[Federal Register Volume 69, Number 144 (Wednesday, July 28, 2004)]
[Rules and Regulations]
[Pages 44932-44942]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-17235]


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DEPARTMENT OF THE TREASURY

31 CFR Part 50

RIN 1505-AB08


Terrorism Risk Insurance Program; Litigation Management

AGENCY: Departmental Offices, Treasury.

ACTION: Final rule.

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SUMMARY: The Department of the Treasury (Treasury) is issuing this 
final rule concerning litigation management as part of its 
implementation of Title I of the Terrorism Risk Insurance Act of 2002 
(Act). That Act established a temporary Terrorism Insurance Program 
(Program) under which the Federal Government will share with commercial 
property and casualty insurers the risk of insured losses from 
certified acts of terrorism that occur on or before the date the 
Program ends, on December 31, 2005. This final rule is the latest in a 
series of regulations that Treasury has issued to implement the Program 
and finalizes a proposed rule concerning litigation management related 
to insured losses under the Program.

DATES: This final rule is effective August 27, 2004.

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

SUPPLEMENTARY INFORMATION:

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 Act provides that the Program ends on December 31, 
2005. The Act also 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.

[[Page 44933]]

    Each entity that meets the definition of ``insurer'' (well over 
2000 firms) must participate in the Program. The amount of federal 
payment for an insured loss resulting from an act of terrorism is to be 
determined based upon insurance company deductibles and excess loss 
sharing with the Federal Government, as specified by the Act and the 
implementing regulations. An insurer's deductible increases each year 
of the Program, thereby reducing the Federal Government's share prior 
to expiration of the Program. An insurer's deductible is calculated 
based on a percentage of the value of direct earned premiums collected 
over certain statutory periods. Once an insurer has met its individual 
deductible, the federal payments cover 90 percent of insured losses 
above the deductible, subject to an annual industry-aggregate limit of 
$100 billion.
    The Program provides a federal reinsurance backstop for three 
years. The Act provides Treasury with authority to recoup federal 
payments made under the Program through policyholder surcharges, up to 
a maximum annual limit. The Act also prohibits duplicative payments for 
insured losses that have been covered under any other federal program.
    The mandatory availability or ``make available'' provisions in 
section 103(c) of the Act require that, for Program Year 1, Program 
Year 2, and, if so determined by the Secretary of the Treasury, for 
Program Year 3, all entities that meet the definition of insurer under 
the Program must make available in all of their property and casualty 
insurance policies coverage for insured losses resulting from an act of 
terrorism. This coverage cannot differ materially from the terms, 
amounts and other coverage limitations applicable to losses arising 
from events other than acts of terrorism. On June 18, 2004, the 
Secretary of the Treasury announced his determination 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 policyholders of the 
premium charged for insured losses covered by the Program and the 
Federal share of compensation for insured losses under the Program. In 
addition, the Act requires that insurers submit claims and make certain 
certifications to Treasury. Treasury has recently published in the 
Federal Register a final rule concerning claims for Federal payment 
under the Program. See 69 FR 39296 (June 29, 2004).
    Section 107 of the Act also contains specific provisions designed 
to manage litigation arising out of or resulting from a certified act 
of terrorism. If the Secretary determines that an act of terrorism 
under section 102 has occurred, section 107 establishes an exclusive 
Federal cause of action and remedy for property damage, personal 
injury, or death arising out of or relating to the act of terrorism. 
Section 107 also preempts certain State causes of action and provides 
that amounts awarded in actions for property damage, personal injury, 
or death that are attributable to punitive damages shall not count as 
``insured losses'' (and thus shall not be paid) under the Program. The 
Act also gives the United States the right of subrogation with respect 
to any payment or claim paid by the United States under the Program. In 
connection with the implementation of the litigation management 
provisions of the Act, the President directed the Secretary to use his 
authority under the Act to propose a rule that would require insurers 
to obtain Treasury's advance approval before settling certain Federal 
causes of action described in section 107 of the Act. See 38 Weekly 
Comp. Pres. Doc. 2097 (Nov. 25, 2002); 2002 WL 14548111 (Dec. 2, 2002) 
(also accessible at http://www.treasury.gov/trip).
    Throughout the implementation of the Program, Treasury has been 
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 aspects of the 
Program with the National Association of Insurance Commissioners 
(NAIC). Third, to the extent possible within statutory constraints, 
Treasury seeks to allow insurers to participate in the Program in a 
manner consistent with procedures used in their normal course of 
business. Finally, given the temporary and transitional nature of the 
Program, Treasury is guided by the Act's goal that insurers develop 
their own capacity, resources, and mechanisms for terrorism insurance 
coverage when the Program expires.

B. Previously Issued Regulations

    To assist insurers, policyholders, and other interested parties in 
complying with immediately applicable requirements of the Act, Treasury 
issued interim guidance to be relied upon by insurers until superseded 
by regulations. These notices of interim guidance have now been 
superseded by final regulations. The scope of the Program, key 
definitions, and other provisions laying the groundwork for Program 
implementation are at Subparts A, B, and C of 31 CFR part 50 (68 FR 
41250; 68 FR 59720). Treasury's final rule applying provisions of the 
Act to State residual market insurance entities and State workers' 
compensation funds is at Subpart D of 31 CFR Part 50 (68 FR 59715). The 
final rule setting forth procedures for filing claims for payment of 
the Federal share of compensation for insured losses is at Subpart F of 
31 CFR part 50, and Subpart G of 31 CFR part 50 contains the final rule 
concerning information to be retained as related to the handling and 
settlement of claims to enable Treasury to perform financial and claim 
audits (both at 69 FR 39296).

C. The Proposed Rule (Litigation Management)

    Treasury published a proposed litigation management rule in the 
Federal Register at 69 FR 25341 on May 6, 2004 to implement the 
provisions in section 107 of the Act. The proposed litigation 
management rule required insurers to seek Treasury's advance approval 
of settlements of certain Federal causes of action involving insured 
losses and proposed clarifications of litigation management aspects 
related to the Program.

II. Summary of Comments and Final Rule

    Treasury received four comments about the proposed rule; however, 
one of these comments was jointly submitted by an ad hoc industry 
working group that included insurance industry organizations, insurance 
companies, and property-casualty insurance industry trade associations 
and their member companies.\1\ Comments were also received from a large 
commercial property-casualty insurance company; a large market of 
London-based insurers and reinsurers; and a real estate industry 
association. In addition, Treasury received a copy of a published 
Procedural Order from the Judicial Panel on Multidistrict

[[Page 44934]]

Litigation, which adopted certain procedures for litigation under the 
Act.
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    \1\ The trade associations are: American Insurance Association 
(``AIA''), the American Association of State Compensation Insurance 
Funds (``AASCIF''), Council of Insurance Agents & Brokers 
(``CIAB''), The Financial Services Roundtable (``FSR''), Independent 
Insurance Agents & Brokers of America (``IIABA''), National 
Association of Mutual Insurance Companies (``NAMIC''), National 
Association of Professional Insurance Agents (``PIA''), Property 
Casualty Insurers Association of America (``PCI''), Reinsurance 
Association of America (``RAA''), and Surety Association of America 
(``SAA'').
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    In general, the proposed rule was received quite favorably by the 
real estate industry trade group, which commented that the rule would 
screen proposed settlements against litigation abuse and fulfill 
Congress's intent that taxpayer funds are not used to pay punitive 
damage claims. In contrast, the joint comment from the ad hoc industry 
working group criticized aspects of the proposed rule as described more 
fully below and urged that the settlement approval provisions be 
dropped, or alternatively, that changes be made to them in the final 
rule. Two other commenters provided suggested changes and 
clarifications to certain aspects of the proposed rule.
    After review and careful consideration of all comments, Treasury 
has decided to promulgate a final rule with several modifications and 
clarifications as discussed below.

