web site at http://www.treasury.gov/trip.
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II. Summary of Comments and Final Rule

    Treasury received 12 comments on the interim final rule. Comments 
were submitted by individual insurance companies and their legal 
counsel, by insurance and mortgage banker industry trade associations, 
by a coalition of trade and professional associations and by the 
American Academy of Actuaries. After review and careful consideration 
of these comments, as well as additional research and consultation with 
the NAIC, Treasury is now promulgating a final rule concerning the 
Act's disclosure and make available requirements. The final rule makes 
few changes to the interim final rule. Clarifications were made in 
several areas based on comments received. These clarifications are 
discussed in the summary of comments below.

A. Disclosures

1. General Disclosure Requirements (Section 50.10)
    Section 103(b) of the Act requires insurers to make certain 
disclosures to policyholders as a condition for federal payment under 
the Act. The general disclosure requirements of section 50.10 of the 
interim final rule incorporate the Act's requirements. This section of 
the final rule is unchanged from the interim final rule. Section 50.10 
states, in part, that an insurer must provide clear and conspicuous 
disclosure to the policyholder of: (1) The premium charged for insured 
losses covered by the Program; and (2) the federal share of 
compensation for insured losses under the Program. As discussed below, 
the disclosure provisions are a condition for federal payment under the 
Act and a mechanism through which Congress sought to enhance 
competition and comparison shopping in the purchase of terrorism risk 
insurance and to increase awareness of the federal contribution to the 
Program.
    One commenter, a mortgage banking trade association, urged Treasury 
to revise the interim final rule to specifically require insurers to 
notify lenders, securitizers, and servicers of commercial mortgages 
(collectively referred to in this preamble as mortgage finance 
providers) of the terrorism coverage options offered under the Act. The 
commenter also requested that the interim final rule be changed to 
require insurers to provide notice to these mortgage finance providers 
of their borrowers' acceptance or rejection of the terrorism risk 
insurance coverage made available by the insurer. In support of these 
suggested revisions, the commenter stated that mortgage finance 
providers are having difficulty determining ``whether most of the 
properties in their portfolios carry adequate terrorism risk insurance 
as required by loan documents.'' The commenter also asserts that the 
absence of these suggested extensions to the current regulatory 
disclosure requirements produces inefficiencies in the commercial real 
estate and capital markets, including information gaps that may have an 
adverse effect on economic growth and on the condition of key financial 
institutions.
    In a careful evaluation of whether the suggested revisions to the 
interim final rule were appropriate, Treasury first reviewed the scope 
of the disclosure provisions of section 103(b) of the Act and then 
considered the legislative history concerning those disclosure 
requirements. Treasury also considered whether there were alternative 
ways in which these mortgage finance providers may obtain the insurance 
coverage information they seek from their borrowers. Treasury consulted 
with the NAIC concerning definitions in various state laws and typical 
industry business practices and standards. For the reasons discussed 
below, Treasury is not extending the disclosure requirement in the 
interim final rule as suggested by the commenter.
    Section 103(b) requires that clear and conspicuous disclosure of 
certain information be provided by insurers to ``policyholders.'' The 
Conference Report to the Act states that Congress required the 
disclosures in section 103(b) in order, ``to enhance the 
competitiveness of the marketplace by better enabling consumers to 
comparison shop for terrorism insurance coverage, and to make 
policyholders better aware that the Federal government will be sharing 
the costs of such coverage with insurers thereby reducing the insurers' 
exposure.'' H.R. Conf. Rep. No. 107-779, at 24 (2002). Neither the 
language in section 103(b) of the Act, nor the congressional intent of 
these disclosures as explained in the Conference Report, requires that 
these disclosures be made to mortgage finance providers or other 
entities that are not policyholders. Similarly, there is no third party 
notification requirement in the Act concerning whether a policyholder 
has, or has not, elected to purchase terrorism risk insurance coverage. 
The stated legislative intent of the disclosures is to enhance 
comparison shopping and Program awareness by policyholders.
    For purposes of the Program, policyholder refers to the ``person'' 
to whom the insurer issues a commercial property and casualty insurance 
policy and who has apparent authority to negotiate, determine or modify 
the terms of the insurance contract. In this regard, the Act and 
Treasury's regulations require insurers to disclose information about 
the premium and the federal share of compensation to policyholders at 
the time of offer, purchase, and renewal.
    In its comment, the association also expressed a concern that, 
``under notice provisions to the mortgagee contained in existing 
insurance policies, a partial cancellation of coverage for terrorism 
(as opposed to a cancellation of the entire policy) may be deemed by 
the insurers as an endorsement of the policy that does not require the 
insurer to send notice to the mortgage lender.'' Thus, the commenter is 
concerned that mortgage finance providers may not be notified if there 
is a subsequent change in the policy with regard to terrorism risk 
insurance. However, the commenter also acknowledges that the failure of 
mortgage finance providers to obtain such notice appears to be due to 
the drafting of notice provisions in policies.
    Treasury considered whether there were other, perhaps more 
appropriate ways, in which mortgage finance providers could obtain the 
information they seek from their borrowers instead of through the 
expansion of the statutory disclosure requirements under this temporary 
Program. Treasury understands that mortgage finance providers generally 
may obtain the information about the status of a borrower's coverage 
for terrorism risks (whether the losses are those covered by the 
Program or broader in scope) through their underwriting requirements 
and/or by contract. For example, loan documents generally require that 
borrowers provide appropriate insurance coverage

