[Federal Register Volume 69, Number 124 (Tuesday, June 29, 2004)]
[Rules and Regulations]
[Pages 39296-39309]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-14588]



[[Page 39295]]

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Part V





Department of the Treasury





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31 CFR Part 50



Terrorism Risk Insurance Program; Claims Procedures; Final Rule

  Federal Register / Vol. 69 , No. 124 / Tuesday, June 29, 2004 / Rules 
and Regulations  

[[Page 39296]]


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DEPARTMENT OF THE TREASURY

31 CFR Part 50

RIN 1505-AB07


Terrorism Risk Insurance Program; Claims Procedures

AGENCY: Departmental Offices, Treasury.

ACTION: Final rule.

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SUMMARY: The Department of the Treasury (Treasury) is issuing this 
final rule as part of its implementation of title I of the Terrorism 
Risk Insurance Act of 2002 (Act). The 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 rule was published in proposed 
form on December 1, 2003, for public comment. The final rule contains 
certain definitions, requirements, and procedures for insurers filing 
claims with Treasury for payment of the Federal share of compensation 
for insured losses under the Program. In particular, the final rule 
addresses requirements for Federal payment, initial notice of insured 
loss, loss certifications, the timing and process for payment, 
associated recordkeeping requirements, and Treasury's audit and 
investigation authority.

DATES: This final rule is effective July 29, 2004.

FOR FURTHER INFORMATION CONTACT: Howard Leikin, Senior Insurance 
Advisor, David Brummond, Legal Counsel, or C. Christopher Ledoux, 
Senior Attorney, Terrorism Risk Insurance Program, (202) 622-6770 (not 
a toll-free number).

SUPPLEMENTARY INFORMATION:

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 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 duplicate payments for 
insured losses that have been covered under other Federal programs.
    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 commercial 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. On June 18, 2004, the 
Secretary of the Treasury announced his decision to extend the make 
available requirements through Program Year 3.
    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 of the 
Federal share of compensation for insured losses under the Program. In 
addition, the Act requires that insurers make certain certifications to 
Treasury and process and submit claims for the insured loss in 
accordance with appropriate business practices and any reasonable 
procedures Treasury may prescribe.
    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 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

[[Page 39297]]

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 promptly issued interim guidance. 
The interim guidance addressed certain immediately applicable 
provisions that required clarification and 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 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. The second notice 
of interim guidance was published at 67 FR 78864 on December 26, 2002, 
and provided guidance concerning which insurance companies were 
``insurers'' for purposes of the Program, including their 
``affiliates.'' It also addressed the scope of insured losses covered 
by the Program and calculation of insurer deductibles. Treasury's third 
notice of interim guidance was published at 68 FR 4544 on January 29, 
2003. It 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\ These interim guidance notices 
have now been superceded by a series of interim final and final 
regulations issued by Treasury.
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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 
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 that laid the groundwork for Program implementation, 
including the scope of the Program and key definitions. 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 interim final regulation created 
subparts B and C of part 50 and addressed 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. It was published in the Federal 
Register at 68 FR 19301 (Apr. 18, 2003). After review of comments, this 
interim final rule was finalized and published at 68 FR 59720 (Oct. 17, 
2003).
    Treasury has also issued a regulation applying the Act to State 
residual market insurance entities and State workers' compensation 
funds. In this regard, Treasury 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). After review of comments Treasury 
finalized and published this rule at 68 FR 59715 (Oct. 17, 2003).

C. The Proposed Rule (Claims Procedures)

    The proposed rule on which this final rule is based was published 
in the Federal Register at 68 FR 67100 on December 1, 2003. In subpart 
F to part 50 of title 31, Treasury's proposed rule contained 
requirements and procedures for insurers that file claims for payment 
of the Federal share of compensation for insured losses resulting from 
a certified act of terrorism under the Act. In particular, the proposed 
rule revised the regulatory definition of ``insured loss,'' provided 
for an initial notice of insured loss and loss certifications, set 
forth general requirements for Federal payment under the Program and 
addressed the timing and process of such payment. Subpart G addressed 
information to be retained related to the handling and settlement of 
claims to enable Treasury to perform financial and claim audits.

II. Summary of Comments and Final Rule

    In the event that it had been necessary to activate the Program's 
claims procedures prior to the issuance of this final rule, Treasury 
was prepared to do so on an expedited basis. Such action, however, was 
not necessary and Treasury is now issuing this final rule after careful 
consideration of all comments received on the proposed rule and after 
consultation with the NAIC. While this final rule largely reflects the 
proposed rule, Treasury has made several revisions and a number of 
clarifications based on the comments received.
    Treasury received comments on the proposed rule from four national 
insurance industry trade associations, collectively, as well as 
individually, a national risk retention trade association, a national 
lender trade association, a national surety trade association, a 
national agent and broker association, a captive insurers association, 
three insurance companies, a group of London-based insurers, a 
consulting actuarial firm, a vendor of insurance services, and a legal 
firm representing captive insurers. As described in detail below, 
commenters generally agreed with the proposed rule. However, Treasury 
received many requests to add a process for advance payments and for 
clarification of specific payment requirements and processes. In 
response, Treasury has revised the proposed rule to allow advance 
payments under certain conditions. In addition, Treasury has clarified 
provisions in the proposed rule that pertain to loss certifications 
requirements, payments to affiliated groups, prohibitions on 
duplicative compensation from other Federal programs, and the 
adjustment and suspension or denial of payments. Several commenters 
also requested that Treasury add specific references in the claims rule 
for State residual market insurance entities and Treasury has done so 
in the final rule. The comments received and Treasury's revisions to 
the proposed rule are summarized below.

A. Definition of Insured Loss (Section 50.5)

    The final rule amends the previously issued definition of ``insured 
loss'' at Sec.  50.5(e) to clarify that certain loss adjustment 
expenses allocable to a specific underlying loss are part of an 
insurer's insured losses and will be included in the Federal share of 
compensation under the Program. This clarification follows customary 
practices of the insurance industry with regard to reinsured losses. 
The definition has also been amended by the final rule to clarify that 
an insurer's payments in excess of policy limits or payments due to an 
insurer's extra-contractual obligations will not be considered as an 
insurer's insured loss. In addition, because section 107(a)(5) of the 
Act explicitly states that punitive damages are not to be considered as 
insured losses, the definition has been further amended to exclude 
compensation to an insurer for any payments attributable to punitive 
damages.

[[Page 39298]]

1. Allocated Loss Adjustment Expense
    In Sec.  50.5(e)(3) of the proposed rule, Treasury proposed to 
revise the definition of the term ``insured loss'' to include certain 
loss adjustment expenses incurred by an insurer in connection with 
insured losses, specifically those expenses ``that are allocated and 
identified by claim file in insurer records, including expenses 
incurred in the investigation, adjustment and defense of claims, but 
excluding staff adjuster salaries and any allocations of other internal 
insurer expenses.'' In the preamble to the proposed rule, Treasury 
noted that this was consistent with customary insurance industry 
business practices.
    Three comments addressed the proposed rule's treatment of these 
allocated loss adjustment expenses (commonly known in the insurance 
industry as ALAE) within the definition of insured loss. An insurance 
industry trade association commended Treasury noting that, ``this is 
consistent with industry practices and certainly appropriate.'' 
However, an individual insurance company commented that this 
description of ALAE would not provide equal indemnification to insurers 
employing staff adjusters versus those using outside, or independent, 
adjustors. Another insurer expressed concern that certain expenses 
would be excluded under Sec.  50.5(e)(3) of the proposed rule. Expenses 
cited were, ``traveling to investigate the site of a loss, attend an 
examination, or perform some other function related to a specific 
claim'' if incurred by insurer staff adjusters.
    Treasury has considered the comments presented and believes that 
the proposed rule generally reflected its intention to follow the Act's 
objectives of a system of shared public and private compensation for 
insured losses, including the unpredictable adjustment expenses 
directly associated with such losses. In particular, Treasury believes 
that the treatment of staff salaries in the proposed rule remains 
consistent with the Congressional findings and purposes of the Act and 
treats insurers participating in the Program comparably. Expenses such 
as staff salaries and other internal insurer expenses that are known 
and incurred regardless of the occurrence of any certified act of 
terrorism are not suitable to be shared with the general taxpayers and 
thus are not included in the definition of insured loss.
    The specific approach taken toward staff adjuster and other 
expenses in Sec.  50.5(e)(3) of the proposed rule is consistent with 
accepted practices in the reinsurance industry and with the broader 
objectives for the Act. However, for added clarity, Treasury has 
modified Sec.  50.5(e)(3) in the final rule to specifically exclude 
``staff salaries, overhead, and other insurer expenses that would have 
been incurred notwithstanding the insured loss'' from the definition of 
insured loss. Consistent with this approach, reasonable, allocated 
expenses for travel to investigate the site of a loss, attend an 
examination, or perform some other function related to the 
investigation, adjustment and defense of a specific claim, even if 
incurred by insurer staff adjusters, are included in the definition of 
insured loss.
2. Extra-Contractual Obligations
    The proposed rule also revised the definition of ``insured loss'' 
to clarify that the Federal Government would not share in an insurer's 
payment of extra-contractual damages. Extra-contractual obligations 
describe an insurer's liability to pay damages to its insured or a 
third party due to the insurer's breach of the insurance policy and/or 
negligent or bad-faith claims-handling conduct, including liability for 
punitive, exemplary, or special damages awarded or paid as a result of 
such conduct.
    Several insurance industry trade groups commented that Treasury's 
proposed rule should be revised to allow for the federal payment of 
extra-contractual obligations paid by an insurer. Extra-contractual 
obligations paid by an insurer are the result of an insurer's conduct 
and are not part of ``insured loss'' or directly associated with 
adjusting the loss as is the case with ALAE. Accordingly, such losses 
are not to be paid under the Program. The final rule adopts Sec.  
50.5(4) of the rule as proposed, with some minor modifications to the 
language.
    In commenting on extra-contractual obligations, one trade group 
stated that in the light of unique situations following an act of 
terrorism, insurers ``may go beyond the contract language to indemnify 
an insured.'' Such payments by an insurer would not be an ``insured 
loss'' because the paid loss is not covered by the terms and conditions 
of the insurance policy. Treasury considered the comment and has 
determined to adopt Sec.  50.50(a)(6) of the proposed rule without 
change in the final rule.
3. Excess Policy Limits Payments
    The definition of ``insured loss'' in the proposed rule did not 
include losses in excess of policy limits (known commonly in the 
insurance industry as XPL). XPL losses occur when the liability of the 
insured to a third party is in excess of that policy limit but 
otherwise within the scope of the insurance coverage. Under certain 
circumstances, an insurer will pay XPL losses to or on behalf of its 
insured (e.g., when an insurer fails to accept a settlement offer 
within policy limits and a jury later finds the policyholder liable in 
an amount in excess of policy limits). In the preamble to the proposed 
rule, Treasury specifically invited comments on whether Treasury should 
include XPL losses within the definition of ``insured loss.''
    One commenter who addressed the issue of XPL losses pointed out 
that excess of loss reinsurance treaties usually include clauses 
providing reinsurance coverage for XPL claims. Treasury recognizes that 
such clauses are sometimes negotiated into reinsurance treaties. 
However, Treasury had determined not to include such losses in the 
definition of ``insured loss'' because such excess losses are not part 
of ``insured loss'' or directly associated with adjusting the loss. 
Given the lack of additional reasons to include XPL, the final rule 
adopts Treasury's proposed language, with a technical correction at 
Sec.  50.5(e)(4)(iii).
4. Losses by State Residual Market Mechanisms
    Three comments were received from insurance trade associations, 
submitted individually and collectively, concerning the proposed rule 
not specifically addressing losses by State residual market insurance 
entities and State workers' compensation funds (hereafter referenced as 
State residual market mechanisms). The commenters offered language to 
explicitly include, in the definition of insured losses, those losses 
allocated on a proportionate share basis from a State residual market 
mechanism to a participating insurer. Treasury has determined that it 
is not necessary to amend the definition of insured loss for this 
purpose, but has addressed this issue through clarifications to 
Sec. Sec.  50.50 and 50.53 regarding the treatment of residual market 
losses. These changes are discussed below.