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

    Section 107(a)(1) states that ``[i]f the Secretary makes a 
determination pursuant to section 102 that an act of terrorism has 
occurred, there shall exist a Federal cause of action for property 
damage, personal injury, or death arising out of or resulting from such 
act of terrorism, which shall be the exclusive cause of action and 
remedy for claims for property damage, personal injury, or death 
arising out of or relating to such act of terrorism, except as provided 
in paragraph (b).'' Section 107(b) provides that nothing in the 
litigation management provisions of section 107 shall in any way limit 
the liability of any government, organization, or person who knowingly 
participates in, conspires to commit, aids and abets, or commits any 
act of terrorism certified as such under the Act. Section 50.80 of the 
proposed rule was based on these provisions of the Act.
    Section 50.80(a) of the proposed rule provided that ``[u]pon 
certification of an act of terrorism pursuant to section 102,'' there 
shall exist a Federal cause of action. The ad hoc industry working 
group raised a concern that the proposed language differed from that of 
the Act. The comment expressed concern that the proposed rule's use of 
the word ``upon'' instead of ``if'' could be interpreted to mean that 
the exclusive Federal cause of action accrues at the time of 
certification rather than at the time of occurrence of the event later 
certified.
    In response to this comment Treasury is slightly modifying section 
50.80 of the final rule to clarify intent and to more closely mirror 
the statutory language by changing the word ``upon'' to ``if'' in 
section 50.80(a) of the final rule.
    The ad hoc industry working group also addressed section 50.80(b) 
of the proposed rule, which was based on section 107(e). Section 107(e) 
provides that the litigation management provisions of section 107 only 
apply to actions for property damage, personal injury, or death that 
arise out of or result from acts of terrorism that occur or occurred 
during the effective period of the Program. Section 50.80(b) of the 
proposed rule described the effective period of the Program ``as set 
forth in section 108 of the Act.'' Section 108(a) establishes only the 
Program's termination date and not the ``effective period.'' The ad hoc 
industry working group expressed concern that the proposed rule may 
create uncertainty as to whether the Secretary has authority to certify 
after the termination date an act that occurs on or before the 
termination of the Program. After considering this comment, Treasury 
made a technical correction to section 50.80(b) of the final rule to 
conform to the precise language of the Act.

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

    Section 107(a)(2) preempts all State causes of action for property 
damage, personal injury, or death arising out of or resulting from an 
act of terrorism that are otherwise available under State law, except 
as provided in paragraph (b) of the Act (i.e., not affecting the 
liability of any government, organization, or person who knowingly 
participates in, conspires to commit, aids and abets, or commits any 
act of terrorism). The ad hoc industry working group pointed out that 
the language of the proposed rule differed from that in the Act. 
Section 107(a)(2) states that ``[a]ll State causes of action of any 
kind for property damage, personal injury, or death arising out of or 
resulting from an act of terrorism that are otherwise available under 
State law are hereby preempted, * * *.'' Tracking the time at which the 
exclusive Federal cause of action comes into existence, section 50.81 
of the proposed rule stated that ``upon certification'' of an act of 
terrorism, all State causes of action for property damage, personal 
injury, or death arising out of or resulting from an act of terrorism 
were preempted. The comment explained that the Act itself preempts 
State causes of action.
    Treasury agrees that the Act preempts all State causes of action 
for property damage, personal injury, or death ``arising out of or 
resulting from an act of terrorism,'' but such causes of action can 
only be identified as ``arising out of or resulting from an act of 
terrorism'' after an act is certified by the Secretary as an ``act of 
terrorism.'' Because the certification is inextricably linked to the 
classification of the causes of action to which the preemption applies, 
the proposed rule described the preemption as being dependent upon the 
certification of an act of terrorism by the Secretary. After 
considering the comment, Treasury determined to revise section 50.81 to 
mirror the language in section 107(a)(2).

C. Program Procedures for Notifying the Judicial Panel on Multidistrict 
Litigation

    Section 107(a)(4) provides that for each act of terrorism certified 
by the Secretary pursuant to section 102, the Judicial Panel on 
Multidistrict Litigation (Judicial Panel) shall designate one district 
court or, if necessary, multiple district courts of the United States 
that shall have original and exclusive jurisdiction over all actions 
for any claim (including any claim for loss of property, personal 
injury, or death) relating to or arising out of an act of terrorism. 
The Act also provides that the Judicial Panel is to designate the 
district court or courts not later than 90 days after the occurrence of 
an act of terrorism.
    In the proposed rule, Treasury recognized that it is the 
Secretary's certification of an act of terrorism that triggers the 
existence of the exclusive Federal cause of action and the need for the 
Judicial Panel to designate a district court or courts for the 
consolidation of actions. Treasury expressed an intent to notify the 
Judicial Panel as soon as practicable following any certification of an 
act of terrorism and invited comments on other appropriate operational 
procedures.
    On June 1, 2004, the Judicial Panel issued a Procedural Order in In 
re Terrorism Risk Insurance Act of 2002 Litigation,--F.R.D.--, 2004 WL 
1252476 (Jud. Pan. Mult. Lit. June 1, 2004) (also accessible at http://www.treasury.gov/trip). As reflected in its Order, the Panel stated 
that the 90-day period for the Judicial Panel to designate the court or 
courts, as prescribed in section 107(a)(4) of the Act, begins on the 
date the Secretary certifies the act of terrorism. Also, pursuant to 
its cited rulemaking authority under 28 U.S.C. 1407(f) and in response 
to the proposed rule, the Judicial Panel adopted procedures for 
litigation under the Act. The Order directs all interested parties to 
notify the Judicial Panel of their suggestions regarding what district 
court or courts should be designated within 20 days of

[[Page 44935]]

the date of certification. In addition, the Judicial Panel orders the 
Secretary, on the date the Secretary certifies an act of terrorism, to 
notify: (1) The public about the Judicial Panel's Order (through 
general media channels, such as Internet and press releases to 
broadcast and print media, ``augmented by direct notice to the parties 
in any already existing litigation known to the Treasury Secretary'') 
and (2) the Clerk of the Judicial Panel that such public notice has 
occurred.
    As the Judicial Panel's Order establishes the procedures Treasury 
and others are to follow once an act is certified as an act of 
terrorism, there is no need for Treasury to set out procedural 
requirements in the final rule.

