[Federal Register Volume 71, Number 165 (Friday, August 25, 2006)]
[Rules and Regulations]
[Pages 50341-50347]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E6-14180]


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DEPARTMENT OF THE TREASURY

31 CFR Part 50

RIN 1505-AB67


Terrorism Risk Insurance Program; TRIA Extension Act 
Implementation

AGENCY: Departmental Offices, Treasury.

ACTION: Final rule.

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SUMMARY: The Department of the Treasury (Treasury) is issuing this rule 
in final form as part of its implementation of amendments made to Title 
I of the Terrorism Risk Insurance Act of 2002 (TRIA or Act) by the 
Terrorism Risk Insurance Extension Act of 2005 (Extension Act). The Act 
established a temporary Terrorism Risk Insurance Program (Program) that 
was scheduled to expire on December 31, 2005, under which the Federal 
Government shared the risk of insured losses from certified acts of 
terrorism with commercial property and casualty insurers. The Extension 
Act extends the Program through December 31, 2007, and makes other 
changes which are implemented by this rule. In particular, the rule 
addresses changes to the types of commercial property and casualty 
insurance covered by the Act, the requirements to satisfy the Act's 
mandatory availability (``make available'') provision and the operation 
of the new ``Program Trigger'' provision in section 103(e)(1)(B) of the 
Act. Treasury published an interim final rule and a cross-referenced 
proposed rule with a request for comment on May 11, 2006. This final 
rule finalizes the proposed rule by adopting the text of the interim 
final rule without revision.

DATES: This final rule is effective September 25, 2006.

FOR FURTHER INFORMATION CONTACT: Howard Leikin, Deputy Director, 
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 by the Act, is certified by the Secretary of the Treasury, in 
concurrence with the Secretary of State and the Attorney General. The 
Act authorizes Treasury to administer and implement the Terrorism Risk 
Insurance Program (Program), including the issuance of regulations and 
procedures.
    Each entity that meets the Act's definition of insurer (well over 
2,000 firms) must participate in the Program. The amount of federal 
payment for an insured loss resulting from an act of terrorism is 
determined by insurance company deductibles and excess loss sharing 
with the Federal Government as specified in the Act and Treasury's 
implementing regulations. An insurer's deductible increases each year 
of the Program and in Program Year 5, so does its share of the losses 
in excess of the deductible, thereby reducing the Federal Government's 
share of compensation for insured losses each year until the Program 
expires. An insurer's deductible is calculated based on the value of 
direct earned premiums collected over certain prescribed calendar 
periods. Once an insurer has met its individual deductible, the federal 
payments cover a percentage of the insured losses above the deductible, 
subject to an industry aggregate limit of $100 billion.
    The Act gives Treasury authority to recoup federal payments made 
under the Program through policyholder surcharges, up to a maximum 
annual limit. The Act reduces the Federal share of compensation for 
insured losses that have been covered under any other federal program. 
The Act also contains provisions designed to manage litigation arising 
from or relating to a certified act of terrorism. Section 107 of the 
Act creates an exclusive federal cause of action, provides for claims 
consolidation in federal court, and contains a prohibition on federal 
payments for punitive damages under the Program. The Act provides the 
United States with the right of subrogation with respect to any payment 
or claim paid by the United States under the Program.

B. Terrorism Risk Insurance Extension Act of 2005

    The Program was originally set to expire on December 31, 2005. On 
December 22, 2005, the President signed into law the Terrorism Risk 
Insurance Extension Act of 2005 (Pub. L. 109-144, 119 Stat. 2660), 
which extends the Program through December 31, 2007. In doing so, the 
Extension Act adds Program Year 4 (January 1-December 31, 2006) and 
Program Year 5 (January 1-December 31, 2007) to the Program. In 
addition, the Extension Act made other significant changes to TRIA that 
include:
     A revised definition of ``insurer deductible'' that adds 
new Program Years 4 and 5 to the definition. The insurer deductible is 
set as the value of an insurer's direct earned premium for commercial 
property and casualty insurance (as now defined in the Act) over the 
immediately preceding calendar year multiplied by 17.5 percent for 
Program Year 4 and by 20 percent for Program Year 5.
     A revised definition of ``property and casualty 
insurance'' that now excludes commercial automobile insurance; burglary 
and theft insurance;