B. Federal Share of Compensation (Section 50.50)

    The final rule provides that the Federal share of compensation 
under the Program is 90 percent of that portion of the insurer's 
insured losses that exceed its insurer deductible during a Program 
Year, subject to specified adjustments and the annual industry 
aggregate limit of $100 billion as provided in the Act. This section 
also

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addresses requirements for federal payment and situations under which 
Treasury may deny or suspend payment.
1. General Clarifications
    In Sec.  50.50(a), Treasury has revised the proposed rule to 
clarify that the Federal share of compensation will be paid once a 
Certification of Loss required by Sec.  50.53 of the final rule is 
deemed sufficient. Section 50.50(a)(1) was changed slightly to make 
clear that the insurer, including all affiliates of the insurer, must 
meet the requirements of Sec.  50.5(f). Also, Sec.  50.50(a)(4) has 
been revised to clarify that Treasury will pay so long as the 
underlying insured loss--as well as the insurer's claim for Federal 
payment--is not fraudulent, collusive, made in bad faith, or dishonest. 
In addition, under Sec.  50.50(4) of the final rule, neither the 
underlying claim for insured loss nor the insurer's claim will be paid 
if Treasury determines that the claim is designed to circumvent the 
purposes of the Act and regulations. This is intended to discourage 
those who may attempt to ``game'' the Program.
    Section 50.50(a) of the proposed rule provided that payment of the 
Federal share of compensation would occur upon Treasury making a 
determination as to the factors listed therein. This section of the 
proposed rule provided that Treasury may make a payment without this 
determination, subject to a ``reservation of rights.'' As that term is 
commonly understood in the insurance industry, payment subject to a 
``reservation of rights'' facilitates prompt payment because the 
payment is not construed as a waiver by the payee of any preconditions 
to payment. Although Treasury has eliminated the ``reservation of 
rights'' language in the final rule, Federal payment is still subject 
to Treasury's statutory authority as administrator of the Program to 
examine, or re-examine the factors listed in Sec.  50.50(a) as part of 
a claims review or audit. This is now reflected in Sec.  50.50(b) of 
the final rule. Treasury has statutory authority to subsequently 
adjust, or require repayment of any federal payment under the Act.
2. State Residual Market Mechanisms
    As previously noted in the discussion of Sec.  50.5, Treasury 
received comments with regard to the distribution of losses to 
participating insurers from State residual market mechanisms described 
in section 103(d)(2)(B) of the Act. A comment jointly provided by four 
insurance industry trade associations suggested that the proposed rule 
be revised to recognize losses paid by participating insurers as their 
share of residual market losses. Treasury concurs with the need to 
clarify the treatment of losses paid as a share of residual market 
losses. Section 50.50(a)(2) has been revised to make clear that the 
insurer's insured losses include ``the allocated dollar value of the 
insurer's proportionate share of losses from a State residual market 
entity or State workers' compensation fund.''
3. Advance Payments
    Section 50.50(a) of the proposed rule provided that the amount of 
payment of the Federal share of compensation would be based, in part, 
upon a Treasury determination that, the ``insurer has made payment of 
an underlying insured loss to a person who had suffered the insured 
loss, or to a person acting on behalf of such person * * *.'' This 
proposed an approach whereby Treasury would pay the Federal share of 
compensation strictly as a reimbursement for amounts actually paid by 
insurers for underlying insured losses, whether fully or partially 
settled. This approach was also followed in Sec.  50.53 of the proposed 
rule (Loss Certifications), which required, in part, a certification 
that the insurer had paid all underlying claims comprising the insured 
losses submitted for payment, as listed in the bordereau provided 
pursuant to Sec.  50.53(b)(1).
    Treasury received six comments on the timing of Federal payments. 
With some variation, the common theme was the issue of whether an 
insurer would receive the Federal share of compensation before or after 
the insurer's payment of underlying insured losses. The commenters, one 
insurer, three trade associations and one law firm on behalf of a trade 
association, contended that adherence to the pure reimbursement 
approach is not required by the Act. It was asserted that insurers may 
need to receive the Federal share of compensation for an insured loss 
in advance of their actual payment because of liquidity problems, 
particularly in the financial environment following a certified act of 
terrorism. The commenters explained that reinsurance industry practice 
permits advance or simultaneous payments subject to certain controls.
    Treasury carefully considered these comments and determined that 
there may be some circumstances in which it would be appropriate for 
Treasury to advance payment for the Federal share of compensation for 
insured losses. Section 104(b)(2) of the Act authorizes the issuance of 
rules or procedures specifying the manner in which payments of the 
Federal share of compensation may be made based on estimates of insured 
losses. In the final rule, Treasury has revised Sec.  50.50 of the 
proposed rule to permit insurers to include on their bordereau requests 
for payment of the Federal share of compensation for both (1) claim 
payments already made, and (2) claim payments about to be made. This 
applies to partial as well as final settlements of underlying claims 
that comprise an insurer's insured losses.
    Under the final rule, insurers are required to certify that any 
advances for underlying insured losses that have been requested will be 
paid within five business days of receipt of funds from Treasury. In 
addition, any interest earned on such funds will be remitted to the 
Treasury. Treasury believes that this provides an appropriate balance 
between meeting the cash flow needs of participating insurers and the 
proper stewardship over public funds.
    To permit advanced payments, Sec.  50.50(a)(3) of the proposed rule 
has been revised in the final rule to recognize that an insurer ``has 
paid or is prepared to pay an underlying insured loss.'' Section 
50.53(b)(2)(i) also has been revised to provide that underlying losses 
on the insurer's bordereau ``either: Have been paid by the insurer; or 
will be paid by the insurer upon receipt of an advance payment of the 
Federal share of compensation as soon as possible, consistent with the 
insurer's normal business practices, but not longer than five business 
days after receipt of the Federal share of compensation.'' Also, a new 
subsection (d) has been added to Sec.  50.54 Payment of the Federal 
Share of Compensation, that requires insurers seeking advanced payments 
to establish segregated interest-bearing accounts for the receipt of 
such payments and for the disbursement of those payments to insureds 
and claimants.
4. Full Payment for All Insured Losses
    One comment was received from a trade association that understood 
the proposed rule as requiring insurers to make payment in full of all 
insured losses before becoming eligible for the Federal share of 
compensation. This is a misreading of the proposed rule and no change 
to the rule is required.
5. Denial or Suspension of Payment
    Section 50.62 of the proposed rule provided generally that an 
insurer may be ineligible to receive payment of the Federal share of 
compensation for insured losses upon a determination by Treasury that 
the insurer intentionally concealed or misrepresented any material fact 
or circumstance, engaged

[[Page 39300]]

in fraudulent conduct, or made false statements relating to 
participation under the Act.
    A national insurance trade association commented on Sec.  50.62. 
This commenter noted that section 103(b) of the Act sets forth the 
grounds under which an insurer may be ineligible to receive Federal 
payments and that section 104(e) of the Act provides Treasury with 
civil money penalty authority. If any of the conditions for payment of 
the Federal share in section 103(b) have not been met with respect to a 
particular insured loss, the commenter suggested that the appropriate 
response of Treasury would be to deny payment for that insured loss. 
Similarly, the commenter suggested that if there is wrongdoing, such as 
fraud or misrepresentation, Treasury could assess civil money penalties 
under section 104(e) of the Act. The commenter concluded that these 
provisions ``cover the landscape of potential offenses'' and thus 
viewed the provisions of Sec.  50.62 to be overbroad. The commenter 
recommended that Sec.  50.62 be deleted or revised.
    Treasury concurs that sections 103(b) and 104(e) provide Treasury 
with broad authority to deny or suspend payment and/or to assess civil 
money penalties in connection with insurer requests for payment of the 
Federal share of compensation under the Act. Treasury has determined to 
delete Sec.  50.62 as the commenter requested and to address certain 
issues through revisions to Sec.  50.50.
    Treasury believes there may be circumstances where failure to meet 
one of the requirements for payment of the Federal share of 
compensation with respect to one insured loss may be an indication of a 
broader pattern or practice of malfeasance or wrongdoing on the part of 
the insurer with regard to its other claims for insured losses. To 
address this, Treasury has added a new subsection (c) to Sec.  50.50 
that provides, in Treasury's discretion, for suspension of payment for 
other insured losses of an insurer if the insurer fails to meet one of 
the requirements in Sec.  50.50(a). In such cases, Treasury may decide 
to conduct additional review and investigation of the insurer's Loss 
Certification submissions before paying the Federal share of 
compensation.