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

    In implementing the section 107(a) provisions concerning exclusive 
jurisdiction, Treasury solicited comment in the preamble to the 
proposed rule on whether it would be appropriate or necessary to 
promulgate a rule to facilitate the filing and transfer of civil 
actions involving Federal causes of action to the Federal district 
court(s) designated by the Judicial Panel. Such a rule could provide 
that any amounts awarded in any civil action relating to or arising out 
of an act of terrorism that are not awarded by the district court or 
courts designated by the Judicial Panel would be ineligible for 
compensation under the Program, regardless of whether the amounts 
awarded would otherwise be insured losses covered by commercial 
property and casualty insurance issued by an insurer.
    The ad hoc industry working group commented that such a rule was 
unnecessary and suggested that cases pending in non-designated courts 
would be removed to Federal court or dismissed and any awards by non-
designated courts would be a legal nullity. Another commenter 
representing a market of London-based insurers and reinsurers suggested 
that if such a rule where adopted, an exception be made for court 
awards made (and paid by insurers) prior to the certification of an act 
of terrorism and presumably before a Federal district court is 
designated. After considering the issue and comments, Treasury has 
decided not to address this issue at this time, but will continue to 
study the issue to determine if any further clarification or procedures 
are needed.

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

    Sections 50.82 and 50.83 of the proposed rule provided for the 
advance approval of settlements of certain Federal causes of action 
arising out of or resulting from certified acts of terrorism. As noted 
earlier, Treasury received a memorandum from the President related to 
this issue. The President's Memorandum directed the Secretary to 
propose a rule requiring insurers to obtain the advance approval of 
Treasury of any proposed settlements of causes of action described in 
section 107 of the Act arising out of or resulting from an act of 
terrorism.
    The proposed rule required advance approval by Treasury of proposed 
settlements of certain causes of action described in section 107, to 
the extent liability for such causes of action is covered by or paid, 
in whole or in part, by an insurer pursuant to coverage for insured 
losses under the Program. As proposed, such settlements were only 
required to be submitted for advance approval if the insurer intends to 
submit the settlement as part of its claim for federal payment under 
the Program.
    A real estate industry association supported the rule as proposed, 
which it described as important procedures for scrutinizing proposed 
settlements and ``excellent rules for implementing Congress's charge 
that TRIA funds are not used to fund punitive damage claims.'' As 
described below, other commenters disagreed.
1. Rulemaking Authority
    As a threshold matter, the ad hoc industry working group contended 
that the advance approval of settlements requirement exceeded 
Treasury's rulemaking authority. They provided no specific support for 
this position. The working group comment advocated elimination of the 
settlement pre-approval requirements in their entirety or other 
alternatives described below.
    For the reasons stated in the preamble to the proposed rule, 
Treasury believes that it has the requisite legal authority to 
promulgate this rule, including the settlement approval provisions. See 
69 FR 25341, 25344. The Act authorizes Treasury to administer the 
Program, investigate and audit claims, and pay the Federal share of 
compensation for insured losses. (see section 104(a)). Under section 
104(a)(2) the Secretary is authorized to prescribe regulations to 
administer and implement the Program effectively. More specifically, 
under section 103(b)(3), Treasury is authorized to prescribe reasonable 
procedures concerning insurers' processing of claims for insured 
losses. Treasury believes that the procedures that this rule adds to 
the insurers' claims process are necessary in order to administer and 
implement the Program effectively. Pursuant to its administrative 
authority under the Act and to protect the interests of the United 
States, Treasury is finalizing sections 50.82 and 50.83 of the proposed 
rule, but with modifications as described below.
2. General Objections to the Rule
    One insurer that commented criticized the proposed rule (and the 
claims regulations found in Subpart F) generally as being a departure 
from the more traditional ``follow the fortunes'' (sometimes also 
referred to as ``follow the settlements'') approach employed by 
reinsurers. The ad hoc industry working group raised this point as 
well. That group stated that through the proposed rule, Treasury would 
be substituting its judgment for that of the insurer in settling claims 
while introducing tremendous complexities into the claims process and 
that the regulations governing claims procedures (Subpart F) provide 
sufficient safeguards and already expose insurers to the risk of having 
an already settled cause of action denied.
    To fulfill the purposes of the Act and its role as administrator, 
Treasury expects to be notified of covered settlements, to review them, 
and to make its objections (if any) known to the insurer. Treasury has 
tried to tailor its review and requests for information, as much as 
possible and with some exceptions, to the type of information typically 
gathered by the insurer as part of the claims adjustment process.
    The ad hoc industry working group also stated that the rule does 
not reflect reinsurance best practices and is not modeled after the 
customary business practices of insurers and reinsurers. As we have 
often stated, Treasury seeks to administer the Program in a manner 
consistent with procedures insurers use in the normal course of 
business to the extent possible within statutory constraints. Given the 
unique characteristics of this Federal Program, the settlement approval 
aspects of this rule are appropriate. Though the Program is often 
thought of as being similar to an excess-of-loss quota share reinsurer, 
the Program is truly a Federal financial backstop funded by public 
monies which, unlike a traditional reinsurer, does not share in 
premiums and can recoup its payments as prescribed in section 103(e)(7) 
of the Act. Reinsurers evaluate and choose the insurers they reinsure, 
consider the claims handling and loss experience of

[[Page 44936]]