[[Page 50342]]

surety insurance; professional liability insurance; and farmowners 
multiple peril insurance. Though the definition excludes professional 
liability insurance, it explicitly retains directors and officers 
liability insurance.
     Creation of a new Program Trigger for any certified act of 
terrorism occurring after March 31, 2006, that prohibits payment of 
Federal compensation by Treasury unless the aggregate industry insured 
losses resulting from that act of terrorism exceed $50 million for 
Program Year 4 and $100 million for Program Year 5.
     A change to the Federal share of compensation for insured 
losses. Subject to the Program Trigger, the Federal share is 90 percent 
of that portion of the amount of insured losses that exceeds the 
applicable insurer deductible in Program Year 4 and decreases to 85 
percent of such amount in Program Year 5.
     Revisions to the recoupment provisions. For purposes of 
recouping the Federal share of compensation under the Act, the 
insurance marketplace aggregate retention amount for the two additional 
years of the Program is increased from the level in Program Year 3. For 
Program Year 4 the insurance marketplace aggregate retention amount is 
established as the lesser of $25 billion and the aggregate amount, for 
all insurers, of insured losses during Program Year 4. The insurance 
marketplace aggregate retention amount for Program Year 5 is the lesser 
of $27.5 billion and the aggregate amount, for all insurers, of insured 
losses during Program Year 5.
     A statutory codification of Treasury's litigation 
management regulatory requirements in Sec.  50.82 of title 31 of the 
Code of Federal Regulations (as in effect on July 28, 2004), which 
requires advance approval by Treasury of proposed settlements of 
certain causes of action involving insured losses under the Program.

C. The Interim Final Rule

    The interim final rule was published in the Federal Register at 71 
FR 27564 (May 11, 2006) with a cross-referenced proposed rule published 
at 71 FR 27573 that would adopt the text of the interim final rule as 
final. References in the following discussion are to the interim final 
rule. The interim final rule incorporated certain changes to 31 CFR 
part 50 required by the amendments to TRIA in the Extension Act, which 
extended the Program by two years, to December 31, 2007. The changes in 
the rules included new insurer deductible amounts for each of those 
Program Years, the extension of mandatory availability requirements, 
the deletion of certain types of insurance from the definition of 
property and casualty insurance, and a continued safe harbor for the 
use of model disclosure forms. The interim final rule also incorporated 
and clarified statutory changes to the determination of the Federal 
share of compensation, taking into account the new Program Trigger.
    This final rule, and the preceding interim final rule, reflect 
interim guidance previously issued by Treasury in a notice published in 
the Federal Register on January 5, 2006 (71 FR 648), in order to assist 
insurers, policyholders, and other interested parties in complying with 
immediately applicable requirements of the Extension Act. Treasury 
consulted with the National Association of Insurance Commissioners 
(NAIC) in developing the interim final rule and has carefully 
considered the comments submitted in finalizing the interim final rule.

II. Summary of Comments and Final Rule

    Treasury received four comments on the interim final rule.\1\ 
Comments were submitted by a farm mutual insurer, an insurance company, 
a farm mutual reinsurer and an insurance industry trade association. 
The comments raised issues in two areas--farm owners multiple peril 
insurance and umbrella and excess policies. In addition, one comment 
commended the Terrorism Risk Insurance Program for addressing issues in 
the earlier interim guidance that had required clarification. After 
review and consideration of the comments, Treasury is now promulgating 
a final rule implementing the Extension Act changes to TRIA. The final 
rule makes no changes to the interim final rule, but the preamble 
provides some clarification in response to the issues raised in the 
comments. The following discussion also summarizes the provisions of 
the interim final, and now final, rule.\1\
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    \1\ We also received one comment from a group of farm mutual 
insurers after the close of the comment period. We note that this 
comment raised the same issues contained in one of the four other 
comments. These issues were addressed in this final rule.
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A. Definitions (Sec.  50.5)