C. Adjustments to the Federal Share of Compensation (Section 50.51)

    The final rule specifies several adjustments in calculating the 
Federal share of compensation. First, the rule reduces aggregate 
insured losses by amounts recovered by insurers for salvage and 
subrogation. Second, the rule provides that, should the amount of an 
insurer's Federal share of compensation from the Program and the amount 
of recoveries from other sources exceed the aggregate amount of its 
insured losses in a Program Year, then any excess recovery must be 
returned to Treasury. Excluded from this requirement are recoveries 
from a reinsurer pursuant to an agreement whereby an insurer's 
obligation to repay its reinsurer takes priority over its obligation to 
repay Treasury. Third, the rule in Sec.  50.51 follows the Act's 
requirement that the Federal share of compensation for insured losses 
be reduced by any duplicate amount of compensation otherwise provided 
by the Federal government for those insured losses.
1. Salvage and Subrogation
    Treasury received three comments on the salvage and subrogation 
provisions of 50.51(a). One commenter, an insurer, noted that the 
preamble to the proposed rule expressed Treasury's expectation that, 
``as normal good business practice, insurers will pursue salvage and 
subrogation.'' The commenter was concerned that this language and the 
proposed rule did not explicitly address the flexibility of the insurer 
to use its own business discretion to pursue, abandon or forego salvage 
and/or subrogation efforts. Treasury believes that normal business 
practice requires the use of discretion in determining salvage and/or 
subrogation efforts. Treasury does not believe a change to the proposed 
rule is required and expects insurers to use the appropriate discretion 
in pursuing salvage and/or subrogation opportunities.
    This same commenter requested clarification regarding the cost of 
pursuing salvage and/or subrogation. The rule states that the insurer's 
aggregate insured losses used to calculate the Federal share of 
compensation shall be reduced by any salvage or subrogation recoveries. 
Treasury agrees that insurers should be able to recover the costs of 
pursuing salvage and subrogation actions. It is expected that these 
expenses will be included by insurers in Allocated Loss Adjustment 
Expenses. Because such reasonable expenses are included in the 
definition of insured loss, Treasury sees no need to further change the 
rule to resolve this issue. Additional guidance on the treatment and 
netting of expenses will be included in the definitions for the fields 
reported on the bordereau form submitted with the Certifications of 
Loss.
    A trade association commented that some insurers do not currently 
capture salvage and subrogation recoveries independent of one another 
and sought relaxed reporting requirements. Treasury prefers to receive 
this information separately, but in the interest of minimizing changes 
to insurers' existing processes Treasury will accept reports with 
salvage and subrogation recoveries combined or separate. This 
accommodation will be accomplished in the bordereau format and 
instructions which are soon to be published (along with other forms) 
for public comment.
2. No Excess Recoveries
    Section 50.51(b)(1) of the proposed rule provided that in any 
Program Year the sum of the Federal share of compensation paid to an 
insurer and the insurer's recoveries for insured losses from other 
sources shall not be greater than the insurer's aggregate losses for 
acts of terrorism in that Program Year. This is consistent with section 
103(g)(2) of the Act.
    One commenter suggested that ceding commissions received by an 
insurer in reinsuring its deductible and retentions under the Act could 
be considered part of an insurer's recovery. Ceding commissions are 
compensation from a reinsurer to a ceding insurer for the costs of 
writing underlying policies and are paid regardless of whether claims 
are ever submitted. It is Treasury's view that ceding commissions are 
not recoveries from other sources for insured losses and, therefore, 
the Federal share of compensation shall not be reduced by such 
commissions. No change has been made to the proposed rule in this 
regard.
    Section 50.51(b)(1) of the proposed rule also provided that amounts 
recovered for insured losses in excess of an insurer's aggregate amount 
of insured losses in a Program Year be repaid to Treasury within 45 
days after the end of the month when such amounts are received by the 
insurer. A trade association commented that it may take a long time 
after actual receipt of recoveries before an insurer is able to 
determine whether a recovery is excess. The commenter suggested that 
repayment be required 45 days after the insurer becomes aware that the 
recovery is excess.
    Treasury recognizes that the determination of a recovery being 
excess may occur some time after the actual receipt of that recovery. 
However, Treasury believes that the commenter's alternative, based on 
when the insurer becomes ``aware'' of any excess recovery, is too vague 
to establish a definitive schedule for the repayment of funds. The 
final rule has been clarified

[[Page 39301]]

in Sec.  50.51(b)(1) so that amounts recovered for insured losses in 
excess of an insurer's aggregate amount of insured losses in a Program 
Year are to be repaid to Treasury based on when total recoveries of the 
insurer, from all sources, become excess.
3. Compensation From Other Federal Programs
    Section 103(e)(1)(B) of the Act states, ``The Federal share of 
compensation for insured losses under the Program shall be reduced by 
the amount of compensation provided by the Federal Government to any 
person under any other Federal program for those insured losses.'' To 
implement this statutory provision, Sec.  50.51(b)(2) of the proposed 
rule stated, ``The Federal share of compensation due an insurer for 
insured losses shall be reduced by any amounts received by the insurer 
or an insured or a third party suffering the underlying loss from any 
other Federal programs as compensation for those insured losses, 
including, but not limited to, insurance, assistance, grants or 
disaster relief from the Federal Government.'' Nine comments addressed 
Sec.  50.51(b)(2). After consideration of the comments and upon further 
analysis, Treasury has made several revisions in the final rule and is 
providing additional explanation in this preamble for greater guidance.
    As a preliminary matter, Treasury has made a few technical 
corrections to the final rule. The proposed rule explained that any 
reduction would be based on the amount of compensation received by the 
insurer or an insured or a third party suffering the underlying loss. 
This provision in the final rule no longer makes reference to amounts 
received or compensation provided to insurers. This is because amounts 
received by insurers are covered in Sec.  50.51(b)(1), which addresses 
recoveries by insurers from all other sources, including compensation 
received by the Federal Government. Second, the language of 50.51(b) is 
being revised from ``any amounts received by'' to ``compensation 
provided by other Federal programs to'' an insured or a third party to 
parallel the statutory language found in section 103(e)(1)(B) of the 
Act.
    a. Types of Compensation Used To Reduce the Federal Share. In its 
proposed rule, Treasury described the type of compensation provided by 
other Federal programs in reducing the Federal share of compensation to 
insurers as ``insurance, assistance, grants, or disaster relief.'' In 
its final rule, Treasury is providing clearer guidance on what 
constitutes compensation provided by other Federal programs for insured 
losses. Section 50.51(b)(2)(i) of the Final Rule provides that 
compensation provided by other Federal programs for insured losses 
means compensation that is provided by Federal programs established for 
the purpose of compensating persons for losses in the event of 
emergencies, disasters, acts of terrorism, or similar events. 
Compensation provided by other Federal programs that could be 
considered duplicate compensation include, but are not limited to, 
compensation provided under Federal programs such as:
     Federal Emergency Management Agency (FEMA) disaster relief 
and emergency assistance;
     Department of Housing and Urban Development block grant 
assistance; and
     Federal programs specially established to compensate 
victims for losses resulting from the certified act of terrorism 
(similar to the September 11th Victim Compensation Fund of 2001 (Pub. 
L. 107-42, 115 Stat. 237, Sec.  401 et seq.)).
    However, it is Treasury's view that Congress did not intend to 
reduce the Federal share of compensation due to receipt of Social 
Security disability payments and other similar benefits. Accordingly, 
Sec.  50.51(b)(2)(i) of the final rule provides that compensation 
provided by Federal programs for insured losses excludes benefit or 
entitlement payments such as those made under the Social Security Act, 
those made under laws administered by the Secretary of Veteran Affairs, 
railroad retirement benefit payments, and other types of similar 
benefit payments. These types of Federal entitlement or benefit 
payments to individuals are the result of services performed and are 
paid irrespective of whether the loss occurs as a result of an act of 
terrorism. Under the final rule they are not treated as duplicate 
compensation for insured losses arising from an act of terrorism and 
shall not be used by Treasury to reduce the Federal share of 
compensation due an insurer.
    b. Statutory Requirement That the Federal Share Be Reduced. Several 
commenters criticized the Act's requirement that the Federal share of 
compensation be reduced by compensation provided by the Federal 
Government under other Federal programs for insured losses. Several 
commenters acknowledged that it is a legitimate goal that no one should 
receive a double recovery for a loss. In developing this rule, Treasury 
understands that its reduction of the Federal share of compensation 
does not, in turn, reduce the amount insurers are obligated to pay 
under the terms and conditions of their insurance policies. This was 
pointed out by several commenters. Nevertheless, Treasury must follow 
the Act.
    Based upon a review of how several other Federal programs would 
likely treat proceeds from ``property and casualty insurance,'' under 
the Act or otherwise, Treasury expects that duplicative compensation 
situations will be rare. This is because the most likely Federal 
programs identified by Treasury as potential sources of duplicate 
payments already guard against duplicate compensation.
    For example, HUD and FEMA programs offset their payments by 
insurance proceeds received or expected to be received by their 
applicants. These programs also have procedures to recoup their 
payments from recipients of assistance to the extent those recipients 
later receive insurance proceeds. Further, it is expected that Congress 
will include mechanisms to prevent double Federal recovery in programs 
designed to help victims of future acts of terrorism, much in the same 
way the September 11th Compensation Fund of 2001 treats collateral 
source payments. Moreover, any payments from other Federal insurance 
programs should be offset by operation of the ``other insurance'' 
clauses in insurers' standard policy forms for commercial property and 
casualty insurance. Finally, insurers themselves can discount 
settlement offers to reflect payments received from other Federal 
programs and in that way avoid the problem of compensation being 
duplicative. For claims that do not settle and proceed to award, some 
states allow or require reductions based on collateral source payments.
    One commenter acknowledged that the proposed rule generally follows 
section 103 of the Act, but nevertheless concluded that section 
presents a ``serious contractual problem'' for insurers because 
insurance contracts do not allow for any reduction of amounts paid to 
insureds, other than for payments made under other insurance policies. 
Also, the commenter explained that because insurers' cannot forecast 
the amount by which their payment will be reduced, insurers cannot 
factor the reduction into the price of their premiums. The commenter 
suggested that Sec.  50.53(b)(1) of the proposed rule be revised by 
deleting the words ``or insured or third party suffering the underlying 
loss'' or if that is not possible, that the Federal Government require 
that the insured reduce the amount of its claim presented to the 
insurer.

