[Federal Register Volume 69, Number 88 (Thursday, May 6, 2004)]
[Proposed Rules]
[Pages 25341-25348]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-10205]


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DEPARTMENT OF THE TREASURY

31 CFR Part 50

RIN 1505-AB08


Terrorism Risk Insurance Program; Litigation Management

AGENCY: Departmental Offices, Treasury.

ACTION: Notice of proposed rulemaking.

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SUMMARY: The Department of the Treasury (Treasury) is issuing this 
proposed rule as part of its implementation of Title I of the Terrorism 
Risk Insurance Act of 2002 (Act). That Act established a temporary 
Terrorism 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 ends on December 31, 2005. This notice of proposed rulemaking 
proposes regulations concerning litigation management related to 
insured losses under the Program. This proposed rule is the fifth in a 
series of regulations that Treasury is issuing to implement the 
Program.

DATES: Written comments may be submitted on or before July 6, 2004.

ADDRESSES: Submit comments (if hard copy, preferably an original and 
two copies) to the Terrorism Risk Insurance Program, Attention: 
Terrorism Risk Insurance Program Public Comment Record, Room 2100, 1425 
New York Avenue, NW., Washington, DC 20220. Because paper mail in the 
Washington, DC, area may be subject to delay, it is recommended that 
comments be submitted electronically to: [email protected]. All 
comments should be captioned with May 6, 2004, NPRM TRIA Comments.'' 
Please include your name, affiliation, address, e-mail address, and 
telephone number in your comment. Comments may also be submitted 
through the Federal eRulemaking Portal: http://www.regulations.gov. 
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: David Brummond, Legal Counsel, or C. 
Christopher Ledoux, Senior Attorney, Terrorism Risk Insurance Program, 
(202) 622-6770 (not a toll-free number).

SUPPLEMENTARY INFORMATION: 

[[Page 25342]]

I. Background

A. Terrorism Risk Insurance Act of 2002

    On November 26, 2002, the President 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 
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 in 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. 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 (as defined under the Act) occurring during the period 
between November 26, 2002, and December 31, 2005.
    Each entity that meets the 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 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 share prior 
to expiration of the Program. An insurer's deductible is calculated 
based on a percentage of 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 insured losses 
above the deductible, subject to an annual industry-aggregate limit of 
$100 billion.
    The Program provides a federal reinsurance backstop for three 
years. The Act provides Treasury with authority to recoup federal 
payments made under the Program through policyholder surcharges, up to 
a maximum annual limit. The Act also prohibits duplicative 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, Program 
Year 2, and, if so determined by the Secretary of the Treasury, for 
Program Year 3, all entities that meet the definition of insurer under 
the Program must make available in all of their property and casualty 
insurance policies coverage for insured losses resulting from an act of 
terrorism. This coverage cannot differ materially from the terms, 
amounts and other coverage limitations applicable to losses arising 
from events other than acts of terrorism. 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 resulting from acts 
of terrorism continue through December 31, 2005.
    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 the 
Federal share of compensation for insured losses under the Program. In 
addition, the Act requires that insurers submit claims and make certain 
certifications to Treasury. Treasury has recently published in the 
Federal Register a proposed rule concerning claims regulations for the 
Program. See 68 FR 67100 (Dec. 1, 2003).
    The Act also contains specific provisions designed to manage 
litigation arising out of or resulting from a certified act of 
terrorism. Among other provisions, section 107 creates, upon 
certification of an act of terrorism by the Secretary, an exclusive 
Federal cause of action and remedy for property damage, personal 
injury, or death arising out of or relating to an act of terrorism; 
preempts certain State causes of action; provides for consolidation of 
all civil actions in Federal court for any claim (including any claim 
for loss of property, personal injury, or death) relating to or arising 
out of an act of terrorism; and provides that amounts awarded in 
actions for property damage, personal injury, or death that are 
attributable to punitive damages are not to be counted as ``insured 
losses'' and not paid under the Program. The Act 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. In this 
rulemaking, Treasury is proposing to implement these provisions of the 
Act to the extent that regulations are necessary for administration of 
the Program or involve the Federal share of compensation under the 
Program. This proposed regulation addresses the advance approval of 
proposed settlements of causes of action described in section 107 of 
the Act, as directed by the President in a Memorandum to the Secretary 
of the Treasury. See 38 Weekly Comp. Pres. Doc. 2096 (Nov. 25, 2002) 
(also accessible at www.treasury.gov/trip).
    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 in a useful and efficient manner. 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 coordinated the 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 that insurers develop their own capacity, 
resources, and mechanisms for terrorism insurance coverage when the 
Program expires.