    The interim final rule incorporated revised definitions for insurer 
deductible, Program Years, and property and casualty insurance. The 
rule also added definitions for professional liability insurance and 
Program Trigger event.
    The revisions to the definitions for insurer deductible and Program 
Years implemented the Extension Act's addition of Program Years 4 
(calendar year 2006) and 5 (calendar year 2007) and the percentages to 
be applied to an insurer's direct earned premium for the immediately 
preceding calendar year in computing insurer deductibles for Program 
Year 4 (17.5 percent) and Program Year 5 (20 percent).
    Section 102(12) of TRIA was also amended to exclude additional 
types of insurance from the definition of property and casualty 
insurance under the Program. The Act now excludes from the definition 
commercial automobile insurance, burglary and theft insurance, surety 
insurance, professional liability insurance (but not directors and 
officers insurance), and farmowners multiple peril insurance. To the 
extent the newly excluded types of insurance represent specific lines 
of business on the NAIC Annual Statement, Treasury is continuing to 
utilize NAIC line of business definitions in implementing the Act. The 
newly excluded types of insurance which may correspond to lines of 
business on the NAIC Annual Statement are: Line 3--Farmowners Multiple 
Peril; Line 19.3--Commercial Auto No-Fault (personal injury 
protection); Line 19.4--Other Commercial Auto Liability; Line 21.2--
Commercial Auto Physical Damage; Line 26--Burglary and Theft; and Line 
24--Surety. In addition, the interim final rule made clear that these 
types of insurance are excluded from the definition of property 
casualty insurance, regardless of how their premiums may be reported.
    The only type of insurance that is newly excluded from the 
definition of property and casualty insurance in the Act, but is not a 
specific line of business on the NAIC Annual Statement, is professional 
liability insurance, located in new section 102(12)(xi). In the interim 
final rule, Treasury provided the following definition of 
``professional liability insurance'':
    Professional liability insurance means insurance coverage for 
liability arising out of the performance of professional or business 
duties related to a specific occupation, with coverage being tailored 
to the needs of the specific occupation. Examples include abstracters, 
accountants, insurance adjusters, architects, engineers, insurance 
agents and brokers, lawyers, real estate agents, stockbrokers and 
veterinarians. For purposes of this definition, professional liability 
insurance does not include directors and officers liability insurance.
    Insurers are to use this definition in identifying policies 
excluded from the Program, as well as for satisfying the Act's ``make 
available'' requirement and determining which policies have

[[Page 50343]]

premiums that should be subtracted from Line 17--Other Liability on the 
NAIC Annual Statement when computing direct earned premium for Program 
purposes.
    This definition is derived from the definition of ``Professional 
Errors and Omissions Liability'' found in the Uniform Property & 
Casualty Coding Matrix currently utilized by the System for Electronic 
Rate and Form Filing (SERFF) sponsored by the NAIC.\2\ However, this 
definition is not meant to limit insurers to the filing code (17.0019) 
specified under SERFF for ``Professional Errors and Omissions 
Liability''. Certainly, policies and coverages that employ the SERFF 
filing code will meet the interim final rule definition of professional 
liability insurance. Treasury acknowledges that many insurers and 
insurance support organizations do not utilize the SERFF mechanism for 
all their form filings. Thus, the definition in the interim final rule 
was intended to have a broader application than the SERFF filing 
process and should not be viewed as limited to one particular SERFF 
filing code.
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    \2\ The Matrix can be found on the NAIC Web site at http://www.naic.org/industry_home.htm.
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    Directors and officers liability insurance, which is sometimes 
considered a type of professional liability insurance, is not included 
in the definition of professional liability insurance. Section 
102(12)(A) of the Act now explicitly includes directors and officers 
liability insurance in the definition of property and casualty 
insurance. This change does not substantively modify the previous 
definition of property and casualty insurance under the Act, but is a 
statutory clarification that directors and officers liability insurance 
is distinct from professional liability insurance. Premium for 
directors and officers liability insurance may be already included in 
Line 17--Other Liability on the NAIC Annual Statement, one of the 
commercial lines of business listed in Treasury's current regulations 
defining property and casualty insurance (31 CFR 50.5(n)), if not 
otherwise excluded. Treasury recommends that insurers consult the 
definition of ``Directors & Officers Liability'' found in the Uniform 
Property & Casualty Coding Matrix now being utilized by SERFF if 
further guidance is needed on what constitutes ``Directors & Officers 
Liability'' insurance.
    The Extension Act adds a new section 103(e)(1)(B) to TRIA entitled 
``Program Trigger.'' This new provision directs the Secretary not to 
compensate insurers under the Program unless the aggregate industry 
insured losses from a certified act of terrorism exceed certain insured 
loss or ``trigger'' amounts.\ 3\To implement this provision, the 
interim final rule added a new definition for ``Program Trigger 
event''. Such an event is ``a certified act of terrorism that occurs 
after March 31, 2006, for which the aggregate industry insured losses 
resulting from such act exceed $50 million with respect to such insured 
losses occurring in 2006 and $100 million with respect to such insured 
losses occurring in 2007.'' Unless an act of terrorism is a Program 
Trigger event, insured losses from that act of terrorism will not be 
considered in any determination of or calculation leading to any 
Federal share of compensation under the Act. The Program Trigger is 
discussed further in ``E. Federal Share of Compensation'' below.
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    \3\ Section 103(e)(1)(B) states: ``In the case of a certified 
act of terrorism occuring after March 31, 2006, no compensation 
shall be paid by the Secretary under subsection (a), unless the 
aggregate industry insured losses resulting from such certified act 
of terrorism exceed--(i) $50,000,000, with respect to such insured 
losses occurring in Program Year 4; or (ii) $100,000,000, with 
respect to such insured losses occurring in Program Year 5.''
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Farmowners Multiple Peril Insurance
    The Extension Act revision to TRIA section 102(12) specifically 
excludes ``farm owners multiple peril insurance'', a particular type of 
insurance which is also a specific line of business on the NAIC Annual 
Statement, from the definition of property and casualty insurance. 
Prior to the issuance of the interim final rule, insurers asked whether 
monoline farm insurance coverages are similarly excluded. With no clear 
guidance in the legislative history of the Extension Act on this issue 
and, guided by the plain meaning of the statute, Treasury issued the 
interim final rule based on its interpretation that this exclusion is 
applicable only to multiple peril coverages insuring farm risks. Single 
peril or monoline coverages insuring farm risks generally would 
continue to be evaluated based on the line of business on the NAIC 
Annual Statement (or equivalent reporting system) where the premiums 
for such coverages are reported. Thus, if the premiums for such 
monoline coverages are usually reported, or otherwise allocated, to one 
of the commercial lines of insurance on the NAIC Annual Statement (or 
equivalent reporting system), unless otherwise excluded by the Act, the 
monoline coverage would be treated as falling within the definition of 
property and casualty insurance under Treasury's regulations.
    Aware of some concerns with this result on the part of some smaller 
insurance entities, such as farm and county mutuals, Treasury 
specifically sought comments on the practical implications of this 
issue and requested the articulation of a basis for any assertion that 
monoline coverages are excluded from the Program as part of the 
farmowners multiple peril exclusion.
    Three commenters addressed the treatment of ``farm owners multiple 
peril insurance'' in Treasury's interim final rule.
    One Texas farm mutual insurer indicated it believed the monoline 
fire policies the insurer issues for farm risks in Texas ``are 
residential in nature and not commercial''. Texas farm mutuals 
generally are precluded from writing commercial insurance. To the 
extent a farm mutual insurer files an NAIC Annual Statement in Texas 
(not all farm mutuals file an NAIC Annual Statement), the premium for 
its monoline fire policies is reported on Line 1--Fire of the NAIC 
Annual Statement (an included line). But the farm mutual insurer 
explained that the ``Fire'' line of business in Texas includes both 
personal and commercial lines. The insurer suggested that ``an argument 
can be made'' that the Texas Department of Insurance looks upon farm 
mutual policies as being residential policies and not commercial 
policies, and that these policies should not be subject to TRIA simply 
because of the line on which they are required to be reported.
    A Midwest reinsurer of county and town mutuals also raised concerns 
about Treasury's interpretation of the meaning of ``farm owners 
multiple peril''. The reinsurer noted that ``the practical implication 
of Treasury's interpretation is that inclusion of exposures in the 
Program is made dependent upon the method by which premium is reported 
and not with regard to the actual exposure being insured.'' The 
reinsurer further suggested that Treasury's interpretation of the 
Extension Act was inconsistent with Treasury's earlier treatment of 
commercial property and casualty insurance \4\ that ``was based on the 
exposure insured, not on the method of reporting premium.''
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    \4\ See 68 FR 9810.
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    The third commenter, which reports all farm policy premium under 
the farm owners multiple peril line of its Annual Statement, even 
premium for what might be considered monoline policies,