[[Page 39302]]

    Treasury has considered the comment but has determined not to 
accept either suggestion. The language in section 103 requires that 
Treasury reduce its payment to insurers by the amount of compensation 
provided ``to any person'' for those insured losses. Insureds or third 
party claimants who suffer the underlying insured loss are included in 
the definition of ``person[s],'' in section 102 of the Act. However, 
nothing in the Act or Treasury's regulations would prevent an insurer 
from pursuing changes to its policies (including obtaining any 
necessary State regulatory approval) in order to address this reduction 
and allow for possible offset.
    Another commenter asserted that the proposed rule ``is neither 
logical nor equitable, and does not serve the underlying purpose of 
103(e)(1)(B).'' According to the commenter, it was not the intent of 
Congress to transfer the risk of double recovery to insurers. The 
commenter does not believe there should be any reduction of the 
insurer's Federal payment but that insurers are willing to assist 
Treasury in identifying those persons that have received double Federal 
recovery for insured losses. Treasury does not share the commenter's 
view. The statutory language requires Treasury to reduce the Federal 
share of compensation by the amount of compensation provided by the 
Federal Government to any person under any other Federal program for 
insured losses.
    This same commenter also suggested that the subrogation provisions 
of the Act are available to prevent double recoveries. Section 107(c) 
of the Act provides that the United States shall have the right of 
subrogation with respect to any payment or claims paid by the United 
States under title I of the Act. Upon payment to an insurer, the United 
States becomes subrogated to the rights of the insurer (to the extent 
of the payment). Yet, as many of the commenters pointed out, the terms 
and conditions of standard commercial property and casualty policies do 
not provide the insurer with any right of offset or recoupment of 
amounts paid by other Federal programs. Therefore, section 107(c) may 
not be effective in guarding against double Federal payment. 
Furthermore, even if the exercise of the United States' subrogation 
rights could avoid the Federal Government paying twice for the same 
loss, the commenter's approach shifts the responsibility to pursue 
subrogation to the United States. Under Sec.  50.50(a)(6), insurers are 
to process claims in a manner consistent with appropriate business 
practices, which include pursuing subrogation recoveries when 
appropriate. The responsibility to pursue recoveries though subrogation 
lies with the insurer in the first instance. The United States retains 
the ability to pursue such recoveries in the event the insurer does 
not.
    c. Other Federal Compensation Already Offset in the Underlying 
Claim for Insured Loss. A trade association commented that the Federal 
share of compensation should not be reduced if in fact the payments by 
the other Federal program are already offset in the insurance claim to 
the insurer. If the insurance claim is already reduced, there is no 
duplicate compensation. The commenter is concerned that the proposed 
rule could be read to require the reduction of the payment to the 
insurer even though the insured or third party did not claim, and the 
insurer did not pay, for that part of the insured loss. To address 
this, the association recommended that Treasury clarify the proposed 
rule to make clear that there will be no reduction in Federal payments 
if the losses compensated for by the other Federal program are not also 
paid by the insurer. Based on the commenter's suggestion, language has 
been added to the final rule that clarifies the Federal share of 
compensation shall be reduced only ``to the extent such other 
compensation duplicates the insurance indemnification for those insured 
losses.'' When the insurer's payment has not been offset, the Federal 
share shall only be reduced by the amount, if any, that the aggregate 
of the insurer's payment and the compensation from the other Federal 
program exceed the total loss. This is because the other compensation 
is not duplicating the payment for insured losses until there is an 
excess recovery.
    The commenter also questioned what would happen in the situation 
where other Federal programs require their claimants to pursue other 
recoveries (such as insurance proceeds) and then to repay the other 
program. Would the insurer be credited for any repayment to the other 
Federal program? In such a situation, the Federal share of compensation 
would be reduced pending the claimant's repayment to the other Federal 
program. Once the claimant repays the other Federal program, presumably 
out of the insurance proceeds, the Program will pay the insurer the 
amount of the reduction. This will occur after the other Federal 
program notifies Treasury that the recipient of the insurance proceeds 
has repaid the other Federal program.
    d. Insurer Due Diligence. Section 50.51(b)(2) of the proposed rule 
stated, ``Each insurer shall inquire of each of its claimants whether 
or not duplicate payments for insured losses have been paid from other 
Federal sources. Such amounts shall be reported with each underlying 
claim on the bordereau specified in Sec.  50.53(b)(1) and the total 
amount subtracted from the aggregate amount claimed as the Federal 
share of compensation for insured losses.'' Generally, all of the 
commenters viewed this information collection requirement as 
reasonable. Three commenters addressed the information insurers would 
need to obtain from claimants and suggested various approaches and 
forms to be used by insurers to collect information about duplicate 
compensation from other Federal sources. Treasury will be issuing a 
notice and publishing forms for public comment at a later date.
    Another commenter pointed out that the proposed rule did not 
address the situation where an insurer pays a claim before the person 
receives compensation from another Federal program. This may occur when 
the person has not yet applied for such compensation from the other 
program despite being eligible or the person later becomes entitled to 
compensation (e.g., a program set up at a later date). Having 
considered this comment, Treasury has modified the rule to require 
insurers to inquire of their policyholders, insureds, and claimants not 
only whether the person receiving the insurance proceeds has received 
compensation from another Federal program but also whether it expects 
to receive, or is entitled to receive compensation from another Federal 
program for the insured loss, and if so, the source and amount of the 
compensation received or expected. An insurer will be expected to 
collect this information at the time of claims settlement. Consistent 
with the insurance industry's business practice, Treasury will not 
require the insurer to re-open its closed claim file simply to collect 
this information, which can be obtained from the other Federal 
programs.
    Although Sec.  50.51(b)(2)(ii) of the final rule requires insurers 
to inquire about duplicate compensation--expected, as well as 
received--the Federal share of compensation will be reduced only by 
those amounts actually provided by the other Federal program. If a 
person informs an insurer that it has not yet received but expects to, 
or is entitled to receive compensation for another Federal program for 
the insured losses, Treasury will notify the other Program.
    Another commenter, a ``federally approved'' insurer, commented that 
it would not have to inquire about

[[Page 39303]]

duplicate Federal compensation because awards under the Longshore and 
Harbor Workers' Compensation Act (``LHWCA'') (33 U.S.C. 901, et seq.) 
already take such payments into account. In such a situation, however, 
the final rule will still require the insurer to inquire about possible 
duplicate compensation since there may be sources of Federal payments 
for LHWCA claimants that are not taken into account under that Act.
    e. False Information Submitted to the Insurer. Another commenter 
asserted that insurers have no way of ensuring that its policyholders, 
insureds, or claimants will reveal information concerning duplicative 
payments. The comment suggested that Treasury add penalties or warn 
persons attempting to collect twice. The final rule only requires that 
insurers inquire concerning duplicate compensation and report the 
response received. If Treasury learns that a person who has received an 
insurance payment shared by the Program has also received compensation 
for those insured losses from another Federal program, the insurer's 
Federal share of compensation shall be reduced.
4. Claims Handling
    A commenter referenced Sec.  50.51(b)(2) as well as Sec.  50.51(a) 
and asserted that the regulations should ``make it clear that the 
Treasury does not wish to exercise any authority over claims 
handling.'' The commenter's observation is incorrect. Treasury is 
responsible for the financial integrity of the Program. Section 50.50, 
which provides the basis for Treasury to determine the amount of the 
Federal share of compensation to insurers, is designed to allow 
Treasury to review the insurer's handling of underlying claims for 
insured losses. For example, Sec.  50.50(a)(6) provides that Treasury 
will examine whether the insurer took all steps reasonably necessary to 
properly and carefully investigate the underlying insured loss and 
otherwise processed the underlying loss using appropriate insurance 
business practices. Section 50.50(a)(7) indicates that Treasury will 
review whether the insured losses submitted for payment are within the 
scope of coverage issued by the insurer. In order for it to properly 
carry out its financial responsibilities, Treasury will, as needed, 
audit insurer requests for compensation, including the handling of 
underlying claims, as provided in subpart G of the rule.