B. Previously Issued Interim Guidance and Regulations

    To assist insurers, policyholders, and other interested parties in 
complying with immediately applicable requirements of the Act prior to 
the issuance of regulations, Treasury issued interim guidance in four 
separate notices, on December 3 and 18, 2002 and on January 22 and 
March 25, 2003. The interim guidance addressed issues requiring 
clarification to immediately applicable provisions. The guidance was to 
be relied upon by insurers until superseded by regulations or a 
subsequent notice.
    Treasury's first notice of Interim Guidance was published in the 
Federal Register at 67 FR 76206 on December 11, 2002, and addressed, 
among other matters, statutory disclosure obligations

[[Page 25343]]

of insurers as conditions for federal payment under the Program; the 
requirement that an insurer ``make available'' terrorism insurance; and 
how insurers were to calculate the ``direct earned premium'' received 
from commercial lines of property and casualty insurance as well as 
their ``insurer deductibles'' for purposes of the Program.
    Treasury's second notice of interim guidance was published at 67 FR 
78864 on December 26, 2002. The Interim Guidance addressed the 
statutory categories of ``insurers'' that are required to participate 
in the Program, including their ``affiliates'; provided clarification 
on the scope of insured losses covered by the Program; and provided 
additional guidance to enable eligible surplus line carriers listed on 
the NAIC Quarterly Listing of Alien Insurers or Federally approved 
insurers to calculate their insurer deductibles for purposes of the 
Program. This was followed by Treasury's third notice of interim 
guidance, which was published at 68 FR 4544 on January 29, 2003, and 
further clarified certain disclosure and certification requirements, 
and addressed issues concerning non-U.S. insurers, and the scope of the 
term ``insured loss'' under the Act.\1\
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    \1\ Treasury's fourth interim guidance, published at 68 FR 15039 
on March 27, 2003, provided insurers a procedure by which they could 
seek to rebut a presumption of control established in Treasury's 
first set of interim final regulations. The Interim Guidance has 
subsequently been superseded by a provision in the final rule for 
Subpart A of Part 50, Title 31 published at 68 FR 41250 (July 11, 
2003).
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    On February 28, 2003 (68 FR 9804) Treasury published an interim 
final rule together with a proposed rule addressing the scope of the 
program, key definitions and certain general provisions to lay the 
groundwork for program implementation. This interim final rule was 
finalized and published in the Federal Register at 68 FR 41250 (July 
11, 2003) (as amended at 68 FR 48280 (Aug. 13, 2003)) and created 
Subpart A of Part 50 in Title 31 of the Code of Federal Regulations. 
Treasury's second regulation created Subparts B and C of Part 50 as an 
interim final rule published in the Federal Register at 68 FR 19301 
(Apr. 18, 2003) and was finalized and published at 68 FR 59720 (Oct. 
17, 2003). These regulations address disclosures that insurers must 
make to policyholders as a condition for federal payment under the Act, 
and requirements that insurers make available, in their commercial 
property and casualty insurance policies, terrorism risk coverage for 
insured losses under the Program.
    Treasury also created a Subpart D to Part 50 of Title 31, which was 
first proposed and published in the Federal Register at 68 FR 19309 
(Apr. 18, 2003) and finalized and published at 68 FR 59715 (Oct. 17, 
2003). This regulation applies the provisions of the Act to State 
residual market insurance entities and State workers' compensation 
funds.
    Most recently, Treasury published a proposed rule in the Federal 
Register at 68 FR 67100 (December 1, 2003) that adds Subparts F and G 
to Part 50 of Title 31. Subpart F establishes procedures for filing 
claims for payment of the Federal share of compensation for insured 
losses. Subpart G addresses information to be retained related to the 
handling and settlement of claims to enable Treasury to perform 
financial and claim audits.

II. The Proposed Rule

A. Overview

    The rule proposed in this notice would create Subpart I of Part 50 
in Title 31 of the Code of Federal Regulations. It would implement the 
litigation management provisions in section 107 of the Act, provide for 
advance approval of settlements of certain causes of action, and 
clarify related aspects of the Program. Upon certification of an act of 
terrorism by the Secretary, section 107 creates a Federal cause of 
action for property damage, personal injury, or death arising out of or 
resulting from the act of terrorism, which is the exclusive cause of 
action and remedy for such losses. In addition, section 107 provides 
that:
     All State causes of action of any kind for property 
damage, personal injury, or death arising out of or resulting from an 
act of terrorism that are otherwise available under State law are 
preempted;
     Civil actions are to be consolidated in a Federal district 
court or courts, as designated by the Judicial Panel on Multidistrict 
Litigation, which shall have original and exclusive jurisdiction over 
all actions for any claim (including any claim for loss of property, 
personal injury, or death) relating to or arising out of an act of 
terrorism;
     The substantive law for decision in such actions shall be 
derived from the law, including choice of law principles, of the State 
in which the act of terrorism occurred, unless such law is otherwise 
inconsistent with or preempted by Federal law;
     Any amounts awarded in any action for property damage, 
personal injury, or death under section 107 that are attributable to 
punitive damages shall not count as ``insured losses'' for purposes of 
the Program;
     Contractual arbitration rights are preserved; and
     The United States has a right of subrogation with respect 
to any payment or claim paid pursuant to the Act.
    In connection with the implementation of the litigation management 
provisions of the Act, the President directed the Secretary to use his 
authority under the Act to require insurers to obtain Treasury's 
advance approval before settling certain causes of action described in 
section 107 of the Act. The following discussion includes a section-by-
section analysis of these proposed regulatory provisions.