[[Page 59723]]

information to their mortgage finance providers, including information 
on terrorism risk insurance coverage. In its comment, the association 
acknowledged this, but stated that these requirements are frequently 
ignored by borrowers and costly to enforce. In Treasury's view, the 
issue appears to be one of contract negotiation, monitoring and 
enforcement by the parties rather than of regulation under the Program.
    In this regard, we also understand that ACORD, an independent, 
nonprofit insurance group comprised of insurance company, reinsurance 
company and financial service institution affiliated members that 
assists in the cooperative development and implementation of insurance 
(and related financial services) standards, has agreed to work with 
mortgage finance providers to revise standard insurance certificates. 
The goal of this market driven effort is to better facilitate access by 
the mortgage finance providers to the insurance coverage information 
concerning terrorism risk insurance and other types of insurance 
coverage.
    Based on our review of section 103(b) and of the legislative intent 
of the disclosure requirements as described in the Conference Report, 
and our understanding of industry practice and ongoing initiatives, as 
indicated by the commenter and in consultations with NAIC, Treasury is 
not expanding the reach of the disclosure to policyholder requirements 
set forth in the interim final rule.
2. Clear and Conspicuous Disclosure (Section 50.12)
    As stated above, section 50.10 reflects the requirement in section 
103(b) of the Act that the insurer must provide ``clear and conspicuous 
disclosure'' to the policyholder of the premium charged and the federal 
share of payments for insured losses under the Program. Section 50.12 
of the interim final rule addresses the meaning of ``clear and 
conspicuous'' disclosure for purposes of the Program. Except as noted 
below with respect to section 50.12(d), this final rule adopts interim 
section 50.12 without change.
    Section 50.12(a) of the interim final rule provides that whether a 
disclosure is clear and conspicuous depends on the totality of the 
facts and circumstances. Consistent with the Program implementation 
goals, the interim final rule does not specify an exclusive form or 
means of satisfying the statutory disclosure requirements, nor does it 
prescribe precise language, typeface, or font for the disclosures. In 
interim guidance issued by Treasury soon after enactment of the Act, 
Treasury deemed certain NAIC model forms to be an acceptable, 
nonexclusive way in which an insurer could satisfy the disclosure 
requirement. (These model forms are available at the Program's Web 
site: http://www.treasury.gov/trip). Treasury stated that insurers 
could modify the NAIC model forms to meet individual circumstances, or 
use other forms, as long as the modifications met the statutory 
standards. This interim guidance was incorporated into the interim 
final rule and is now in the final rule, which also provides a safe 
harbor (see section 50.17). Insurers may continue to use certain NAIC 
model forms if appropriate or they may develop other disclosure forms 
that meet the requirements of the Act and the regulations. Treasury 
received one comment on section 50.12(a) of the interim final rule, 
which was supportive of Treasury's approach. Section 50.12(a) of the 
interim final rule is adopted without change.
    Section 50.12(b) of the interim final rule provides that, in 
describing the premium charged for insured losses covered by the 
Program, an insurer may refer to it as a portion or percentage of an 
annual premium, if consistent with normal business practice; but, may 
not describe this premium in a manner that would be misleading in the 