D. Initial Notice of Insured Loss (Section 50.52)

    The final rule includes an early notification requirement when an 
insurer obtains information indicating its insured losses will exceed 
50 percent of its insurer deductible as defined by the Act. At that 
time, the insurer is required to submit, on a form prescribed by 
Treasury, estimates of aggregate losses for the Program Year, its 
insurer deductible and the Federal share of aggregate losses, as well 
as the name of the person designated to make required certifications 
and receive Federal payments. Such information will assist in 
estimating funding levels for certified acts of terrorism and otherwise 
facilitate operations of the Program. Because the insurer deductible 
applies collectively to all insurers in an affiliated group, the notice 
must include the designation of a single insurance entity to coordinate 
the submission of required reports and documentation (including the 
Initial Notice of Insured Loss), make required certifications and 
receive Federal payments on behalf of the affiliated group.
    No comments were received specific to this section of the proposed 
regulation. However, as a result of changes made to Sec.  50.54 in 
response to comments regarding the designated single payee in an 
affiliated group, this section has also been revised. The Initial 
Notice of Insured Loss is to include a ``designated insurer'' as a 
single point of contact in an affiliated group for ``receiving, 
disbursing, and distributing'' payments of the Federal share. This 
issue is more fully addressed in the discussion of Sec.  50.54 below.

E. Loss Certifications (Section 50.53)

    The final rule specifies the type of loss information that an 
insurer is required to submit in documenting insured losses eligible 
for payment of the Federal share of compensation. An Initial 
Certification of Loss, on a form prescribed by Treasury, is required 
when insured losses first exceed the insurer's deductible. If the 
insurer sustains ongoing, additional insured losses, periodic 
Supplementary Certifications of Loss, on a form prescribed by Treasury, 
must be submitted. These Certifications of Loss will be used by 
Treasury to assess payment eligibility for the Federal share of 
compensation and compliance with the Act's prerequisites for payment. 
The rule also addresses various written certifications the Act requires 
as a condition for payment of the Federal share. Specific statements 
certifying actions by the insurer as required by the Act, and by 
Treasury in administering and implementing the Act, are to be included 
as part of each Certification of Loss.
    One revision to the proposed rule has been made to this section 
solely to add clarity. The definition of a bordereau, formerly Sec.  
50.53(e), has now been included in Sec.  50.53(b)(1).
1. Timing of Submission of Initial Certification of Loss
    In Sec.  50.53(b) of the proposed rule, Treasury proposed that an 
insurer ``use its best efforts to file the Initial Certification of 
Loss with Treasury within 45 days following the last calendar day of 
the month when an insurer's aggregate insured losses exceed its insurer 
deductible.'' One insurer trade organization commented that an insurer 
may not be able to file the initial certification of loss within that 
time period and that a time requirement is not really necessary. 
Alternatively, it suggested that Treasury modify the rule to allow 
insurers to request an extension of time to submit the Initial 
Certification of Loss.
    The proposed rule provided for insurers to use their ``best 
efforts'' to submit the Initial Certification of Loss within 45 days. 
The proposed rule did not establish a fixed deadline that would serve 
as the basis to deny a claim for federal payment. Thus, a special 
request for an extension of time is not necessary so long as the 
insurer has used its best efforts to meet the requirement. Treasury 
believes this is reasonable. The objective of the rule is to encourage 
timely reporting of losses so that Treasury remains as current as 
possible with its potential liabilities. Generally, it will be in the 
insurer's interest to report losses as soon as possible. Accordingly, 
Treasury has made no change to the proposed rule.
    The trade group also recommended that the loss certification 
process should specifically recognize special circumstances associated 
with large deductible policies. The commenter noted that with large 
deductible policies, particularly in workers compensation, insurers 
will typically first pay the entire claim to the insured worker and 
then recover the deductible from the insured employer. Treasury agrees 
that this comment regarding large deductible policies merits attention 
and will address the concern in the development of the actual loss 
certification reporting forms.
2. Certification Language
    Two insurance trade associations and an insurer commented on the 
certification required in proposed rule Sec.  50.53(b)(2)(iv) dealing 
with the clear and conspicuous disclosures that insurers are required 
to provide to policyholders. The commenters noted

[[Page 39304]]

that the certification requirement appeared to impose a more stringent 
standard than was promulgated in previously issued regulations, in that 
insurers are required to certify they have ``complied with the 
disclosure requirements * * * for each underlying loss.'' They 
suggested the use of less demanding certification language that would 
allow insurers to rely on ``systems and normal business practices that 
demonstrate a practice of compliance'' with the mandatory disclosure 
requirement as referenced in Sec.  50.12(e).
    Treasury does not believe that the compliance language of Sec.  
50.53(b)(2)(iv) is inconsistent or more stringent than the ``normal 
business practices'' approach in Sec.  50.12(e). The compliance 
language of Sec.  50.53(b)(2)(iv) means that for each underlying loss 
an insurer would be able to demonstrate it made an individual 
disclosure because it had a reliable system in its normal business 
practice that generated disclosures. For this reason, Treasury has 
decided to not change the certification language of Sec.  
50.53(b)(2)(iv).
    One insurance trade association suggested deletion of the 
requirement in Sec.  50.53(b)(2)(v) of the proposed rule to certify 
compliance with the Act's mandatory availability requirements because, 
in the commenter's view, there is no specific statutory requirement for 
the certification as a condition for payment. The mandatory 
availability or ``make available'' provisions in section 103(c) of the 
Act require that, for Program Years 1 and 2, and if so determined by 
Treasury for Program Year 3, all insurers 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. 
Under its authority in section 104(a)(2) of the Act to effectively 
administer and implement the Program, Treasury believes it is 
appropriate to include the certification requirement in Sec.  
50.53(b)(2)(iv). The ``make available'' requirement is, as the 
commenter also acknowledged, an ``important predicate to the proper 
functioning of [the Act].'' For this reason, Treasury has made no 
change in making the rule final.
3. State Residual Market Mechanisms
    As described earlier, Treasury revised Sec.  50.50(a)(2) of the 
proposed rule to clarify that the proportionate share of insured losses 
from State residual market insurance entities or State workers' 
compensation funds described in Sec.  50.35 (those that share profit 
and losses) are treated as the insured losses of the individual insurer 
participants of those State residual market mechanisms. Joint comments 
from the four insurer trade associations also raised issues regarding 
the certification of loss requirements for these entities in Sec.  
50.53(b)(2) of the proposed rule. The joint comments observed that the 
flow of information pertaining to insured losses of State residual 
market mechanisms was different than that of individual insurers. For 
example, commenters noted that knowledge about processing claims in 
accordance with ``appropriate business practices'' as required by 
section 103(b)(3) of the Act lies with State residual market mechanism 
servicing carriers and administrators, not the participating insurers 
who are assessed a proportionate share of insured losses of the State 
residual market mechanism. Consequently, the joint trade association 
comment recommended special treatment for the loss certification 
requirements of Sec.  50.53(b)(2) for State residual market insurance 
entities and State workers' compensation funds.
    After considering the joint comments, as well as its own concerns 
with the mechanisms of information flow and content in connection with 
reconciling and auditing insured loss information of State residual 
market mechanisms, Treasury has added a new Sec.  50.53(e) to the final 
rule to deal with loss certifications of State residual market 
mechanisms. Essentially, Treasury has sought to accommodate the special 
circumstances of State residual market mechanisms by separating the 
entity receiving payment (insurers participating in a residual market 
mechanism) from the entity with responsibility for providing 
certifications under section 103(b) of the Act (the residual market 
mechanism based on its own servicing or that of a servicing carrier).
    In order to receive payment of the Federal share of compensation 
for residual market losses, an insurer participating in a State 
residual market mechanism will submit to Treasury, as an underlying 
loss on its bordereau, the amount of losses allocated to it by the 
State residual market mechanism. The State residual market mechanism 
will provide to its participating insurers the detailed underlying loss 
information that supports the total amount of insured losses from which 
the proportionate share of insured losses was calculated for each 
participating insurer. The State residual market mechanism will also 
provide to its participating insurers and to Treasury the 
certifications required by Sec. Sec.  50.53(b)(2) and 50.53(c)(2). To 
facilitate any needed review or audit pursuant to Sec. Sec.  50.60 and 
50.61, State residual market mechanisms and their individual 
participating insurers are both required to maintain insured loss 
information they received or provided, as well as any supporting 
documentation for certifications.