B. Exclusive Federal Cause of Action and Remedy (Section 50.80)

    Section 107(a)(1) of the Act states that once the Secretary has 
certified that an act of terrorism has occurred pursuant to section 102 
of the Act, there shall exist a Federal cause of action for property 
damage, personal injury, or death arising out of or resulting from such 
act of terrorism. The Federal cause of action shall be the exclusive 
cause of action and remedy for claims for property damage, personal 
injury, or death arising out of or relating to such act of terrorism, 
except as provided in section 107(b) of the Act, as discussed further 
below. The exclusive Federal cause of action created by the Act applies 
to all actions for property damage, personal injury, or death arising 
out of or resulting from a certified act of terrorism, regardless of 
whether the cause of action involves an insured loss covered by 
commercial property and casualty insurance. Section 50.80(a) of the 
proposed rule follows this provision of the Act.
    Section 107(b) of the Act creates an exception to the exclusive 
Federal cause of action and remedy established in section 107(a) by 
stating that nothing in the litigation management provisions of section 
107 shall in any way limit the liability of any government, 
organization, or person who knowingly participates in, conspires to 
commit, aids and abets, or commits any act of terrorism certified as 
such under the Act. The proposed rule reflects this exception.
    Section 107(e) of the Act provides that section 107 applies only to 
actions for property damage, personal injury, or death that arise out 
of or result from acts of terrorism that occur or occurred during the 
effective period of the Program. Under the Act, the Program terminates 
on December 31, 2005 (see section 108(a) of the Act); therefore the

[[Page 25344]]

proposed rule provides that the exclusive cause of action and remedy 
exists only for those causes of action that arise out of or result from 
certified acts of terrorism that occur through December 31, 2005.
    Finally, section 107(d) of the Act provides that section 107 shall 
not be construed to affect (1) any party's contractual right to 
arbitrate a dispute; or (2) any provision of the Air Transportation 
Safety and System Stabilization Act (Pub. L. 107-42; 49 U.S.C. 40101 
note). Section 50.80(c) of the proposed rule follows the provisions of 
the Act.

C. Preemption of State Causes of Action (Section 50.81)

    The Act preempts all State causes of action for property damage, 
personal injury, or death arising out of or resulting from an act of 
terrorism that are otherwise available under State law, except as 
provided in section 107(b). See section 107(a)(2) of the Act. Section 
50.81 of the proposed rule reflects this statutory preemption and 
includes the circumstances where the Act does not limit liability 
(i.e., for causes of action against any government, organization, or 
person who knowingly participates in, conspires to commit, aids and 
abets, or commits any act of terrorism.)
    Treasury recognizes that the Act's preemption of State causes of 
action for personal injury or death raises a question regarding the 
treatment of workers' compensation claims under section 107. It is 
Treasury's view that section 107(a)(2) of the Act does not preempt 
workers' compensation claims involving personal injury or death on the 
basis that workers' compensation claims are not ``causes of action'' 
for personal injury or death within the meaning of section 107. A 
``cause of action'' is a group of operative facts giving rise to one or 
more bases for one person to sue and obtain a remedy in court from 
another person.\2\ As a general matter, the laws of the various States 
have eliminated ``causes of action'' for work-related injuries and 
replaced them with various types of workers' compensation systems; 
therefore, there are no ``causes of action * * * otherwise available 
under State law'' for work related injuries within the meaning of 
section 107(a)(2). Thus, it is Treasury's view that the preemption 
provision in section 107(a)(2) does not extend to workers' compensation 
systems in the various States.
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    \2\ See Black's Law Dictionary 214 (7th ed. 1999).
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D. Program Procedures for Notifying Federal Court

    Section 107(a)(4) of the Act provides that for each act of 
terrorism certified by the Secretary pursuant to section 102 of the 
Act, the Judicial Panel on Multidistrict Litigation shall designate one 
district court or, if necessary, multiple district courts of the United 
States that shall have original and exclusive jurisdiction over all 
actions for any claim (including any claim for loss of property, 
personal injury, or death) relating to or arising out of an act of 
terrorism.
    The Act also provides that the Judicial Panel on Multidistrict 
Litigation is to designate the district court or courts not later than 
90 days after the occurrence of an act of terrorism. However, it is the 
Secretary's certification of an act of terrorism that triggers the 
creation of the exclusive Federal cause of action and the need for the 
Judicial Panel to designate a district court for the consolidation of 
actions. Therefore, to facilitate administration of the Program, 
Treasury intends to notify the Panel as soon as practicable following 
any certification of an act of terrorism. In this regard, Treasury is 
considering the appropriate operational procedures that it would follow 
once an act of terrorism is certified by the Secretary. Treasury 
invites comments on such procedures from all interested parties.