their reinsureds, and reassess those relationships during renewal 
audits. Treasury does not have a similar private market relationship 
with insurers. Moreover, Treasury does not believe that it has strayed 
inappropriately from reinsurance practices. Treasury is aware that some 
reinsurance treaties contain claims-cooperation clauses that allow 
reinsurers to receive early notification and the discretionary right to 
associate in the control, defense, and litigation of claims.
    The ad hoc industry working group comment also stated that the 
proposed rule would expose insurers to bad faith claims and/or 
violations of State unfair claims practices standards which generally 
require them to promptly settle claims. The working group comment 
contends that the rule as proposed could expose insurers to liability 
for extra-contractual obligations (i.e., punitive or exemplary damages) 
and/or damages in excess of policy limits if imposed by a court due to 
the insurer's delay or failure to settle because of Treasury's actions 
under this rule. The comment also pointed out that, by operation of 
sections 50.50(a) and 50.5(e)(4)(ii) and (iii) of the claims procedures 
regulations, Treasury does not share in extra-contractual or excess of 
policy limits type damages. If Treasury promulgates a final rule, the 
ad hoc industry working group suggested that Treasury should also share 
in these damages; pay one hundred percent of any liability of the 
insurer above the amount the insurer proposed settling the cause of 
action; or grant insurers qualified immunity from state law claims 
standards.
    Treasury believes the hypothetical scenario suggested by the ad hoc 
industry working group in its comment may be overstated. First, the 
rule envisions a settlement approval process that normally will occur 
within 30 days. The information sought is that typically assembled by 
the insurer's claim professionals in handling and adjusting claims and 
should not delay settlements. Settlements can still be effectuated 
promptly and the additional processes required by this rule seem 
unlikely to lead to the types of inordinate delays typically associated 
with bad faith damages being awarded or State regulatory actions being 
brought. Insurers could inform the State regulatory officials and court 
that they are following Federal regulation and nothing in this rule 
prevents an insurer from settling a cause of action without or despite 
Treasury's pre-approval, doing so only precludes compensation under the 
Program. Treasury declines to adopt the ad hoc working group's 
suggestions.
3. Thresholds for Pre-Approval of Certain Proposed Settlements
    The proposed rule required an insurer to seek Treasury's advance, 
written approval where an insurer (directly or through its insured) 
intends to settle a Federal cause of action involving third-party 
claims (by a third-party against an insured and/or the insurer) for 
property damage, personal injury, or death arising out of or resulting 
from an act of terrorism when--
     All or part of the settlement amount is expected to be 
part of the insurer's claim for federal payment under the Program; and
     Any portion of the proposed settlement amount that is 
attributable to liability for personal injury or death is $1 million or 
more, or that is attributable to liability for property damage 
(including loss of use) is $5 million or more, regardless of the number 
of third-party claims being settled.
    In the preamble to the proposed rule, Treasury specifically 
requested comments on these monetary thresholds. The real estate 
industry association supported the thresholds as proposed. Another 
suggested that the thresholds were too low and that they should be 
raised to $10 million for both property and casualty claims. Upon 
consideration of the views of the commenters and Treasury's further 
assessment of the administrative costs and operational issues 
associated with the advance approval of too large a number of 
settlements, Treasury has decided to adjust the monetary thresholds set 
out in paragraphs (a)(1) and (2) of section 50.82 of the final rule. As 
now finalized, insurers will be required to submit for advance approval 
by Treasury settlements where the amount attributable to the insured's 
liability for personal injury or death is $2 million or more, or that 
is attributable to liability for property damage is $10 million or 
more.
    Treasury is setting these monetary thresholds (below which an 
insurer is not required to seek pre-approval by Treasury) pursuant to 
section 104(a)(2) of the Act which authorizes the Secretary to 
prescribe regulations to administer and implement the Program 
effectively. In balancing between the need to protect the interests of 
the United States with the effective administration of the Program, 
Treasury believes it appropriate to raise the thresholds. In addition, 
Treasury notes that settlements that are reviewed and approved (or 
deemed approved), or that are not required to be submitted for prior 
approval, are all still subject to later Treasury review, like any 
other claim, at the point of claim submission by the insurer or at the 
time of any audit (see Subparts F and G).
    In raising the settlement thresholds in section 50.82(a) of the 
final rule, Treasury expressly retains the right to require insurers to 
submit for pre-approval any settlement of a Federal cause of action 
that comes to its attention, on a case-by-case basis, even if the 
settlement amount attributable to liability for property damage, 
personal injury, or death is below the applicable threshold. 
Accordingly, Treasury is modifying section 50.82 of the final rule to 
add a new paragraph (b) which states that Treasury may request that an 
insurer submit for review and advance approval proposed settlements of 
Federal causes of action for property damage, personal injury, or 
death, where the settlement amounts are below the monetary thresholds 
identified in section 50.82(a)(1) and (2).
    Several commenters asked for clarification covering different, but 
related aspects concerning what is included in calculating the 
thresholds. In response, Treasury provides the following additional 
clarifications:
     Any portion of the proposed settlement amount that is 
attributable to an insured loss or losses is aggregated per third-party 
claimant, regardless of the number of causes of action or insured 
losses being settled (section 50.82(a)(1) and (2) are being revised to 
reflect the ``per third-party claimant'' qualification);
     The thresholds include self-insured retentions (no change 
to the rule is necessary);
     Defense costs are not included in the thresholds. They are 
reviewed as loss adjustment expenses under sections 50.50(a) and 
50.5(e)(4) of the regulations; and
     The pre-approval process does apply to Federal causes of 
action settled before the insurer has exceeded its insurer deductible 
under the Act. See section 102(7); 103(e)(1)(A). This is because under 
the claims procedures rule, insured losses are submitted on an 
aggregate basis without identification as to which insured losses are 
assigned to meeting the insurer deductible. See section 50.51(a) of 
Subpart F.
    One commenter, representing a market of London-based insurers and 
reinsurers commented that it read the proposed settlement pre-approval 
requirements as being limited to settlements of filed legal actions. As 
Treasury stated in the preamble to its proposed rule (69 FR at 25344-
45), the

[[Page 44937]]