F. Payment of Federal Share of Compensation (Section 50.54)

    The final rule establishes the process for making payment as 
provided by the Act. It also addresses the making of payments before 
the total amount of insured losses are known, providing for later 
adjustment based on any overpayment or underpayment. The rule specifies 
the types of insurer accounts required for Treasury to electronically 
transfer funds in making payments of the Federal share of compensation 
and, in the case of advance payments of the Federal share, establishes 
that interest earned on those funds must be remitted to Treasury. 
Because the Act requires insurance entities within an affiliated group 
to be treated as a single entity in determining the insurer deductible, 
the rule requires that all payments be made to a single insurance 
entity within an affiliated group. This entity is to be identified by 
the affiliated group and designated on the Initial Notice of Insured 
Loss. Applicable payment process procedures are to be posted at 
www.treasury.gov/trip or otherwise made publicly available.
1. Prompt Payment
    Section 50.54(a) of the proposed rule provided that Treasury would 
``promptly'' pay to an insurer the Federal share of compensation due 
the insurer for its insured losses and that any overpayments by 
Treasury of the Federal share will be offset from future payments to 
the insurer or returned to Treasury within 45 days. Three comments were 
received on the issue of prompt payment. One commenter was pleased with 
the rule as written. Two commenters asked that prompt payment be better 
defined. One of these commenters suggested that Treasury set a goal of 
processing and paying claims within 45 days of receipt of an Initial 
Certification of Loss or any Supplemental Certification if the losses 
being claimed are not in dispute. After considering these comments, 
Treasury does not believe a regulatory time limit for payment is 
necessary. Treasury intends to pay the Federal share of compensation 
due insurers as promptly as possible and believes this commitment in 
the provision of public

[[Page 39305]]

funds is sufficient. In seeking contractor support for the management 
of Program claims, Treasury has made this intention clear. Treasury has 
also clarified this section to specify that the payment process 
incorporates the use of electronic funds transfer through the Automated 
Clearinghouse (ACH) network. This provides a mechanism for the prompt 
disbursement of funds from Treasury to an insurer.
2. Advance Payments
    As stated in the discussion of Sec.  50.50, Treasury has revised 
this section in order to permit advance payments of the Federal share. 
Section 50.54 of the final rule describes the types of accounts 
required to be established by insurers to receive the Federal share of 
compensation. Treasury's control over the payment process is 
facilitated by having only one account per insurer into which payments 
will be made. If an insurer is only seeking reimbursement for insured 
losses it has already paid, then the only requirement for the account 
is the capability to receive electronic funds transfers over the ACH 
network. If an insurer seeks advance payments of the Federal share, or 
a combination of advance payments and reimbursement, then the account 
must be segregated from other insurer accounts. A ``segregated 
account'' is defined in section 50.54(d) of the final rule as an 
interest bearing, separate account at an institution eligible to 
receive payments through the ACH network and limited to the purposes of 
(i) receiving payments of the Federal share of compensation (ii) 
disbursing payments to insureds and claimants and (iii) transferring 
payments to the insurer or affiliated insurers for insured losses 
reported on the bordereau as already paid.
    Payments to insureds and claimants that are made using funds 
advanced by Treasury are to be made directly from the segregated 
account. All interest earned on these advanced funds is to accrue 
through such time that payments from the account clear and is to be 
entirely remitted to Treasury. If it is determined that an insurer has 
not properly disbursed advances of the Federal share or otherwise not 
complied with these regulatory claims procedures, then Treasury may 
deny or withhold making advance payments of the Federal share of 
compensation.
3. Affiliated Group
    Because the Act requires insurance entities within an affiliated 
group to be treated as a single entity in determining the insurer 
deductible, the proposed rule required that all payments be made to a 
single insurance entity within an affiliated group. The proposed rule 
required this entity to be identified by the affiliated group and 
designated on the Initial Notice of Insured Loss. The proposed rule 
further required insurers within an affiliated group to assign their 
rights to receive payments of their Federal share of compensation to 
this designated single insurance entity, while requiring the single 
insurance entity to distribute such payments ``as appropriate'' among 
affiliated insurers in the group.
    Four commenters addressed issues involving Treasury's payment of 
the Federal share of compensation to a single insurance entity on 
behalf of an affiliated group of insurers. One commenter expressed the 
view that it preferred that Federal payments go to the individual 
insurer making the underlying claim payment. In the alternative, the 
commenter recommended that, in order to prevent a designated insurer 
from withholding distribution to affiliates, at a minimum, the rule be 
revised to require the single insurance entity to distribute payments 
of the Federal share of compensation to affiliated insurers in the 
group or to hold those funds in trust for distribution to affiliated 
insurers in the group. This suggestion was echoed by a second 
commenter.
    Another commenter criticized the assignment requirement in Sec.  
50.54(c) of the proposed rule. Because of the potential shift in 
statutory rights or corporate asset values resulting from this 
``compulsory assignment of rights,'' the commenter suggested a better 
approach would be to require each entity within an affiliated group to 
appoint a common agent within the group for submission of claims while 
retaining legal title in its own name to all proceeds. The commenter 
further suggested that the common agent be required to act in a 
fiduciary capacity on behalf of other affiliates.
    A fourth commenter noted that the execution of assignment 
agreements will trigger holding company filing requirements pursuant to 
state insurance laws. The commenter observed that such filing 
requirements have been brought to the attention of the NAIC and 
expressed interest in working with both NAIC and Treasury ``to craft an 
appropriate solution that will be convenient for all parties.'' As a 
result of this comment, Treasury consulted with the NAIC and devised a 
more flexible approach to the single payee/affiliated group provision 
than what was proposed.
    In the final rule, Treasury has deleted the requirement that 
affiliated insurers assign their rights to be paid under the Program to 
the single insurance entity in their affiliated group. Treasury has 
concluded that the proposed requirement of an assignment of rights may 
be an overly restrictive approach and that different mechanisms may be 
used among affiliate groups to assure proper distribution of the 
Federal share of compensation.
    In addition, in Sec.  50.54 of the final rule Treasury has 
clarified that the designated insurer receiving payments of the Federal 
share of compensation on behalf of an affiliated group must distribute 
payments in a manner that assures that other insurers in the group are 
compensated for their insured losses taking into account a reasonable 
and fair allocation of the group's insurer deductible. Because the 
insurer deductible for a group is an aggregate calculation based on the 
collective property and casualty insurance premium of all insurers in 
the group, Treasury recognizes there may be complexities and 
difficulties in determining individual insurer deductibles within the 
group. Treasury has thus provided guidance in requiring that the group 
deductible be allocated in a ``reasonable and fair'' manner among 
affiliated insurers. If necessary, Treasury will review the deductible 
allocation of an affiliated group, looking to the totality of the 
circumstances in determining what is ``reasonable'' and ``fair.'' The 
final rule also clarifies that Treasury's obligation to pay the Federal 
share of compensation to affiliated insurers in a group is discharged 
upon its payment to the designated insurer, to the extent of the 
payment for insured losses of the group as reported on the group's 
bordereau. This provision does not prevent Treasury from subsequently 
adjusting payments, for example, as a result of an audit.

G. Audit Authority and Recordkeeping (Sections 50.60 and 50.61)

    Sections 50.60 and 50.61 of the final rule require insurers to 
retain all records and files pertaining to the processing, handling, 
and settlement of insured losses, including electronic documents and 
data, and allow Treasury access in order to conduct subsequent 
financial, claims, and performance reviews and audits. Treasury and/or 
its appointed designee(s) will need access to pertinent books, files, 
agreements and records that support the insurer's Certifications of 
Loss previously submitted.
    Three comments were received regarding the proposed Sec. Sec.  
50.60 Audit authority and 50.61 Recordkeeping. One commenter 
recommended that Sec.  50.60 explicitly require the retention of

[[Page 39306]]

reinsurance and other relevant agreements and that they be available 
during audit. Treasury believes that the proposed language already 
required such information to be maintained and accessible. Thus, no 
change to the proposed rule was required. A second commenter requested 
that access to the records be provided ``upon reasonable notice'' to 
the insurer by Treasury. Treasury has added this language to the final 
rule. This commenter also recommended that the audit authority of Sec.  
50.60 be expressly limited to the records required to be kept under 
Sec.  50.61. Treasury disagrees and declines to limit the records it 
may need to access during investigation, audit and examination.
    A third commenter was concerned with the type and form of claims 
records to be maintained. The commenter observed that Sec.  50.61 of 
the proposed rule only required that ``records'' of material matters 
pertinent to insured losses be retained, not actual claim files 
containing activities relative to the handling and adjustment of 
claims. The commenter further suggested that any records required to be 
retained beyond actual claim files be permitted to be stored in a 
limited form such as electronic data storage Treasury is concerned with 
the availability of information needed for investigation, confirmation, 
audit and examination for the time periods specified in Sec.  50.61, 
not the medium in which information is retained. Information that is 
material needs to be retained in whatever form that can provide 
reasonable access by Treasury. Treasury believes that insurers' normal 
claims and other record keeping methods, technology, and systems can be 
used to meet this requirement and the proposed rule does not need to be 
changed.

H. Other Issues

1. Future Issues
    As Treasury explained in the preamble to the proposed rule, its 
strategy has been to give priority to regulations needed in the event 
of an act of terrorism. In addition to comments on the proposed claims 
rule, Treasury received several comments regarding aspects of insured 
losses resulting from certified acts of terrorism that were not 
included in the proposed rule. Comments were received concerning 
insurer insolvency, dispute resolution, commutation of losses, and the 
impact of losses exceeding the annual aggregate cap of $100 billion 
specified by the Act. These are the types of secondary issues that 
Treasury intends to address as necessary through guidance or 
supplementary rulemaking. Treasury will consider all the comments that 
have already been submitted in its development of pertinent future 
regulations.
2. Confidential or Privileged Information
    A trade association commented that the proposed rule did not 
protect confidential or privileged information submitted to Treasury as 
part of the TRIA claim process. Any issues relating to the disclosure 
of confidential or privileged information will be addressed through the 
procedures and exceptions applicable under the Freedom of Information 
Act, 5 U.S.C. 552.
3. Longshore and Harbor Workers' Compensation Act Assessments
    A comment, received from an insurer, dealt specifically with the 
insurer's situation regarding assessments under the Longshore and 
Harbor Workers' Compensation Act. This comment was not pertinent to the 
proposed rule and therefore has not been addressed. Insurers can 
request interpretations from Treasury pursuant to 31 CFR 50.9.