context of the Program, such as by characterizing it as a 
``surcharge.'' It is inappropriate and misleading to use the term 
``surcharge'' in the disclosures because surcharge is a term used in 
section 103(e)(8) of the Act in connection with the statutorily 
required recoupment.
    Treasury received two comments on this provision. One commenter, an 
association of insurance brokers and agents, strongly supported 
Treasury's position. This commenter believed the use of the term 
``surcharge'' in disclosing the premium, ``threatened both to undermine 
the ability of consumers to properly evaluate their coverage needs and 
to call into question the legitimacy of the Program.'' An insurance 
industry association commented that the group had ``no objection'' to 
this section in the interim final rule. Section 50.12(b) of the interim 
final rule is adopted without change.
    Section 50.12(c) of the interim final rule allows insurers to make 
the required disclosures using normal business practices, including 
forms and methods of communication used to communicate similar 
policyholder information to policyholders. The comments generally 
supported this approach, which is adopted without change.
    Section 50.12(d) of the interim final rule provides further 
guidance on the use of an agent to provide the required disclosures to 
policyholders. The interim final rule refers to an insurance broker or 
other intermediary acting as agent for the insurer, if the insurer 
normally communicates with a policyholder in this fashion. An insurance 
industry association commenter suggested that, in view of the diverse 
treatment of the legal status of insurance brokers under the laws of 
the various States, unnecessary confusion may result from the use of 
terms such as ``agent'' and ``broker'' with varying implications in 
different jurisdictions. The commenter suggested that the final rule 
instead use the term ``producer.'' Treasury agrees with this 
suggestion, but emphasizes that if the insurer elects to make the 
required disclosure through a producer or other intermediary, 
regardless of on whose behalf the producer or other intermediary is 
acting, the insurer remains responsible for ensuring that the 
disclosures are provided by the producer or other intermediary to 
policyholders in accordance with the Act. Accordingly, Treasury is 
modifying section 50.12(d) consistent with this comment.
    Section 50.12(e) of the interim final rule provides generally that 
an insurer may demonstrate that it has satisfied the requirement to 
provide clear and conspicuous disclosure through use of appropriate 
systems and normal business practices that demonstrate a practice of 
compliance. Although no comments explicitly addressed this provision, 
the comments generally supported the overall approach in section 50.12. 
Section 50.12(e) is adopted without change.
    Section 50.12(f) of the interim final rule provides that an insurer 
must certify that it has complied with the requirement to provide 
disclosure to the policyholder on all policies that form the basis for 
the underlying claim(s) submitted by the insurer for federal payment 
under the Program. One commenter believed the language of section 
50.12(f) itself was clear, but stated that the corresponding discussion 
in the preamble to the interim final rule was not as clear and 
requested further clarification in the final rule.
    This final rule adopts section 50.12(f) of the interim final rule 
without change. Section 50.12(f) requires that, on all policies that 
form the basis for any claim that the insurer submits for federal 
payment for insured losses under the Program, an insurer must certify 
that it has complied with requirements to make disclosures to