settlement pre-approval requirements, which are now being finalized, 
apply to Federal causes of action regardless of whether a lawsuit has 
actually been filed or an arbitration commenced with respect to the 
claim. This is because, as we explained in the preamble to the proposed 
rule, ``a `cause of action' is a group of operative facts giving rise 
to one or more bases for one person to sue and obtain a remedy in court 
from another person.''
    Commenters generally favored the proposed rule's limitation on the 
pre-approval requirements to causes of action brought by third-party 
claimants against insureds. As stated in the preamble to the proposed 
rule, the prior approval requirement extends only to settlements for 
insured losses arising from third-party claims against an insured for 
property damage, personal injury or death against a commercial insured. 
Coverage disputes involving contract rights are not included in the 
scope of the causes of actions requiring advanced settlement approval 
by Treasury. Such disputes involve causes of action that are based on 
contract law, not on property damage, personal injury, or death, and 
are not subject to prior approval by Treasury. Several commenters 
suggested that Treasury include this important distinction in the rule 
itself. After consideration of these comments, Treasury has clarified 
in section 50.82(a) of the final rule that the advance approval 
requirements apply to any proposed agreement to settle or compromise 
any Federal cause of action for property damage, personal injury, or 
death, asserted by a third-party or parties against an insured.
4. Factors To Be Reviewed by Treasury
    In determining whether to approve a proposed settlement, section 
50.82(b) of the proposed rule (now being re-designated in the final 
rule as subparagraph (c)) identified the factors (in addition to those 
listed in section 50.50 of Subpart F) that Treasury would consider. 
These factors included the nature of the insured loss, the facts and 
circumstances surrounding the loss, and, as applicable, other related 
factors, as well as any other information requested by Treasury. The 
real estate industry association stated that the proposed rule 
``provides commendable detail in requiring specific information to be 
communicated in submissions of proposed settlement for pre-approval by 
Treasury.''
    The ad hoc industry working group suggested that if the proposed 
rule is adopted, Treasury should limit the pre-approval of proposed 
settlements to a review that only would consider whether punitive 
damages were included in the settlement. Alternatively, the working 
group comment suggested eliminating section 50.83 and modifying section 
50.82 to require insurers to provide Treasury ``notice'' that the 
settlement is not an ex gratia payment (i.e., a payment not required 
under the terms of the insurance policy); does not include settlement 
of a claim for punitive damages; and is not the result of fraud, 
collusion, bad faith, or dishonesty. In addition, the working group 
comment suggested the insurer notify Treasury that the insurer has 
complied with applicable State laws governing claims practices; 
determined that liability of the insured is clear; and has agreed to 
settlement based on merits and terms and conditions of the policy, 
without regard to the submission as part of its claim for the Federal 
share of compensation. These factors are generally covered through 
application of the claims procedures rule. See section 50.50(a). 
Accordingly, Treasury has decided to not revise the rule as suggested.
    The real estate industry association wanted the factors expanded to 
include all information considered by the insurer's claims adjuster; 
that settlements also are reviewed for ``excessiveness''; and that 
Treasury should receive detailed statement explaining how any proposed 
settlement ensures that punitive damages are not included. Treasury 
believes the listed factors are sufficient. In addition, section 
50.82(c)(5) allows Treasury to consider any other criteria that 
Treasury may consider appropriate, depending on the facts and 
circumstances surrounding the settlement. The commenter's suggestions 
are the type of additional information that could be requested 
(pursuant to 50.83(d)(12) of the final rule) and evaluated in certain 
circumstances, but certainly not all, and therefore, Treasury declines 
to add them by specific reference at this time.
    Other comments were directed specifically to some of the factors, 
described below.
a. Ensuring That the Settlement Is an Insured Loss Covered Under the 
Insurance Policy (Section 50.82(c)(1))
    Among the factors the proposed rule listed as relevant to 
Treasury's consideration of proposed settlements, section 50.82(c)(1) 
stated that Treasury would consider whether the proposed settlement 
compensates for a loss that is an insured loss under the terms and 
conditions of the underlying commercial property and casualty insurance 
policy. The ad hoc industry working group pointed out that this is 
already part of the claims review process under the claims procedures 
rule in Subpart F and doing a coverage analysis at the pre-approval 
stage may cause delay in insurers paying claims.
    In consideration of this comment, Treasury is revising the final 
rule to state that Treasury will review whether the ``proposed 
settlement compensates for a third-party's loss, the liability for 
which is an insured loss under the terms and conditions of the 
underlying commercial property and casualty insurance policy, as 
certified by the insurer pursuant to Sec.  50.83(d)(2).'' As a result, 
Treasury is changing section 50.83(d)(2) of the final rule to require 
the insurer to provide to Treasury as part of the approval submission 
process a certification by the insurer that the settlement is for a 
third-party's loss, the liability of which is an insured loss under the 
terms and conditions of the underlying commercial property and casualty 
insurance policy. The revisions clarify that the loss is that of a 
third-party, the liability for which is an insured loss, as suggested 
by an insurer who commented that the rule, left unchanged, could be 
misread to capture first-party settlements.
b. Ensuring That Settlement Amounts Shared With the Program Do Not 
Include Payment of Punitive Damages (Section 50.82(c)(2))
    Section 107(a)(5) provides that any amounts awarded in actions 
under section 107(a)(1) of the Act (exclusive Federal cause of action 
for property damage, personal injury, or death arising out of or 
resulting from an act of terrorism) that are attributable to punitive 
damages shall not count as insured losses under the Act. Because 
section 107(a)(5) of the Act does not consider punitive damages 
``insured losses'' under the Act, the Federal Government will not 
compensate an insurer for such damages. See also sections 50.5(e)(4)(i) 
of Subpart A (definition of ``insured loss'') and 50.50(a) of Subpart 
I.
    Consistent with the claims procedures rule, this proposed rule 
stated that a factor Treasury would consider in approving a proposed 
settlement is whether the settlement excludes punitive damages, 
regardless of how the parties to the settlement agreement characterize 
the payment. An insurer shall be required to identify any portion of a 
proposed settlement amount that is attributable to punitive damages, or 
that is intended to compromise a claim or demand for punitive damages 
in a cause of action for which punitive damages

[[Page 44938]]

could be awarded. And Treasury will review proposed settlements to 
determine whether all or part of the settlement amount is intended to 
compromise an actual or threatened claim for punitive or exemplary 
damages, even if the settlement does not indicate that the payment 
includes punitive or exemplary damages.
    The real estate industry association stated that, ``[o]ne of the 
best elements of the NPRM [Notice of Proposed Rulemaking] is its 
detailed discussion of steps that will be taken to ensure that 
settlements do not include indemnity for punitive damages claims.'' The 
ad hoc industry working group suggested that the proposed rule be 
modified to require the review of amounts ``attributable to an award of 
punitive or exemplary damages,'' presumably following the literal 
language of section 107(a)(5) of the Act. The working group stated that 
while claims for punitive damages are made routinely, actual awards are 
rare. Without the modification, the working group comment suggested, 
Treasury's review would be highly subjective, involve substantial legal 
and factual analysis, and create inordinate delay, yet would promise 
little value. After review of these comments, Treasury is finalizing 
the rule as proposed in order to ensure that punitive damages are not 
awarded through settlements.
    Several commenters requested that Treasury explain how it would 
determine what portion of a proposed settlement might be attributable 
to a claim for punitive damages when the settlement does not indicate 
that the payment includes such damages. No methods of review were 
suggested by these comments. The real estate industry association, 
however, suggested that Treasury could require and receive a detailed 
statement from the insurer (under section 50.83) explaining how any 
proposed settlement ensures that punitive damages are not included. 
Treasury considered the comments and decided that a requirement for the 
insurer to identify any portion of a proposed settlement amount that is 
attributable to punitive damages (or that is intended to compromise a 
claim or demand for punitive damages) is sufficient.
c. Ensuring That Settlement Amounts Shared With the Program Have 
Accounted For Compensation Received by Third-Parties From Other Federal 
Programs (Section 50.82(c)(3))
    Section 50.82(b)(3) of the proposed rule (now re-designated as 
paragraph (c)(3) in the final rule) stated that a factor Treasury would 
consider in approving a proposed settlement is whether the settlement 
amount offset amounts received from the United States pursuant to any 
other Federal program. 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. See also section 50.51(b) of Subpart I. The ad hoc 
industry working group objected to Treasury's consideration of this as 
part of the settlement approval process because, as explained by the 
working group, an insurer generally does not have the ability under the 
terms and conditions of a property and casualty insurance policy to 
reduce the value of a claim by such collateral source amounts. Treasury 
is adopting this requirement in the final rule because it is required 
under the Act to adjust the Federal share of compensation by these 
amounts, Treasury is in effect asking, as a practical versus 
contractual matter, whether the insurer has already taken collateral 
source payments into consideration in arriving at the settlement amount 
(i.e., would the settlement have been higher but for the compensation 
from the other Federal Program?). Section 50.82(c)(3) of the final rule 
is finalized as proposed, without change.
d. Review of Impact of Professional Fees and Expenses on Settlement 
Amount (50.82(c)(4))
    Another factor Treasury proposed to take into account in reviewing 
proposed settlements was the amount of attorneys' fees and other legal 
expenses paid out of the settlement proceeds. The proposed rule was 
based on Treasury's concern about inflated, unsupported insured losses. 
In order to address this concern, Treasury proposed to evaluate whether 
attorneys' fees and expenses in connection with the settlement were 
unreasonable or inappropriate, in whole or in part, and whether they 
caused the insured losses under the underlying commercial property and 
casualty insurance policy to be overstated.
    Another commenter asked if review of attorneys' fees included 
review of defense attorneys' fees and expenses? Such costs would not be 
reviewed at the pre-approval stage but would be reviewed as part of the 
insurer's claim for loss adjustment expenses. See sections 50.50(a) and 
50.5(e)(3).
    In the preamble to our proposed rule, we described how Treasury 
would examine the appropriateness of attorneys' fees and expenses, 
generally by considering such factors as those weighed by Federal 
courts regarding the reasonableness of attorneys' fees and expenses. 
The real estate industry association praised this approach.
    Many of the comments addressed this section of the proposed rule. 
The ad hoc industry working group contended that the review of 
attorneys' fees contained in the proposed rule was unnecessary because 
bar association ethics rules (prohibiting unreasonable fees) and 
procedural review by courts (presumably over settlements of filed legal 
actions) are a sufficient check on legal fees that may inflate the 
settlement amounts paid by insurers.
    In light of some of the comments and upon further consideration, 
Treasury has decided to revise section 50.82(c)(4) of the final rule to 
more clearly focus on the issue of whether insured losses have been 
inflated. Under the final rule, Treasury will consider whether the 
settlement amount has been inflated by such things as unjustified 
professional fees and expenses of attorneys, experts, and other 
professionals. The intent is to focus on whether such fees or other 
expenses have caused the settlement amount to exceed the value of the 
insured loss as compared to similar losses. In order to apply this 
revision to the pre-approval submission and in response to a request 
for clarification by a commenter, Treasury is also making a related 
revision to section 50.83(d)(7) to clarify that insurers are to submit 
to Treasury the net amount to be received by the third-party after the 
payment of professional fees and expenses. Section 50.83(d)(7) is 
revised to now require that insurers inform Treasury of ``[t]he amount 
to be paid that will compensate for any items such as fees and expenses 
of attorneys, experts, and other professionals for their services and 
expenses related to the insured loss and/or settlement and the net 
amount to be received by the third-party after such payment.''
    Some commenters explained that insurers might not always be able to 
obtain this information. Treasury understands the possible difficulty 
in obtaining information but believes the insurer is in the best 
position to obtain this information and it is hoped that a third-party 
would provide such information to the insurer knowing that it is a 
requirement upon which Treasury's approval, and in turn the insurer's 
eventual agreement to finalize the settlement, may depend. Insurers 
should recognize that the factors listed in section 50.82(c) will be 
viewed as a whole, with different emphasis on different factors 
depending on the particulars of the cause of action. If an