III. Procedural Requirements

    Executive Order 12866, ``Regulatory Planning and Review.'' This 
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 (OMB).
    Regulatory Flexibility Act. Pursuant to the Regulatory Flexibility 
Act, 5 U.S.C. 601 et seq., it is hereby certified that this rule will 
not have a significant economic impact on a substantial number of small 
entities. Treasury is required to pay the Federal share of compensation 
to insurers for insured losses in accordance with the Act. A condition 
of Federal payment is that the insurer must submit to Treasury, in 
accordance with procedures established by Treasury, a claim for payment 
and certain certifications. The rule seeks to emulate loss reporting 
practices in the reinsurance industry, which insurers already follow in 
order to get payment for reinsurance, thus minimizing the impact on all 
insurers. The Act itself requires all insurers receiving direct earned 
premium for any type of property and casualty insurance, as defined in 
the Act, to participate in the Program. This includes all insurers 
regardless of size or sophistication. The Act also defines property and 
casualty insurance to mean commercial lines insurance without any 
reference to the size or scope of the insurer or the insured. 
Accordingly, any economic impact associated with the rule flows from 
the Act and not the rule. A regulatory flexibility analysis is thus not 
required.
    Paperwork Reduction Act. The collection of information 
(recordkeeping requirement) contained in this rule has been approved by 
the OMB in accordance with the requirements of the Paperwork Reduction 
Act, 44 U.S.C. 3507(d) and assigned OMB Control Number 1505-0197. The 
forms to be prescribed by Treasury will be the subject of a separate 
submission to OMB on which the public will be provided an opportunity 
to comment. 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.
    The collection of information is the recordkeeping requirement in 
Sec.  50.61. The information will be used by Treasury (or its 
designees) to audit or examine claims for Federal payments submitted by 
insurers. The recordkeeping requirement is mandatory for any insurer 
that seeks payment of a Federal share of compensation.
    The estimated number of record keepers is 100 insurers sustaining 
insured losses. The estimated average annual burden per recordkeeper is 
8.33 hours. The estimated total annual recordkeeping burden is 833 
hours.
    Comments regarding the accuracy of this burden estimate should be 
directed to the Terrorism Risk Insurance Program, Suite 2100, 
Department of the Treasury, 1425 New York Ave., NW., Washington, DC 
20220 and to the Office of Management and Budget, Attn: Desk Officer 
for the Department of the Treasury, Office of Information and 
Regulatory Affairs, New Executive Office Building, Room 3208, 
Washington, DC 20503.

List of Subjects in 31 CFR Part 50

    Terrorism risk insurance.

0
For the reasons stated above, 31 CFR part 50 is amended as follows:

PART 50--TERRORISM RISK INSURANCE PROGRAM

0
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).


0
2. Revise Sec.  50.5(e) to read as follows:


Sec.  50.5  Definitions.

* * * * *

[[Page 39307]]

    (e) Insured loss. (1) The term insured loss means any loss 
resulting from an act of terrorism (including an act of war, in the 
case of workers' compensation) that is covered by primary or excess 
property and casualty insurance issued by an insurer if the loss:
    (i) Occurs within the United States;
    (ii) Occurs to an air carrier (as defined in 49 U.S.C. 40102), to a 
United States flag vessel (or a vessel based principally in the United 
States, on which United States income tax is paid and whose insurance 
coverage is subject to regulation in the United States), regardless of 
where the loss occurs; or
    (iii) Occurs at the premises of any United States mission.
    (2)(i) A loss that occurs to an air carrier (as defined in 49 
U.S.C. 40102), to a United States flag vessel, or a vessel based 
principally in the United States, on which United States income tax is 
paid and whose insurance coverage is subject to regulation in the 
United States, is not an insured loss under section 102(5)(B) of the 
Act unless it is incurred by the air carrier or vessel outside the 
United States.
    (ii) An insured loss to an air carrier or vessel outside the United 
States under section 102(5)(B) of the Act does not include losses 
covered by third party insurance contracts that are separate from the 
insurance coverage provided to the air carrier or vessel.
    (3) The term insured loss includes reasonable loss adjustment 
expenses, incurred by an insurer in connection with insured losses, 
that are allocated and identified by claim file in insurer records, 
including expenses incurred in the investigation, adjustment and 
defense of claims, but excluding staff salaries, overhead, and other 
insurer expenses that would have been incurred notwithstanding the 
insured loss.
    (4) The term insured loss does not include:
    (i) Punitive or exemplary damages awarded or paid in connection 
with the Federal cause of action specified in section 107(a)(1) of the 
Act. The term ``punitive or exemplary damages'' means damages that are 
not compensatory but are an award of money made to a claimant solely to 
punish or deter; or
    (ii) Extra contractual damages awarded against, or paid by, an 
insurer; or
    (iii) Payments by an insurer in excess of policy limits.
* * * * *

0
3. New Subparts F and G of Part 50 are added as follows:
Subpart F--Claims Procedures
Sec.
50.50 Federal share of compensation.
50.51 Adjustments to the Federal share of compensation.
50.52 Initial Notice of Insured Loss.
50.53 Loss certifications.
50.54 Payment of Federal share of compensation.

Subpart F--Claims Procedures


Sec.  50.50  Federal share of compensation.

    (a) General. The Treasury will pay the Federal share of 
compensation for insured losses as provided in section 103 of the Act 
once a Certification of Loss required by Sec.  50.53 is deemed 
sufficient. Subject to paragraph (b) of this section, Treasury shall 
pay the appropriate amount of the Federal share of compensation upon a 
determination that:
    (1) The insurer is an entity, including an affiliate thereof, that 
meets the requirements of Sec.  50.5(f);
    (2) The insurer's insured losses as defined in Sec.  50.5(e), 
including the allocated dollar value of the insurer's proportionate 
share of insured losses from a State residual market insurance entity 
or State workers' compensation fund as described in Sec.  50.35, have 
exceeded its insurer deductible as defined in Sec.  50.5(g);
    (3) The insurer has paid or is prepared to pay an underlying 
insured loss, based on a filed claim for the insured loss;
    (4) Neither the insurer's claim for Federal payment nor any 
underlying claim for an insured loss is fraudulent, collusive, made in 
bad faith, dishonest or otherwise designed to circumvent the purposes 
of the Act and regulations;
    (5) The insurer had provided a clear and conspicuous disclosure as 
required by Sec. Sec.  50.10 through 50.19;
    (6) The insurer took all steps reasonably necessary to properly and 
carefully investigate the underlying insured loss and otherwise 
processed the underlying insured loss using appropriate insurance 
business practices;
    (7) The insured losses submitted for payment are within the scope 
of coverage issued by the insurer under the terms and conditions of the 
policies for commercial property and casualty insurance as defined in 
Sec.  50.5(l); and
    (8) The procedures specified in this Subpart have been followed and 
all conditions to payment have been met.
    (b) Adjustments. Treasury may subsequently adjust, including 
requiring repayment of, any payment made under paragraph (a) of this 
section in accordance with its authority under the Act.
    (c) Suspension of payment for other insured losses. Upon a 
determination by Treasury that an insurer has failed to meet any of the 
requirements for payment specified in paragraph (a) of this section for 
a particular insured loss, Treasury may suspend payment of the Federal 
share of compensation for all other insured losses of the insurer 
pending investigation and audit of the insurer's insured losses.
    (d) Amount payable. The Federal share of compensation under the 
Program shall be 90 percent of that portion of the insurer's aggregate 
insured losses that exceed its insurer deductible during a Program 
Year, subject to any adjustments in Sec.  50.51 and the cap of $100 
billion as provided in section 103(e)(2) of the Act.


Sec.  50.51  Adjustments to the Federal share of compensation.

    (a) Aggregate amount of insured losses. The aggregate amount of 
insured losses of an insurer in a Program Year used to calculate the 
Federal share of compensation shall be reduced by any amounts recovered 
by the insurer as salvage or subrogation for its insured losses in the 
Program Year.
    (b) Amount of Federal share of compensation. The Federal share of 
compensation shall be adjusted as follows:
    (1) No excess recoveries. For any Program Year, the sum of the 
Federal share of compensation paid by Treasury to an insurer and the 
insurer's recoveries for insured losses from other sources shall not be 
greater than the insurer's aggregate amount of insured losses for acts 
of terrorism in that Program Year. Amounts recovered for insured losses 
in excess of an insurer's aggregate amount of insured losses in a 
Program Year shall be repaid to Treasury within 45 days after the end 
of the month in which total recoveries of the insurer, from all 
sources, become excess. For purposes of this paragraph, amounts 
recovered from a reinsurer pursuant to an agreement whereby the 
reinsurer's right to any excess recovery has priority over the rights 
of Treasury shall not be considered a recovery subject to repayment to 
Treasury.
    (2) Reduction of amount payable. The Federal share of compensation 
for insured losses under the Program shall be reduced by the amount of 
other compensation provided by other Federal programs to an insured or 
a third party to the extent such other compensation duplicates the 
insurance indemnification for those insured losses.
    (i) Other Federal program compensation. For purposes of this 
section, compensation provided by other Federal programs for insured 
losses means compensation that is

[[Page 39308]]

provided by Federal programs established for the purpose of 
compensating persons for losses in the event of emergencies, disasters, 
acts of terrorism, or similar events. Compensation provided by Federal 
programs for insured losses excludes benefit or entitlement payments, 
such as those made under the Social Security Act, under laws 
administered by the Secretary of Veteran Affairs, railroad retirement 
benefit payments, and other similar types of benefit payments.
    (ii) Insurer due diligence. Each insurer shall inquire of each of 
its policyholders, insureds, and claimants whether the person receiving 
insurance proceeds for an insured loss has received, expects to 
receive, or is entitled to receive compensation from another Federal 
program for the insured loss, and if so, the source and the amount of 
the compensation received or expected. The response, source, and such 
amounts shall be reported with each underlying claim on the bordereau 
specified in Sec.  50.53(b)(1).


Sec.  50.52  Initial Notice of Insured Loss.