E. Failure To Litigate in Federal Court Pursuant to the Act

    In applying section 107(a)(4) of the Act specifically to the 
Program, Treasury is considering whether it is appropriate or necessary 
to include in Part 50 a rule providing that any amounts awarded in any 
civil action relating to or arising out of an act of terrorism that are 
not awarded by the district court or district courts designated by the 
Judicial Panel on Multidistrict Litigation shall be ineligible for 
compensation, regardless of whether the amounts awarded are insured 
losses covered by commercial property and casualty insurance issued by 
an insurer. Treasury solicits public comment on such a provision from 
all interested parties.

F. Treasury's Advance Approval of Settlements (Section 50.82)

    On November 26, 2002, upon signing the Terrorism Risk Insurance Act 
of 2002, the President issued a Memorandum to the Secretary of the 
Treasury that directed the Secretary to propose a rule requiring 
insurers to obtain the advance approval of Treasury of any proposed 
settlements of causes of action described in section 107 of the Act 
arising out of or resulting from an act of terrorism. 38 Weekly Comp. 
Pres. Doc. 2096 (Nov. 25, 2002) (also accessible at www.treasury.gov/trip).
    The Act authorizes Treasury to administer the Program, investigate 
and audit claims, and pay the Federal share of compensation for insured 
losses. (see section 104(a) of the Act). In addition, under section 
103(b)(3) of the Act, Treasury is authorized to prescribe reasonable 
procedures concerning insurers' processing of claims for insured 
losses, which become conditions for federal payment. Pursuant to its 
administrative authority under the Act and to protect the interests of 
the United States, the proposed rule requires advance approval by 
Treasury of proposed settlements of certain causes of action described 
in section 107, to the extent liability for such causes of action is 
covered by or paid, in whole or in part, by an insurer pursuant to 
coverage for insured losses under the Program, provided that the 
insurer intends to submit the settlement as part of its claim for 
federal payment under the Program.
1. Pre-Approval of Certain Proposed Settlements
    Under section 104(a)(2), the Secretary is authorized to prescribe 
regulations to administer and implement the Program effectively. 
Treasury believes that establishing monetary thresholds below which an 
insurer is not required to seek pre-approval by Treasury of settlements 
balances the need to protect the interests of the United States with 
the administrative costs involved in the advance approval of 
settlements. Treasury invites comments on these thresholds (which are 
explained in more detail below) from all interested parties.
    Treasury's proposed rule would require an insurer to seek 
Treasury's advance, written approval where an insurer (directly or 
through its insured) intends to settle a Federal cause of action 
involving third-party liability claims (by a third party against an 
insured and/or the insurer) for property damage, personal injury, or 
death arising out of or resulting from an act of terrorism when:
     Any portion of the proposed settlement amount that is 
attributable to liability for personal injury or death is $1 million or 
more, or that is attributable to liability for property damage 
(including loss of use) is $5 million or more, regardless of the number 
of third-party liability claims being settled; and
     All or part of the settlement amount is expected to be 
part of the insurer's