[[Page 59724]]

those policyholders covered by the policies. These insured losses are 
used in determining whether an insurer has met its insurer deductible 
under the Program. If an insurer chooses not to provide disclosures on 
a block of policies covered by the Program, the insurer will not 
receive federal payment for any claims it may submit to Treasury for 
insured losses covered by such policies because the required 
disclosures--a condition for federal payment--were not made. The 
insurer could submit a claim for federal payment under the Program on 
another block of policies, as long as the insurer made the required 
disclosures to those policyholders, and otherwise met all other 
conditions for payment of those insured losses. Treasury will initiate 
a future rulemaking concerning claims and certification procedures for 
purposes of the Program.
    The following example provides further clarification of section 
50.12(f). A surety insurer may satisfy the Act's make available 
requirement by providing terrorism risk insurance coverage under the 
Program to a block of notary public bond policyholders at no cost. The 
surety insurer may decide not to provide disclosure notices to those 
policyholders because it considers the expense of making the 
disclosures as being greater than the benefit of receiving the federal 
payments under the Program. Therefore, the insurer would be liable for 
any insured losses on the notary public bonds, but would not be 
eligible to receive any federal payment under the Program backstop on 
such losses because a condition for federal payment (making the 
requisite disclosures to policyholders) was not met. However, if the 
insurer provides the required disclosures to policyholders insured 
under a separate block of construction bond policies, the failure to 
make disclosures to the notary public bond policyholders would not 
prevent the insurer from certifying that it provided the required 
disclosure to policyholders insured under the construction bond 
policies for which the insurer was seeking federal payment for insured 
losses under the Program. The insured losses under the construction 
bond policies ``form the basis'' for a claim submitted for federal 
payment; the insured losses under the notary public bonds do not. 
Regardless of whether disclosures are provided, direct earned premiums 
on the notary public bonds would be included in the calculation of the 
insurer deductible for purposes of the Program and such notary public 
bond policyholders would be subject to any subsequent recoupment. The 
insurer's calculation of insured losses under the Program for purposes 
of meeting its insurer deductible would include only those losses on 
the construction bonds.
    Section 50.12(f) relates to other aspects of the Program in the 
following ways. First, regardless of whether an insurer intends to 
submit a claim for federal payment, all insurers must comply with the 
make available requirements of section 103(c) of the Act and in the 
regulations. Second, in calculating its direct earned premium and 
insurer deductible under the Program, an insurer must include premium 
income from all policies for commercial property and casualty insurance 
for losses occurring at certain locations (see section 50.5(d)), 
whether or not the insurer made the required disclosures. Third, an 
insurer may submit a claim for federal payment only for those ``insured 
losses'' on policies on which the insurer made required disclosures to 
policyholders. Finally, all commercial property and casualty insurance 
policies are subject to the Act's surcharge provisions, regardless of 
whether the insurer made the disclosures. Accordingly, if an insurer 
fails to provide the disclosure notices to its policyholders, the 
insurer will not have met conditions for federal payment and will not 
be eligible for federal payment for insured losses under those 
policies. The insurer, however, will continue to be subject to the make 
available requirements, and the insurer and its policyholders will 
continue to be subject to the surcharge provisions under the Act and 
the Program.
3. Separate Line Item (Section 50.14)
    Section 50.14 of the interim final rule incorporates interim 
guidance previously issued by Treasury that deems an insurer to be in 
compliance with the requirement of providing disclosure on a ``separate 
line item in the policy'' under section 50.10(d), and in compliance 
with section 103(b)(2)(C) of the Act, if the insurer makes the 
disclosure: (1) on the declarations page of the policy; (2) elsewhere 
within the policy itself; or (3) in any rider or endorsement that is 
made a part of the policy. In addition to the clear and conspicuous 
requirement, the Act requires that the separate line item disclosure be 
``in the policy.''
    Rather than require insurers to rewrite all of their policies, 
Treasury has determined that the disclosure is sufficient if made on 
the declarations page or within any rider or endorsement that is made a 
part of the policy. One commenter suggested revising the interim final 
rule to clarify that other documents could be used. This commenter 
contended this would make it clear that compliance is not dependent on 
the name or title of the document, but rather on the fact that such 
disclosure document is made part of the policy. Treasury agrees and is 
amending section 50.14(c) accordingly.

B. Mandatory Availability

1. General Mandatory Availability Requirements (Sections 50.20 and 
50.21)
    Sections 103(c)(1)(A) and (B) of the Act require an insurer (as 
defined by the Act and the implementing regulations) to make available, 
in all of its property and casualty insurance policies, coverage for 
insured losses; and to make available property and casualty insurance 
coverage for insured losses that does not differ materially from the 
terms, amounts, and other coverage limitations applicable to losses 
arising from events other that acts of terrorism. The make available 
requirements apply during the period beginning on the first day of the 
Transition Period and ending on the last day of Program Year 2 unless 
the make available requirements are extended by the Secretary through 
Program Year 3. The duration and possible extension of the make 
available requirements in section 103(c) should not be confused with 
the established three-year duration of the Program as provided by 
section 108 of the Act.
2. Policies in Existence on November 26, 2002
    Section 50.21(a) of the interim final rule states, in part, that 
the make available requirement of the Act applies to insurance policies 
in existence on November 26, 2002 (the date of enactment of the Act). 
One commenter suggested this provision may not be technically correct. 
The commenter reasoned that the make available requirement applies at 
the time of initial offer of coverage and that for policies in 
existence on November 26, 2002, the initial offer of coverage had 
already occurred, and, further, that only section 105 (voiding of 
terrorism exclusions) is applicable for policies in existence at the 
time of enactment.
    It is Treasury's view that the make available requirement applies 
to policies in existence on November 26, 2002. Section 103(c)(1)(A) of 
the Act mandates that beginning on the first day of the Transition 
Period (defined in section 102(11) as of the date of enactment), an 
insurer shall make available coverage for insured losses in all of its 
property and casualty insurance policies. Section 105 of the Act, in 
effect, made coverage