    Each insurer shall submit to Treasury an Initial Notice of Insured 
Loss, on a form prescribed by Treasury, whenever the insurer's 
aggregate insured losses (including reserves for ``incurred but not 
reported'' losses) within a Program Year exceed an amount equal to 50 
percent of the insurer's deductible as specified in Sec.  50.5(g). 
Insurers are advised the form for the Initial Notice of Insured Loss 
will include an initial estimate of aggregate losses for the Program 
Year, the amount of the insurer deductible and an estimate of the 
Federal share of compensation for the insurer's aggregate insured 
losses. In the case of an affiliated group of insurers, the form for 
the Initial Notice of Insured Loss will include the name and address of 
a single designated insurer within the affiliated group that will serve 
as the single point of contact for the purpose of providing loss and 
compliance certifications as required in Sec.  50.53 and for receiving, 
disbursing, and distributing payments of the Federal share of 
compensation in accordance with Sec.  50.54. An insurer, at its option, 
may elect to include with its Initial Notice of Insured Loss the 
certification of direct earned premium required by Sec.  50.53(b)(3).


Sec.  50.53  Loss certifications.

    (a) General. When an insurer has paid aggregate insured losses that 
exceed its insurer deductible, the insurer may make claim upon Treasury 
for the payment of the Federal share of compensation for its insured 
losses. The insurer shall file an Initial Certification of Loss, on a 
form prescribed by Treasury, and thereafter such Supplementary 
Certifications of Loss, on a form prescribed by Treasury, as may be 
necessary to receive payment for the Federal share of compensation for 
its insured losses.
    (b) Initial Certification of Loss. An insurer shall use its best 
efforts to file with the Program the Initial Certification of Loss 
within 45 days following the last calendar day of the month when an 
insurer has paid aggregate insured losses that exceed its insurer 
deductible. The Initial Certification of Loss will include the 
following:
    (1) A bordereau, on a form prescribed by Treasury, that includes 
basic information about each underlying insured loss. For purposes of 
this section, a ``bordereau'' is a report of basic information about an 
insurer's underlying claims that, in the aggregate, constitute the 
insured losses of the insurer. The bordereau will include, but may not 
be limited to:
    (i) A listing of each underlying insured loss by catastrophe code 
and line of business;
    (ii) The total amount of reinsurance recovered from other sources;
    (iii) A calculation of the aggregate insured losses sustained by 
the insurer above its insurer deductible for the Program Year; and
    (iv) The amount the insurer claims as the Federal share of 
compensation for its aggregate insured losses.
    (2) A certification that the insurer is in compliance with the 
provisions of section 103(b) of the Act and this part, including 
certifications that:
    (i) The underlying insured losses listed on the bordereau filed 
pursuant to Sec.  50.53(b)(1) either: Have been paid by the insurer; or 
will be paid by the insurer upon receipt of an advance payment of the 
Federal share of compensation as soon as possible, consistent with the 
insurer's normal business practices, but not longer than five business 
days after receipt of the Federal share of compensation;
    (ii) The underlying claims for insured losses were filed by persons 
who suffered an insured loss, or by persons acting on behalf of such 
persons;
    (iii) The underlying claims for insured losses were processed in 
accordance with appropriate business practices and the procedures 
specified in this subpart;
    (iv) The insurer has complied with the disclosure requirements of 
Sec. Sec.  50.10 through 50.19 for each underlying insured loss that is 
included in the amount of the insurer's aggregate insured losses; and
    (v) The insurer has complied with the mandatory availability 
requirements of Sec. Sec.  50.20 through 50.24.
    (3) A certification of the amount of the insurer's ``direct earned 
premium'' as defined in Sec.  50.5(d), together with the calculation of 
its ``insurer deductible'' as defined in Sec.  50.5(g) (provided this 
certification was not submitted previously with the Initial Notice of 
Insured Loss specified in Sec.  50.52).
    (4) A certification that the insurer will disburse payment of the 
Federal share of compensation in accordance with this subpart.
    (c) Supplementary Certification of Loss. If the total amount of the 
Federal share of compensation due an insurer for insured losses under 
the Act has not been determined at the time an Initial Certification of 
Loss has been filed, the insurer shall file monthly, or on a schedule 
otherwise determined by Treasury, Supplementary Certifications of Loss 
updating the amount of the Federal share of compensation owed for the 
insurer's insured losses. Supplementary Certifications of Loss will 
include the following:
    (1) A bordereau described in Sec.  50.53(b)(1); and
    (2) A certification as described in Sec.  50.53(b)(2).
    (d) Supplementary information. In addition to the information 
required in paragraphs (b) and (c) of this section, Treasury may 
require such additional supporting documentation as required to 
ascertain the Federal share of compensation for the insured losses of 
any insurer.
    (e) State Residual Market Insurance Entities and State Workers' 
Compensation Funds. A State residual market insurance entity or State 
workers' compensation fund described in Sec.  50.35 shall provide the 
Certifications of Loss described in Sec. Sec.  50.53(b) and 50.53(c) 
for all its insured losses to each participating insurer at the time it 
provides the allocated dollar value of the participating insurer's 
proportionate share of insured losses. In addition, at such time the 
State residual market insurance entity or State workers' compensation 
fund shall provide the certification described in Sec.  50.53(b)(2) to 
Treasury. Participating insurers shall treat the allocated dollar value 
of their proportionate share of insured losses from a State residual 
market insurance entity or State workers' compensation fund as an 
insured loss for the purpose of their own reporting to Treasury in 
seeking the Federal share of compensation.

[[Page 39309]]

Sec.  50.54  Payment of Federal share of compensation.

    (a) Timing. Treasury will promptly pay to an insurer the Federal 
share of compensation due the insurer for its insured losses. Payment 
shall be made in such installments and on such conditions as determined 
by the Treasury to be appropriate. Any overpayments by Treasury of the 
Federal share of compensation will be offset from future payments to 
the insurer or returned to Treasury within 45 days.
    (b) Payment process. Payment of the Federal share of compensation 
for insured losses will be made to the insurer designated on the 
Initial Notice of Loss required by Sec.  50.52. An insurer that 
requests payment of the Federal share of compensation for insured 
losses must receive payment through electronic funds transfer. The 
insurer must establish either an account for reimbursement as described 
in paragraph (c) of this section (if the insurer only seeks 
reimbursement) or a segregated account as described in paragraph (d) of 
this section (if the insurer seeks advance payments or a combination of 
advance payments and reimbursement). Applicable procedures will be 
posted at www.treasury.gov/trip or otherwise will be made publicly 
available.
    (c) Account for reimbursement. An insurer shall designate an 
account for the receipt of reimbursement of the Federal share of 
compensation at an institution eligible to receive payments through the 
Automated Clearing House (ACH) network.
    (d) Segregated account for advance payments. An insurer that seeks 
advance payments of the Federal share of compensation as certified 
according to Sec.  50.53(b)(2)(i)(B) shall establish an interest-
bearing segregated account into which Treasury will make advance 
payments as well as reimbursements to the insurer.
    (1) Definition of segregated account. For purposes of this section, 
a segregated account is an interest-bearing separate account 
established by an insurer at a financial institution eligible to 
receive payments through the ACH network. Such an account is limited to 
the purposes of:
    (i) Receiving payments of the Federal share of compensation;
    (ii) Disbursing payments to insureds and claimants; and
    (iii) Transferring payments to the insurer or affiliated insurers 
for insured losses reported on the bordereau as already paid.
    (2) Remittance of interest. All interest earned on advance payments 
in the segregated account must be remitted at least quarterly to 
Treasury's Office of Financial Management or as otherwise prescribed in 
applicable procedures.
    (e) Denial or withholding of advance payment. Treasury may deny or 
withhold advance payments of the Federal share of compensation to an 
insurer if Treasury determines that the insurer has not properly 
disbursed previous advances of the Federal share of compensation or 
otherwise has not complied with the requirements for advance payment as 
provided in this subpart.
    (f) Affiliated group. In the case of an affiliated group of 
insurers, Treasury will make payment of the Federal share of 
compensation for the insured losses of the affiliated group to the 
insurer designated in the Initial Notice of Insured Loss to receive 
payment on behalf of the affiliated group. The designated insurer 
receiving payment from Treasury must distribute payment to affiliated 
insurers in a manner that ensures that each insurer in the affiliated 
group is compensated for its share of insured losses, taking into 
account a reasonable and fair allocation of the group deductible among 
affiliated insurers. Upon payment of the Federal share of compensation 
to the designated insurer, Treasury's payment obligation to the 
insurers in the affiliated group with respect to any insured losses 
covered on the applicable bordereau is discharged to the extent of the 
payment.

Subpart G--Audit and Investigative Procedures


Sec.  50.60  Audit authority.

    The Secretary of the Treasury, or an authorized representative, 
shall have, upon reasonable notice, access to all books, documents, 
papers and records of an insurer that are pertinent to amounts paid to 
the insurer as the Federal share of compensation for insured losses for 
the purpose of investigation, confirmation, audit and examination.


Sec.  50.61  Recordkeeping.

    Each insurer that seeks payment of a Federal share of compensation 
under subpart F of this part shall retain such records as are necessary 
to fully disclose all material matters pertinent to insured losses and 
the Federal share of compensation sought under the Program, including, 
but not limited to, records regarding premiums and insured losses for 
all commercial property and casualty insurance issued by the insurer 
and information relating to any adjustment in the amount of the Federal 
share of compensation payable. Insurers shall maintain detailed records 
for not less than 5 years from the termination dates of all reinsurance 
agreements involving commercial property and casualty insurance subject 
to the Act. Records relating to premiums shall be retained and 
available for review for not less than 3 years following the conclusion 
of the policy year. Records relating to underlying claims shall be 
retained for not less than 5 years following the final adjustment of 
the claim.

    Dated: June 21, 2004.
Wayne A. Abernathy,
Assistant Secretary of the Treasury.
[FR Doc. 04-14588 Filed 6-28-04; 8:45 am]
BILLING CODE 4811-15-P