[[Page 44939]]

insurer cannot obtain the information required by section 50.82(c)(4), 
it should simply indicate that fact to Treasury, as well as what 
attempts it made to discover the information. An insurer could also 
provide its best estimate based on its prior business experience of 
what professionals charge under the circumstances of the particular 
claim. Having provided such guidance, Treasury has decided to not 
change the rule.
5. Settlement Without Treasury's Approval
    Under section 50.82(d) of the rule, if an insurer settles a cause 
of action after Treasury has rejected the proposed settlement, or if an 
insurer settles a cause of action without seeking Treasury's approval 
in advance, as required by section 50.82(a), the insurer will not be 
entitled to the Federal share of the amount paid as part of its claim 
for federal payment unless the insurer can demonstrate, to the 
satisfaction of the Treasury, extenuating circumstances. Also, the 
insurer shall not be entitled to include the paid settlement amount as 
an insured loss in its aggregate insured losses (whether or not those 
aggregate insured losses exceed the insurer deductible) for purposes of 
calculating the Federal share of compensation due to the insurer under 
the Program.
    In its proposed rule, Treasury requested comments on how frequently 
claims are received by commercial property and casualty insurers under 
commercial liability policies where the insured settles directly with a 
claimant and then notifies the insurer after the settlement has been 
consummated. No one commented on the frequency of such situations or 
the size of claims usually involved. The ad hoc industry working group 
cited situations under the law of three states that may allow an 
insured to settle causes of action without the knowledge or consent of 
their insurer. The working group comment suggested one possible 
approach to address these situations is to specifically state in the 
rule that settlements without insurer consent are ``extenuating 
circumstances'' that will not preclude Federal compensation of the 
insurer's payment of the settlement or indemnification of the insured.
    Although there may be situations where this does occur, perhaps 
under relevant State law, Treasury prefers to evaluate each situation 
when it occurs, based on the particular circumstances as presented by 
the insurer. Accordingly, Treasury is not changing the rule and adopts 
section 50.82(d), as proposed, as final.

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

    Section 50.83 of the proposed rule set out a procedure for an 
insurer to submit proposed settlements for advance approval by 
Treasury. Generally, within 30 days after Treasury's receipt of a 
complete notice of the proposed settlement and an insurer's request 
that the proposed settlement be approved, Treasury may issue a written 
response and either approve or disapprove the proposed settlement, in 
whole or in part. If Treasury does not issue a written response within 
30 days after its receipt of a complete notice (or within the time as 
extended in writing by Treasury), the request for advance approval of 
the settlement will be deemed approved under section 50.83(c). (The 
settlement will still be subject to review under the claims procedures 
rule.)
    The majority of the comments either supported or did not object to 
the within 30-day pre-approval review process. The ad hoc industry 
working group suggested that 30 days is too long. Treasury emphasizes 
that the rule anticipates a decision by Treasury within 30 days, and 
through the ``deemer'' provision, no later than 30 days. While it is 
true, as a comment noted, that the ``deemer'' provision allows Treasury 
to extend the 30-day period, Treasury expects such instances to not be 
common. Treasury is aware of its responsibility to manage the Program 
effectively and efficiently and will employ its best efforts to 
administer the pre-approval process in an expedient manner. For reasons 
stated previously in the proposed rule preamble, Treasury is not 
changing the 30-day time period in the rule. See 69 FR 25341, 25346.
    Several commenters pointed out that the process does not envision 
any type of expedited review of settlements where the agreements in 
principal may be reached shortly before a Federal cause of action is 
about to be tried. The commenters suggest Treasury consider approaches 
to accommodate such situations. Treasury has made no change to the 
proposed rule. Treasury expects that attorneys representing the 
insureds will advise the Federal district court about Treasury's 
approval role.
    Section 50.83 of the proposed rule also outlined minimum 
information Treasury thought might be relevant and useful in 
considering whether to approve a proposed settlement. One comment was 
supportive of the proposed rule. Others, primarily representing or 
themselves insurers, believed the rule requested too much information 
which would be burdensome on insurers and cause substantial delay. 
Comments were received on the various items, some of which have 
resulted in some modifications, which are now discussed.
    In careful consideration of the insurer's comments, Treasury has 
changed the section 50.83(d) of the final rule in the following ways in 
order to ensure that Treasury is preliminarily only seeking the minimum 
information required by Treasury:
     As explained earlier in the discussion of section 
50.82(c)(1) (ensuring that the settlement is of an insured loss under 
the terms and conditions of the insurance policy), the final rule now 
adds a revised requirement at paragraph (d)(2) to 50.83, requiring a 
certification by the insurer that the settlement is for a third-party's 
loss, the liability for which is an insured loss under the terms and 
conditions of the underlying commercial property and casualty insurance 
policy. This revision is being made because Treasury needs less 
information since it will no longer be performing a complete review of 
the insurer's coverage analysis as part of the pre-approval process, as 
originally proposed;
     Paragraph (d)(4) of section 50.83 of the final rule now 
requires a statement from the insurer or its attorney in support of the 
settlement rather than a more onerous one recommending the settlement 
and requiring the basis for the recommendation;
     As explained earlier in the discussion of section 
50.82(c)(4) and the proposed review of attorneys' fees and expenses, 
paragraph (d)(7) of section 50.83 of the final rule is revised to call 
for the amount to be paid out of the settlement proceeds that in turn 
will compensate professionals for their services and expenses related 
to the insured loss and/or settlement and the net amount to be received 
by the third-party claimant. In addition to conforming to the changes 
made to 50.82(c)(4), this paragraph now combines (and clarifies) 
section 50.82(d)(6) and (7) of the proposed rule;
     Relevant agreements called for in the proposed rule are 
now, under section 50.83(d)(10) of the final rule, only required to be 
submitted if requested by Treasury; and
     Paragraph (d)(12) of section 50.83 is clarified to assure 
insurers that Treasury will request and require only such other 
information that is related to the insured loss and that it deems 
necessary to evaluate the proposed settlement.
    Treasury has decided not to adopt several of the other suggestions 
by the commenters, such as: Treasury receive the same information 
submitted to a