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claim for federal payment under the Program (included in the insurer's 
aggregate insured losses). No approval is required if the insurer does 
not intend to and does not submit all or part of the settlement as part 
of its claim for federal payment of insured losses under the Program.
    Treasury notes that its proposed settlement approval requirement 
applies to Federal causes of action described above regardless of 
whether a lawsuit has actually been filed or an arbitration commenced 
with respect to the matter.
    Treasury also notes that settlements that are not required to be 
submitted for prior approval are still subject to Treasury review, like 
any other claim, at the point of claim submission by the insurer or at 
the time of any audit (see Subparts F and G proposed as part of claims 
and audit rulemakings, 68 FR 67100 (Dec. 1, 2003).
    Treasury views this prior approval requirement as extending to 
settlements for insured losses arising from third-party claims for 
property damage, personal injury or death against a commercial insured. 
Most commercial liability policies provide coverage for the insured's 
defense of such action. In this regard, the insurer is usually involved 
in the settlements of litigated third-party property and casualty 
claims. Through the insurer, Treasury will have final settlement 
approval authority.
    Coverage disputes and other civil actions involving contract rights 
are not included in the scope of the civil actions requiring advanced 
settlement approval by Treasury. Such disputes involve causes of action 
that are based on contract law, not on property damage, personal 
injury, or death and are not subject to prior approval by Treasury.
    Treasury seeks comments on how frequently claims are received by 
commercial property and casualty insurers under commercial liability 
policies where the insured settles directly with a claimant and then 
notifies the insurer after the settlement has been consummated. In this 
situation, if the insurer was not promptly notified in advance of the 
settlement, the insurer may have difficulty meeting the requirement to 
obtain prior approval from Treasury of the proposed settlement, 
jeopardizing the application of federal reinsurance under the Program. 
Treasury invites public comments on the frequency of such situations, 
the size of claims usually involved, and possible approaches to address 
these situations.
2. Factors To Be Reviewed by Treasury
    In determining whether to approve a proposed settlement, and in 
keeping with its obligation to safeguard the use of taxpayer resources, 
Treasury will consider the nature of the insured loss, the facts and 
circumstances surrounding the loss, and other factors such as whether:
     The proposed settlement compensates for a bona fide loss 
that is an insured loss under the terms and conditions of the 
underlying commercial property and casualty insurance policy;
     Any amount of the proposed settlement is attributable to 
punitive or exemplary damages intended to punish or deter (whether or 
not specifically so described as such damages);
     The settlement amount offsets amounts received from the 
United States pursuant to any other Federal program;
     Attorneys' fees and expenses in connection with the 
settlement are unreasonable or inappropriate, in whole or in part and 
whether they have caused the insured losses under the underlying 
commercial property and casualty insurance policy to be overstated; and
     Any other criteria that Treasury may consider appropriate, 
depending on the facts and circumstances surrounding the settlement, 
including the information contained in section 50.83.
    Additionally, Treasury will review any proposed settlement in 
accordance with proposed section 50.50 of Subpart F, including whether:
     The settlement was fraudulent, collusive, in bad faith, or 
otherwise dishonest; and
     The insurer took all businesslike steps reasonably 
necessary to properly and carefully investigate and ascertain the 
amount of the loss consistent with appropriate business practices.
3. Settlement Without Treasury's Approval
    If an insurer settles a cause of action after Treasury has rejected 
the proposed settlement, or if an insurer settles a cause of action 
without seeking Treasury's approval in advance, as required by section 
50.82, the insurer will not be entitled to the Federal share of the 
amount paid as part of its claim for federal payment unless the insurer 
can demonstrate, to the satisfaction of the Treasury, extenuating 
circumstances. Also, the insurer shall not be entitled to include the 
paid settlement amount as an insured loss in its aggregate insured 
losses (whether or not those aggregate insured losses exceed the 
insurer deductible) for purposes of calculating the Federal share of 
compensation due to the insurer under the Program. Treasury is 
proposing to make advance approval of certain settlements a condition 
for federal payment under the Program, unless the insurer demonstrates, 
to the satisfaction of the Treasury, that extenuating circumstances 
prevented the insurer from seeking Treasury's advance approval.
4. Ensuring That Punitive Damages Are Not Compensated for Under the 
Program
    Section 107(a)(5) of the Act provides that any amounts awarded in 
actions under section 107(a)(1) of the Act (exclusive Federal cause of 
action for property damage, personal injury, or death arising out of or 
resulting from an act of terrorism) that are attributable to punitive 
damages shall not count as insured losses under the Act. Punitive 
damages, sometimes also referred to as exemplary damages, are damages 
that are not compensatory in nature but are an award of money made to a 
claimant solely to punish or deter a wrongdoer. Because section 
107(a)(5) of the Act does not consider punitive damages as ``insured 
losses'' under the Act, the Federal Government will not compensate an 
insurer for such damages. Accordingly, Treasury has proposed amending 
section 50.5 of Subpart A (as part of another proposed rulemaking 
recently published in the Federal Register) and amending the definition 
of ``insured loss'' specifically to exclude punitive or exemplary 
damages as compensable under the Program.
    Consistent with the proposed claims procedures rule, a factor 
Treasury will consider in approving a proposed settlement is whether 
the settlement excludes punitive damages, regardless of how the parties 
to the settlement agreement characterize the payment. An insurer shall 
be required to identify any portion of a proposed settlement amount 
that is attributable to punitive damages, or that intends to compromise 
a claim or demand for punitive damages in a cause of action for which 
punitive damages could be awarded. Treasury will review proposed 
settlements to determine whether all or part of the settlement amount 
is intended to compromise an actual or threatened claim for punitive or 
exemplary damages, even if the settlement does not indicate that the 
payment includes punitive or exemplary damages.