[[Page 59725]]

available upon enactment of the Act by voiding any exclusions within 
insurance policies that were in existence on November 26, 2002. Because 
the make available requirement and the process in section 105 of the 
Act for voiding terrorism risk insurance exclusions and offering 
coverage are generally consistent for commercial property and casualty 
policies in effect on November 26, 2002, Treasury has decided that no 
additional clarification is needed. See below for a discussion of the 
``initial offer of coverage'' provision in the rule.
3. Initial Offer of Coverage
    Section 50.21(a) of the interim final rule provides that the make 
available requirement also applies to new policies issued and renewals 
of existing policies during the period beginning on November 26, 2002 
and ending on December 31, 2004 (the last day of Program Year 2) and, 
if the requirement is extended by the Secretary, to new policies issued 
and renewals of existing policies in Program Year 3 (calendar year 
2005). The last line of 50.21(a) states that the ``requirement applies 
at the time an insurer makes the initial offer of coverage.''
    One commenter, an insurance trade association, proposed revising 
the interim final rule by adding language to the end of section 50.21 
stating that the make available requirement applies at the time an 
insurer makes the initial offer of coverage ``and at no other time.'' 
The commenter suggested this revision because of a concern that a 
policyholder may try to purchase terrorism risk insurance coverage 
during a policy period (for example, upon a heightened state of terror 
alert) despite having rejected an initial offer of coverage by an 
insurer.
    In context, Treasury believes the requirement in section 50.21(a) 
is clear. It is Treasury's view that by offering the coverage at the 
time of initial offer, the insurer has satisfied the make available 
requirement. However, the commenter's suggested change would limit the 
make available requirement more narrowly than intended by Treasury. 
This is because the initial offer of coverage is not the only time when 
the make available requirement applies. Treasury did not intend section 
50.21 of the interim final rule to be read to mean that, as long as an 
insurer makes coverage available through an initial offer, the insurer 
has no further obligation to make coverage available to the 
policyholder during the Program's duration (e.g., at initial offer of 
renewal or in a new policy.) An insurer must make the coverage 
available, not only at the time of initial offer, but also upon offer 
of policy renewal.
    It is Treasury's view that an insurer need not make coverage 
available to a policyholder who did not accept an initial offer of 
coverage and later demands the coverage be added to the same policy 
during the policy period (i.e., through endorsement). In such a 
situation, the policyholder is not left without options; a policyholder 
can cancel its policy and solicit a new offer or proposal for 
insurance. Treasury is modifying section 50.21(a) to clarify the make 
available requirement applies at the time an insurer makes the initial 
offer of coverage as well as at the time an insurer makes an initial 
offer of renewal of an existing policy.
    This insurance association commenter also suggested that Treasury 
consider changing the rule to eliminate the requirement that an insurer 
make available coverage through an initial offer. Instead, the 
commenter proposed that an insurer only be required to simply disclose 
that coverage is available for purchase and to invite policyholders to 
contact the insurer for an offer or quote, if desired. The commenter 
suggested that insurers could still make a formal offer of coverage if 
consistent with their normal business practice, but an offer would not 