[[Page 44940]]

claims officer who approves the settlement on behalf of the insurer; a 
statement of risks and disadvantages of settlement with an assessment 
of the strengths and weaknesses of the claim; and a disclosure whether 
coverage is disputed and other coverage issues. It was also suggested 
that the submissions for approval be verified under oath. For the 
reasons stated earlier, Treasury declines to adopt the suggestions 
except that, for the reasons stated earlier, it will require 
certification of the insurer's coverage determination under section 
50.83(a)(2) of the final rule.
    Finally, the ad hoc industry working group commented that the 
proposed rule did not include provisions to protect confidential or 
privileged information submitted to Treasury under section 50.83. Any 
issues relating to the protection or disclosure of confidential or 
privileged information are adequately addressed through the procedures 
and exceptions (e.g., exception (b)(4) and (5)) applicable under the 
Freedom of Information Act, 5 U.S.C. 552, and Treasury's FOIA 
regulations at 31 CFR part 1, subpart A. Insurers wishing to protect 
such information should follow those procedures, including labeling the 
information pursuant to those regulations.

G. Right of Subrogation (Section 50.84)

    Section 107(c) provides that the United States shall have the right 
of subrogation with respect to any payment or claim paid by the United 
States under the Act. In section 50.85 of the proposed rule, Treasury 
proposed a requirement that insurers take steps to preserve the Federal 
Government's rights of subrogation under section 107(c).
    The ad hoc industry working group claimed that the requirement to 
preserve the subrogation rights of the United States conflicts with 
claims procedures rule that allows insurers to use business judgment in 
deciding whether to pursue subrogation opportunities. See Section 
50.51(a). Treasury believes there is no conflict. Under the claims 
procedures rule, when an insurer pursues subrogation opportunities, the 
outcome inures to the benefit of the United States through an 
adjustment to the Federal share of compensation. As we stated at 60 FR 
39296, 39300 (June 29, 2004), if an insurer decides to forego 
subrogation, the United States itself can pursue those opportunities. 
This does not conflict with section 50.84 of the final rule, which is 
designed to ensure that insurers do not waive subrogation rights and to 
prevent the very situation the working group identified when it stated, 
``waiver of subrogation rights often takes place in settlement.'' 
Treasury is not changing the rule on the basis of this comment. Given 
the language in section 107, insurers are prohibited from negotiating 
away the Federal Government's subrogation rights.
    The group of London-based insurers and reinsurers pointed out that 
the proposed rule required insurers to ``take all steps necessary to 
preserve the subrogation rights of the United States.'' The commenter 
explains that it is not clear what affirmative steps insurers must take 
to preserve these rights. The commenter suggested revising the rule to 
instead require that insurers avoid taking action that would prejudice 
the Federal Government's right of subrogation. Treasury is accepting 
this commenter's suggestion and is changing the language of section 
50.84 accordingly.

H. Management of Pre-Certification Litigation and Related Issues

    Several commenters pointed out that the proposed rule does not 
address causes of action settled and/or paid after the occurrence of an 
event not yet, but later certified by the Secretary pursuant to section 
102 of the Act as an ``act of terrorism.'' The comments raised issues 
that may warrant further study and consideration and Treasury has 
decided not to address this issue at this time.

I. Time Between Occurrence and Certification of an Event as an Act of 
Terrorism

    The ad hoc industry working group raised the issue of the time it 
may take for the Secretary to certify an event as an act of terrorism 
pursuant to section 102 of the Act. As previously explained in the 
preamble to other regulations, Treasury believes it unwise and 
inappropriate to establish a set time frame within which the Secretary 
would be required to make a certification that an ``act of terrorism'' 
had occurred. See 68 FR 41250, 41252 (July 11, 2003). The ad hoc 
industry working group comment requested that Treasury promulgate a 
rule allowing for: (1) A ``conditional'' determination if the facts 
strongly lead to a conclusion of foreign or domestic involvement; or 
(2) a regulatory provision acknowledging the possibility of a delayed 
certification and urging state regulatory consideration of that 
possibility; or (3) qualified immunity where there is a delay in the 
certification process. Treasury declines to adopt these suggestions.

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. Accordingly, 
a regulatory flexibility analysis is not required. The rule establishes 
requirements for advance approval of settlements when claims are to be 
submitted for insured losses. There is no impact on small insurers 
unless an act of terrorism occurs and federal compensation is sought by 
small insurers entitled to reimbursement for their insured losses. If 
an act of terrorism occurs and Federal payment is sought through a 
claim, the rule's impact on small insurers is likely to be minimal 
because most of the information that would have to be submitted in 
connection with Treasury approval of settlements largely duplicates 
information already contained in an insurer claim file or an attorney 
case file. Moreover, the $2 million and $10 million thresholds for the 
submission of settlements to Treasury for approval is likely further to 
minimize burdens on small insurers.

Paperwork Reduction Act

    The collection of information contained in this 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 1505-0196. 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 notice of proposed settlement 
in section 50.83 that insurers must submit to implement the settlement 
approval process prescribed by section 50.82. The information will be 
used by Treasury to evaluate the reasonableness of proposed settlements 
in order to approve them in advance. The submission of specified 
information in connection with a proposed settlement is mandatory for 
any insurer that seeks payment of a Federal share of compensation.
    The burden associated with this collection of information is 
estimated to

[[Page 44941]]

be 4 hours with respect to each claim. Comments on the accuracy of this 
estimate and suggestions on how to reduce this burden should be sent to 
the Terrorism Risk Insurance Program, Room 2100, 1425 New York Avenue, 
NW., Washington, DC 20220 and to the Desk Officer for the Department of 
the Treasury, Office of Information and Regulatory Affairs, Office of 
Management and Budget, Washington, DC 20503.

List of Subjects in 31 CFR Part 50

    Terrorism risk insurance.