[[Page 25346]]

5. Evaluating Attorneys' Fees and Expenses
    One of the factors Treasury will take into account in reviewing 
proposed settlements is the amount of attorneys' fees and other legal 
expenses. In evaluating the appropriateness of attorneys' fees and 
expenses that are part of any proposed settlement, Treasury intends to 
consider such factors as those weighed by Federal courts regarding the 
reasonableness of attorneys' fees under applicable law. Among the 
factors Treasury may consider are the time and labor required; the 
novelty and difficulty of the questions; the skill requisite to perform 
the legal service properly; the customary fee; whether the fee is fixed 
or contingent; the amount involved and results obtained; the 
experience, reputation, and the ability of the attorneys; and awards in 
similar cases. In addition, Treasury will determine whether the 
attorneys' fees in question have caused the insured losses under the 
underlying commercial property and casualty insurance policy to be 
overstated.

G. Procedures for Requesting Approval of Settlements (Section 50.83)

    Section 50.83 of the proposed rule establishes a procedure for an 
insurer to submit proposed settlements for advance approval by 
Treasury. Generally, within 30 days after Treasury's receipt of a 
complete notice of the proposed settlement and an insurer's request 
that the proposed settlement be approved, Treasury may issue a written 
response and either approve or disapprove the proposed settlement, in 
whole or in part. If Treasury does not issue a written response within 
30 days after its receipt of a complete notice (or within the time as 
extended in writing by Treasury), the request for advance approval of 
the settlement will be deemed approved under section 50.83. (The 
settlement will still be subject to review under the claims 
procedures.) The proposed rule also outlines the minimum information 
Treasury believes may be relevant and useful in considering whether to 
approve a proposed settlement. Treasury invites public comment 
concerning this settlement approval request process.

H. Right of Subrogation (Section 50.84)

    Section 107(c) of the Act provides that the United States shall 
have the right of subrogation with respect to any payment or claim paid 
by the United States under the Act. In most commercial insurance 
policies, insurance companies become subrogated to the rights of the 
persons they pay, to the extent of payment. In section 50.85, Treasury 
proposes to require insurers to take steps to preserve rights of 
subrogation under section 107(c).

III. Procedural Requirements

Executive Order 12866, ``Regulatory Planning and Review''

    This proposed rule is a significant regulatory action for purposes 
of Executive Order 12866, ``Regulatory Planning and Review,'' and has 
been reviewed by the Office of Management and Budget.

Regulatory Flexibility Act

    Pursuant to the Regulatory Flexibility Act, 5 U.S.C. 601 et seq., 
it is hereby certified that this proposed rule will not have a 
significant economic impact on a substantial number of small entities. 
Accordingly, a regulatory flexibility analysis is not required. The 
proposed rule establishes requirements for advance approval of 
settlements when claims are to be submitted for insured losses. There 
is no impact on small insurers unless an act of terrorism occurs and 
federal compensation is sought by small insurers entitled to 
reimbursement for their insured losses. If an act of terrorism occurs 
and federal payment is sought through a claim, the proposed rule's 
impact on small insurers is likely to be minimal because most of the 
information that would have to be submitted in connection with Treasury 
approval of settlements largely duplicates information already 
contained in an insurer claim file or an attorney case file. Moreover, 
the $1 million and $5 million thresholds for the submission of 
settlements to Treasury for approval is likely further to minimize 
burdens on small insurers.

Paperwork Reduction Act

    The collection of information contained in this proposed rule has 
been submitted to the Office of Management and Budget (OMB) for review 
under the requirements of the Paperwork Reduction Act, 44 U.S.C. 
3507(d). An agency may not conduct or sponsor, and a person is not 
required to respond to, a collection of information unless it displays 
a valid control number assigned by OMB.
    Organizations and individuals desiring to submit comments 
concerning the collection of information in the proposed rule should 
direct them to the Desk Officer for the Department of the Treasury, 
Office of Information and Regulatory Affairs, Office of Management and 
Budget, Washington, DC 20503 (preferably by FAX to 202-395-6974, or by 
email to [email protected]). A copy of the comments should also be 
sent to Treasury at the following address: Terrorism Risk Insurance 
Program, Attention: Terrorism Risk Insurance Program Public Comment 
Record, Room 2100, 1425 New York Avenue, NW., Washington, DC 20220 and 
electronically to: [email protected]. Comments on the 
collection of information should be received by June 7, 2004.
    Treasury specifically invites comments on: (a) Whether the proposed 
collection of information is necessary for the proper performance of 
the mission of Treasury and whether the information will have practical 
utility; (b) the accuracy of the estimate of the burden of the 
collections of information (see below); (c) ways to enhance the 
quality, utility, and clarity of the information collection; (d) ways 
to minimize the burden of the information collection, including through 
the use of automated collection techniques or other forms of 
information technology; and (e) estimates of capital or start-up costs 
and costs of operation, maintenance, and purchase of services to 
maintain the information.
    The collection of information in the proposed rule is the 
information required in connection with requests for Treasury approval 
of proposed settlements in Sec.  50.83. The submission of specified 
information in connection with a proposed settlement is mandatory for 
any insurer that seeks payment of a Federal share of compensation.
    If an act of terrorism is certified under the Act, the number of 
settlements, if any, will be determined by the size and nature of the 
certified act of terrorism. Because of the extreme uncertainty 
regarding any such event, a ``best estimate'' has been developed based 
on the considered judgment of Treasury. This estimate has 100 insurers 
sustaining insured losses; each of these insurers would process an 
average of 100 underlying claims for a total of 10,000 claims. If one 
in five claims involves amounts in dispute that exceed the monetary 
thresholds in Sec.  50.82(a), there would be 2,000 claims eligible for 
settlement. If 90 percent of these claims settle before any judgment or 
award, this would require 1,800 claims to be submitted to Treasury for 
advance approval under Subpart I.
    The information required by Treasury in connection with a request 
for advanced approval of a proposed settlement in Sec.  50.83 largely 
duplicates