be required. Treasury is not adopting this suggestion, which is 
inconsistent with the purposes of the statutory provisions.
4. Umbrella-Type Policies
    An insurance industry trade association commenter raised several 
questions about the applicability of the make available requirement for 
insured losses through commercial property and casualty umbrella 
insurance. In response, Treasury emphasizes that commercial property 
and casualty umbrella insurance is included in the Program because it 
falls within the Program's definition of commercial property and 
casualty insurance. Therefore, an insurer that offers such umbrella 
insurance coverage is subject to the make available requirements.
    Section 102(12) of the Act defines commercial lines of property and 
casualty insurance to specifically include ``excess insurance.'' 
Section 50.5(l) of the regulations further defines commercial property 
and casualty insurance with reference to certain lines of insurance 
business reported on NAIC's Annual Statement's Exhibit of Premiums and 
Losses, commonly known as Statutory Page 14. Commercial property and 
casualty umbrella insurance is reported on Statutory Page 14 and not 
otherwise excluded. Such umbrella policies are within the definition of 
``commercial property and casualty insurance.'' If the umbrella policy 
issuer is an insurer under the Act, it must participate in the Program 
and it is subject to the Act's requirements.
    Accordingly, insurers that issue commercial property and casualty 
insurance through umbrella policies are subject to the make available 
requirements of the Program. This means that they must (1) make 
available in all of their commercial property and casualty insurance 
policies coverage for insured losses and (2) make available such 
coverage for insured losses that does not differ materially from the 
terms, amounts, and other coverage limitations applicable to losses 
arising from events other than acts of terrorism.
    The commenter also stated that some policyholders have declined 
insurance coverage for losses caused by an act of terrorism from their 
primary insurance carriers, electing instead to have such losses 
covered by the ``drop down'' coverage afforded through their 
(presumably less expensive) umbrella insurance policies. To prevent 
what the commenter characterizes as policyholder ``gaming,'' the 
commenter suggests that ``Treasury permit an umbrella insurer, in 
accordance with normal business practice, to refuse to drop down where 
the insured intentionally elected to forego primary coverage for acts 
of terrorism.''
    Although Treasury understands that certain provisions of the Act 
may not fit neatly with typical business practices of umbrella policy 
underwriters and other insurers, Treasury has determined to not revise 
the interim final rule as suggested because it may create a situation 
that appears to excuse an insurer from fulfilling its contractual 
obligation to pay a policyholder's claim for an insured loss that 
otherwise may be covered by the terms and conditions of a policy 
covered by the Program. Instead, it is Treasury's view that the 
commenter's concern is more appropriately addressed by the insurer that 
issues the umbrella policy, for example, through the insurer's 
underwriting procedures, pricing, and/or policy drafting. Therefore, an 
umbrella insurer could draft policy language that excludes from ``drop 
down'' coverage any losses arising from perils for which insurance was 
available from the primary or underlying insurer but was intentionally 
not purchased by the policyholder, provided: (1) The language does not 
differ materially from the terms and other coverage limitations 
applicable to losses arising from events other than acts of terrorism 
and (2) the