Authority and Issuance

0
For the reasons set forth 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. Subpart I of part 50 is added to read as follows:
Sec.
50.80 Federal cause of action and remedy.
50.81 State causes of action preempted.
50.82 Advance approval of settlements.
50.83 Procedure for requesting approval of proposed settlements.
50.84 Subrogation.

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


Sec.  50.80  Federal cause of action and remedy.

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


Sec.  50.81  State causes of action preempted.

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


Sec.  50.82  Advance approval of settlements.

    (a) Mandatory submission of settlements for advance approval. An 
insurer shall submit to Treasury for advance approval any proposed 
agreement to settle or compromise any Federal cause of action for 
property damage, personal injury, or death, asserted by a third-party 
or parties against an insured, involving an insured loss, all or part 
of the payment of which the insurer intends to submit as part of its 
claim for Federal payment under the Program, when:
    (1) Any portion of the proposed settlement amount that is 
attributable to an insured loss or losses involving personal injury or 
death in the aggregate is $2 million or more per third-party claimant, 
regardless of the number of causes of action or insured losses being 
settled; or
    (2) Any portion of the proposed settlement amount that is 
attributable to an insured loss or losses involving property damage 
(including loss of use) in the aggregate is $10 million or more per 
third-party claimant, regardless of the number of causes of action or 
insured losses being settled.
    (b) Discretionary review of other settlements. Notwithstanding 
paragraph (a), Treasury may require that an insurer submit for review 
and advance approval any proposed agreement to settle or compromise any 
Federal cause of action for property damage, personal injury, or death, 
asserted by a third-party or parties against an insured, involving an 
insured loss, all or part of the payment of which the insurer intends 
to submit as part of its claim for Federal payment under the Program 
where the settlement amounts are below the applicable monetary 
thresholds identified in paragraphs (a)(1) and (2) of this section.
    (c) Factors. In determining whether to approve a proposed 
settlement, Treasury will consider the nature of the loss, the facts 
and circumstances surrounding the loss, and other factors such as 
whether:
    (1) The proposed settlement compensates for a third-party's loss, 
the liability for which is an insured loss under the terms and 
conditions of the underlying commercial property and casualty insurance 
policy, as certified by the insurer pursuant to Sec.  50.83(d)(2);
    (2) Any amount of the proposed settlement is attributable to 
punitive or exemplary damages intended to punish or deter (whether or 
not specifically so described as such damages);
    (3) The settlement amount offsets amounts received from the United 
States pursuant to any other Federal program;
    (4) The settlement amount does not include any items such as fees 
and expenses of attorneys, experts, and other professionals that have 
caused the insured losses under the underlying commercial property and 
casualty insurance policy to be overstated; and
    (5) Any other criteria that Treasury may consider appropriate, 
depending on the facts and circumstances surrounding the settlement, 
including the information contained in Sec.  50.83.
    (d) Settlement without seeking advance approval or despite 
disapproval. If an insurer settles a cause of action or agrees to the 
settlement of a cause of action without submitting the proposed 
settlement for Treasury's advance approval in accordance with paragraph 
(a) or (b) of this section, and in accordance with Sec.  50.83 or 
despite Treasury's disapproval of the proposed settlement, the insurer 
will not be entitled to include the paid settlement amount (or portion 
of the settlement amount, to the extent partially disapproved) in its 
aggregate insured losses for purposes of calculating the Federal share 
of compensation of its insured losses, unless the insurer can 
demonstrate, to the satisfaction of Treasury, extenuating 
circumstances.


Sec.  50.83  Procedure for requesting approval of proposed settlements.

    (a) Submission of notice. Insurers must request advance approval of 
a proposed settlement by submitting a notice of the proposed settlement 
and other required information in writing to the Terrorism Risk 
Insurance Program Office or its designated representative. The address 
where notices are to be submitted will be available at http://www.treasury.gov/trip following any

[[Page 44942]]

certification of an act of terrorism pursuant to section 102(1) of the 
Act.
    (b) Complete notice. Treasury will review requests for advance 
approval and determine whether additional information is needed to 
complete the notice.
    (c) Treasury response or deemed approval. Within 30 days after 
Treasury's receipt of a complete notice, or as extended in writing by 
Treasury, Treasury may issue a written response and indicate its 
partial or full approval or rejection of the proposed settlement. If 
Treasury does not issue a response within 30 days after Treasury's 
receipt of a complete notice, unless extended in writing by Treasury, 
the request for advance approval is deemed approved by Treasury. Any 
settlement is still subject to review under the claim procedures 
pursuant to Sec.  50.50.
    (d) Notice format. A notice of a proposed settlement should be 
entitled, ``Notice of Proposed Settlement--Request for Approval,'' and 
should provide the full name and address of the submitting insurer and 
the name, title, address, and telephone number of the designated 
contact person. An insurer must provide all relevant information, 
including the following, as applicable:
    (1) A brief description of the insured's underlying claim, the 
insured's loss, the amount of the claim, the operative policy terms, 
defenses to coverage, and all damages sustained;
    (2) A certification by the insurer that the settlement is for a 
third-party's loss the liability for which is an insured loss under the 
terms and conditions of the underlying commercial property and casualty 
insurance policy;
    (3) An itemized statement of all damages by category (i.e., actual, 
economic and non-economic loss, punitive damages, etc.);
    (4) A statement from the insurer or its attorney in support of the 
settlement.;
    (5) The total dollar amount of the proposed settlement;
    (6) Indication as to whether the settlement was negotiated by 
counsel;
    (7) The amount to be paid that will compensate for any items such 
as fees and expenses of attorneys, experts, and other professionals for 
their services and expenses related to the insured loss and/or 
settlement and the net amount to be received by the third-party after 
such payment;
    (8) The amount received from the United States pursuant to any 
other Federal program for compensation of insured losses related to an 
act of terrorism;
    (9) The proposed terms of the written settlement agreement, 
including release language and subrogation terms;
    (10) If requested by Treasury, other relevant agreements, 
including:
    (i) Admissions of liability or insurance coverage;
    (ii) Determinations of the number of occurrences under a commercial 
property and casualty insurance policy;
    (iii) The allocation of paid amounts or amounts to be paid to 
certain policies, or to specific policy, coverage and/or aggregate 
limits; and
    (iv) Any other agreement that may affect the payment or amount of 
the Federal share of compensation to be paid to the insurer;
    (11) A statement indicating whether the proposed settlement has 
been approved by the Federal court or is subject to such approval and 
whether such approval is expected or likely; and
    (12) Such other information that is related to the insured loss as 
may be requested by Treasury that it deems necessary to evaluate the 
proposed settlement.


Sec.  50.84  Subrogation.

    An insurer shall not waive its rights of subrogation under its 
property and casualty insurance policy and preserve the subrogation 
right of the United States as provided by section 107(c) of the Act by 
not taking any action that would prejudice the United States' right of 
subrogation.

    Dated: July 23, 2004.
Wayne A. Abernathy,
Assistant Secretary of the Treasury.
[FR Doc. 04-17235 Filed 7-26-04; 9:22 am]
BILLING CODE 4810-42-P