[[Page 25347]]

information already contained in an insurer claim file or an attorney 
case file. The burden associated with compiling and submitting such 
information to Treasury is therefore relatively moderate.
    Accordingly, Treasury estimates that the proposed rule will impose 
5 hours of burden with respect to each claim. The estimated annual 
burden of the proposed rule is therefore 9,000 hours.

List of Subjects in 31 CFR Part 50

    Terrorism risk insurance.

Authority and Issuance

    For the reasons set forth above, 31 CFR part 50 is proposed to be 
amended as follows:

PART 50--TERRORISM RISK INSURANCE PROGRAM

    1. The authority citation for 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).

    2. Subpart I of part 50 is added to read as follows:
Subpart I--Federal Cause of Action; Approval of Settlements
Sec.
50.80 Federal cause of action and remedy.
50.81 State causes of action preempted.
50.82 Advance approval of settlements.
50.83 Procedure for requesting approval of proposed settlements.
50.84 Subrogation.

Subpart I--Federal Cause of Action; Approval of Settlements


Sec.  50.80  Federal cause of action and remedy.

    (a) General. Upon certification of an act of terrorism pursuant to 
section 102 of the Act, there shall exist a Federal cause of action for 
property damage, personal injury, or death arising out of or resulting 
from such act of terrorism, pursuant to section 107 of the Act, which 
shall be the exclusive cause of action and remedy for claims for 
property damage, personal injury, or death arising out of or relating 
to such act of terrorism, except as provided in paragraph (c) of this 
section.
    (b) Effective period. The exclusive Federal cause of action and 
remedy described in paragraph (a) of this section shall exist only for 
causes of action for property damage, personal injury, or death that 
arise out of or result from acts of terrorism that occur or occurred 
during the effective period of the Program as set forth in section 108 
of the Act.
    (c) Rights not affected. Nothing in section 107 of the Act or this 
Subpart shall in any way:
    (1) Limit the liability of any government, organization, or person 
who knowingly participates in, conspires to commit, aids and abets, or 
commits any act of terrorism;
    (2) Affect any party's contractual right to arbitrate a dispute; or
    (3) Affect any provision of the Air Transportation Safety and 
System Stabilization Act (Pub. L. 107-42; 49 U.S.C. 40101 note).


Sec.  50.81  State causes of action preempted.

    Upon certification of an act of terrorism pursuant to section 102 
of the Act, all State causes of action of any kind for property damage, 
personal injury, or death arising out of or resulting from such act of 
terrorism that are otherwise available under State law are preempted, 
except that, pursuant to section 107(b) of the Act, nothing in this 
section shall limit in any way the liability of any government, 
organization, or person who knowingly participates in, conspires to 
commit, aids and abets, or commits the act of terrorism certified by 
the Secretary.


Sec.  50.82  Advance approval of settlements.