[[Page 59726]]

exclusion is otherwise permitted by State law.
    Another commenter raised similar questions with regard to 
Difference-In-Conditions (DIC) commercial property and casualty 
insurance. DIC insurance is included within the Program definition of 
commercial property and casualty insurance. DIC insurance is reported 
by insurers on commercial lines of Statutory Page 14 included in the 
Program (see section 50.5(l)). DIC insurance policies generally provide 
coverage for certain risks not covered by other policies. The commenter 
suggested that DIC commercial property and casualty insurance should 
not be included in the Program. The commenter contended that the Act 
and section 50.23 mean that all underlying commercial property and 
casualty policies must provide for--and cannot exclude--insured losses 
caused by an act of terrorism, and thus DIC coverage will never be 
triggered.
    Treasury does not agree. As stated above with regard to umbrella 
polices, the Act requires all insurers under the Program to make 
available commercial property and casualty coverage for insured losses 
under the Program. If the issuer of a DIC commercial property and 
casualty insurance policy is an insurer as defined under the Program, 
then the DIC insurer must comply with the requirements of the Act and 
Treasury's implementing regulations, including those concerning the 
make available requirements. Insurers can exclude coverage for insured 
losses if the policyholder declines or elects not to purchase the 
coverage. If a DIC insurer's policyholder declines or elects not to 
purchase terrorism risk insurance coverage in an underlying policy, the 
Act requires that the DIC insurer must make available terrorism risk 
insurance for insured losses as part of the DIC policy. As with 
umbrella policies, Treasury recognizes that certain provisions of the 
Act may not fit neatly within typical business practices of DIC 
insurers but it is Treasury's view that the commenter's concern is more 
appropriately addressed through DIC underwriting procedures, pricing or 
policy drafting. Thus, in the final rule, Treasury is making no change 
to section 50.21 to provide special treatment to DIC or umbrella 
insurance policies.
5. Limitations on Types of Risk (Section 50.23)
    Section 103(c)(1)(B) of the Act provides that insurers under the 
Program ``shall make available property and casualty insurance coverage 
for insured losses that does not differ materially from the terms, 
amounts, and other coverage limitations applicable to losses arising 
from events other than acts of terrorism.'' Sections 50.20 through 
50.24 of the interim final rule reflect the statutory language and 
previously issued interim guidance. Section 50.23(b) addresses 
limitations on types of risk and provides that if an insurer does not 
cover all types of commercial property and casualty risks, then it is 
not required to cover the excluded risks in satisfying the make 
available requirements. For example, if an insurer does not cover all 
types of commercial property and casualty risk, either because the 
insurer is outside of direct State regulatory oversight, or because a 
State permits certain exclusions for certain types of losses, such as 
nuclear, biological, or chemical events, then the insurer is not 
required to make such coverage available. In addition, Section 50.24 
addresses the applicability of State law.
    A comment, submitted by a coalition of trade and professional 
associations expressed concern about the make available provisions in 
the interim final regulation. The commenter contended that the interim 
final rule's deference to State law exclusions for certain types of 
losses is not consistent with the purposes of the Act. The commenter 
also stated that the purpose of the Act was to put policyholders back 
to the level of coverage (or availability) that existed prior to 
September 11, 2001. Although acknowledging that whether a policyholder 
purchases terrorism risk insurance may be related to the price of the 
coverage, the commenter suggested that a lack of coverage for 
biological and chemical perils may adversely affect the policyholder's 
decision to purchase terrorism risk insurance.
    After carefully considering the concerns expressed by the commenter 
and reviewing the purposes of the Act, Treasury is not making any 
change in the make available requirement as set forth in the interim 
final rule for the following reasons. First, it is Treasury's view that 
the make available requirement in the interim final rule, including the 
deference to state law exclusions, is fully consistent with the 
purposes of the Act. As stated in Section 101(b), the purposes of the 
Act include establishment of a temporary federal Program to ``allow for 
a transitional period for the private markets to stabilize, resume 
pricing of such insurance and build capacity to absorb any future 
losses, while preserving State insurance regulation and consumer 
protections.'' In addition, other provisions of the Act, such as 
section 106, generally support narrow State law preemption, consistent 
with the McCarran Ferguson Act. Moreover, throughout the implementation 
process, Treasury has followed Congress's direction to consult with the 
NAIC, and in that regard, has relied to the greatest extent possible on 
the existing State regulatory structure for this temporary Program.
    Second, based on information provided by the NAIC, it is Treasury's 
understanding that, even prior to September 11, 2001, insurers offered 
limited coverage for nuclear reaction or radiation or radioactive 
contamination, however caused, in commercial property and casualty 
insurance. In addition, deference to existing State law as it relates 
to the make available requirement does not mean that all losses 
associated with a nuclear, biological or chemical event would be 
excluded under the Program. Even with State exclusions, there may be 
commercial property and casualty insurance coverage in certain 
circumstances for certain biological, chemical or nuclear events. 
Moreover, the make available requirements in the interim final rule do 
not limit an insurer's ability to provide coverage for nuclear, 
biological, or chemical exposures as part of the Program, if the 
insurer chooses to offer such coverage. If an insurer provided such 
coverage in a commercial property and casualty policy, and met its 
insurer deductible and other conditions for federal payment, the 
insurer would receive federal payment under the Program for a claim 
filed based on that policy.
    Third, the availability of terrorism risk insurance is affected by 
the affordability of such insurance. Neither the Act nor the Program 
mandates particular pricing. Therefore even if the ``make available'' 
requirement were applied in markets where exclusions are permitted, 
insurers would be able to price the coverage as appropriate, within any 
constraints, if any, imposed by the particular State. In such cases, if 
insurers believed they had insufficient capacity or that they lacked 
the ability to adequately evaluate the risks associated with a nuclear, 
biological, or chemical event, the corresponding price for such 
coverage along with the overall price for terrorism coverage could 
remain relatively high as insurers sought to build greater capacity and 
to account for greater uncertainty associated with these types of 
events.

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

[[Page 59727]]

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 came within the Act's definition of ``insurer.''
    The disclosure requirements are statutory conditions for federal 
payment under the Program. The disclosure requirements were effective 
immediately upon enactment and remain ongoing requirements that apply 
to new and renewed policies throughout the life of the Program. In the 
event of an act of terrorism resulting in insured losses under the 
Program, insurers must certify, and Treasury must ascertain, that these 
disclosure requirements have been met before federal payment is made. 
Similarly, the make available requirements are important elements of 
the Act. These requirements were effective immediately upon enactment 
and applied to policies in effect at that time. The make available 
requirements will continue to apply to new and renewed policies through 
the end of 2004 (and if the requirements are extended by the Secretary, 
through 2005). Given the significance of the disclosure and make 
available requirements to policyholders and insurers, there is an 
urgent need to issue immediately effective regulations. This includes 
the need to clarify, as necessary, the previously issued interim final 
rule. Moreover, because the changes are in the nature of 
clarifications, there should be no operational impact on insurers and 
no need for a delayed effective date.
    Accordingly, pursuant to 5 U.S.C. 553(d)(3), Treasury has 
determined that there is good cause for this final rule to become 
effective immediately upon publication.
    This 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.
    It is hereby certified that this final rule will not have a 
significant economic impact on a substantial number of small entities. 
The Act requires all licensed or admitted insurers to participate in 
the Program. This includes all insurers regardless of size or 
sophistication. The Act also defines property and casualty insurance 
without any reference to the size or scope of the commercial entity. 
The disclosure and make available requirements are required by the Act. 
The final rule allows all insurers, whether large or small, to use 
existing systems and business practices to demonstrate compliance. 
Accordingly, any economic impact associated with the final rule flows 
from the Act and not the final rule. 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 insurers and 
their policyholders and by 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

0
For the reasons set forth above, the interim final rule amending 
Subparts B and C of 31 CFR Part 50, which was published at 68 FR 19302 
on April 18, 2003, is adopted as a final rule with the following 
changes:

PART 50--TERRORISM RISK INSURANCE PROGRAM

0
1. The authority citation for 31 CFR Part 50 continues to read as 
follows:

    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).

0
2. Section 50.12(d) of Subpart B is revised to read as follows:


Sec.  50.12  Clear and conspicuous disclosure.

* * * * *
    (d) Use of producer. If an insurer normally communicates with a 
policyholder through an insurance producer or other intermediary, an 
insurer may provide disclosures through such producer or other 
intermediary. If an insurer elects to make the disclosures through an 
insurance producer or other intermediary, the insurer remains 
responsible for ensuring that the disclosures are provided by the 
insurance producer or other intermediary to policyholders in accordance 
with the Act.
* * * * *

0
3. Section 50.14 of Subpart B is revised to read as follows:


Sec.  50.14  Separate line item.

    An insurer is deemed to be in compliance with the requirement of 
providing disclosure on a ``separate line item in the policy'' under 
Sec.  50.10(d) if the insurer makes the disclosure:
    (a) On the declarations page of the policy;
    (b) Elsewhere within the policy itself; or
    (c) In any rider or endorsement, or other document that is made a 
part of the policy.

0
4. Section 50.18(b)(2) of Subpart B is revised to read as follows:


Sec.  50.18  Disclosure required by reinstatement provision

* * * * *
    (b) * * *
    (2) The insurer provided notice at least 30 days before any such 
reinstatement of the increased premium for such terrorism coverage and 
the rights of the insured with respect to such coverage, including the 
date upon which the exclusion would be reinstated if no payment is 
received, and the insured fails to pay any increased premium charged by 
the insurer for providing such terrorism coverage.

0
5. Section 50.21(a) of Subpart C is revised to read as follows:


Sec.  50.21  Make available.

    (a) General. The requirement to make available coverage as provided 
in Sec.  50.20 applies to policies in existence on November 26, 2002, 
new policies issued and renewals of existing policies during the period 
beginning on November 26, 2002 and ending on December 31, 2004 (the 
last day of Program Year 2), and if the requirement is extended by the 
Secretary, to new policies issued and renewals of existing policies in 
Program Year 3 (calendar year 2005). The requirement applies at the 
time an insurer makes the initial offer of coverage as well as at the 
time an insurer makes an initial offer of renewal of an existing 
policy.
* * * * *

    Dated: October 1, 2003.
Wayne A. Abernathy,
Assistant Secretary of the Treasury.
[FR Doc. 03-26251 Filed 10-16-03; 8:45 am]
BILLING CODE 4811-15-P