    (a) General. An insurer shall submit to Treasury for advance 
approval any proposed agreement to settle or compromise any Federal 
cause of action for property damage, personal injury, or death, 
including any agreement between its insured(s) and third parties, 
involving an insured loss, all or part of the payment of which the 
insurer intends to submit as part of its claim for Federal payment 
under the Program, when:
    (1) Any portion of the proposed settlement amount that is 
attributable to an insured loss or losses involving personal injury or 
death in the aggregate is $1 million or more, regardless of the number 
of causes of action or insured losses being settled; or
    (2) Any portion of the proposed settlement amount that is 
attributable to an insured loss or losses involving property damage 
(including loss of use) in the aggregate is $5 million or more, 
regardless of the number of causes of action or insured losses being 
settled.
    (b) Factors. In determining whether to approve a proposed 
settlement in advance, Treasury will consider the nature of the loss, 
the facts and circumstances surrounding the loss, and other factors 
such as whether:
    (1) The proposed settlement compensates for a loss that is an 
insured loss under the terms and conditions of the underlying 
commercial property and casualty insurance policy;
    (2) Any amount of the proposed settlement is attributable to 
punitive or exemplary damages intended to punish or deter (whether or 
not specifically so described as such damages);
    (3) The settlement amount offsets amounts received from the United 
States pursuant to any other Federal program;
    (4) The settlement does not involve unreasonable or inappropriate 
attorneys' fees and legal expenses and whether they have caused the 
insured losses under the underlying commercial property and casualty 
insurance policy to be overstated; and
    (5) Any other criteria that Treasury may consider appropriate, 
depending on the facts and circumstances surrounding the settlement, 
including the information contained in Sec.  50.83.
    (c) Settlement Without Seeking Advance Approval or Despite 
Disapproval. If an insurer settles a cause of action or agrees to the 
settlement of a cause of action without submitting the proposed 
settlement for Treasury's advance approval in accordance with this 
section and in accordance with Sec.  50.83 or despite Treasury's 
disapproval of the proposed settlement, the insurer will not be 
entitled to include the paid settlement amount (or portion of the 
settlement amount, to the extent partially disapproved) in its 
aggregate insured losses for purposes of calculating the Federal share 
of compensation of its insured losses, unless the insurer can 
demonstrate, to the satisfaction of Treasury, extenuating 
circumstances.


Sec.  50.83  Procedure for requesting approval of proposed settlements.

    (a) Submission of Notice. Insurers must request advance approval of 
a proposed settlement by submitting a notice of the proposed settlement 
and other required information in writing to the Terrorism Risk 
Insurance Program Office or its designated representative. The address 
where notices are to be submitted will be available at http://www.treasury.gov/trip following any certification of an act of 
terrorism pursuant to section 102(1) of the Act.
    (b) Complete Notice. Treasury will review requests for advance 
approval and determine whether additional information is needed to 
complete the notice.
    (c) Treasury Response or Deemed Approval. Within 30 days after 
Treasury's receipt of a complete notice, or as extended in writing by 
Treasury, Treasury may issue a written response and indicate its 
partial or full approval

[[Page 25348]]

or rejection of the proposed settlement. If Treasury does not issue a 
response within 30 days after Treasury's receipt of a complete notice, 
unless extended in writing by Treasury, the request for advance 
approval is deemed approved by Treasury. Any settlement is still 
subject to review under the claim procedures pursuant to Sec.  50.50.
    (d) Notice Format. A notice of a proposed settlement should be 
entitled, ``Notice of Proposed Settlement--Request for Approval,'' and 
should provide the full name and address of the submitting insurer and 
the name, title, address, and telephone number of the designated 
contact person. An insurer must provide all relevant information, 
including the following, as applicable:
    (1) A brief description of the insured's underlying claim, the 
insured's loss, the amount of the claim, the operative policy terms, 
defenses to coverage, and all damages sustained;
    (2) An itemized statement of all damages by category (i.e., actual, 
economic and non-economic loss, punitive damages, etc.);
    (3) A statement from the insurer or its attorney recommending the 
settlement and the basis for the recommendation;
    (4) The total dollar amount of the proposed settlement;
    (5) Indication as to whether the settlement was negotiated by 
counsel;
    (6) The net amount to be paid to the insured and/or third party;
    (7) The amount to be paid that will compensate attorneys for their 
services and expenses and an explanation as to why the amount is not 
unreasonable;
    (8) The amount received from the United States pursuant to any 
other Federal program for compensation of insured losses related to an 
act of terrorism;
    (9) The proposed terms of the written settlement agreement, 
including release language and subrogation terms;
    (10) Other relevant agreements, including:
    (i) Admissions of liability or insurance coverage;
    (ii) Determinations of the number of occurrences under a commercial 
property and casualty insurance policy;
    (iii) The allocation of paid amounts or amounts to be paid to 
certain policies, or to specific policy, coverage and/or aggregate 
limits; and
    (iv) Any other agreement that may affect the payment or amount of 
the Federal share of compensation to be paid to the insurer;
    (11) A statement indicating whether the proposed settlement has 
been approved by the Federal court or is subject to such approval and 
whether such approval is expected or likely; and
    (12) Such other information as may be requested by Treasury or its 
designee.


Sec.  50.84  Subrogation.

    An insurer shall not waive its rights of subrogation under its 
insurance policy and shall take all steps necessary to preserve the 
subrogation right of the United States as provided by section 107(c) of 
the Act.

    Dated: April 29, 2004.
Wayne A. Abernathy,
Assistant Secretary of the Treasury.
[FR Doc. 04-10205 Filed 5-5-04; 8:45 am]
BILLING CODE 4811-15-P