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requested confirmation that under the rules, because of the way its 
premium is reported, the policy form it uses would be considered farm 
owners multiple peril insurance.
    As noted previously, there is no clear guidance in the legislative 
history of the Extension Act that suggests the meaning of ``farm owners 
multiple peril insurance'' should be interpreted broadly to include 
single peril, or monoline, farmowners insurance. Moreover, ``farm 
owners multiple peril insurance'' is a specific line of business on the 
NAIC Statement. Since the inception of the Program, Treasury has used 
Statutory Page 14 of the NAIC Annual Statement as the ``best available 
point of reference'' \5\ to define what constitutes commercial property 
and casualty insurance, also applicable as guidance to insurers that do 
not report via Statutory Page 14 to the NAIC. Treasury's rules 
generally define property and casualty insurance in terms of specified 
lines of business on the NAIC Annual Statement. Insurance for which 
premiums are reported on an excluded line of business is not included 
in the Program. Insurance for which premiums are reported on an 
included line of business is included, unless the particular type of 
insurance is otherwise excluded by the Act.
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    \5\ See 68 FR 41257.
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    Treasury believes that its earlier guidance on what constitutes 
commercial property and casualty insurance is consistent with its more 
recent interpretation of the Extension Act meaning of ``farm owners 
multiple peril insurance''. However, the preamble discussion of this 
issue in the interim final rule was fairly brief and we offer 
additional discussion below.
    Treasury has maintained that premium reported on the specified 
commercial lines on Statutory Page 14 of the NAIC Annual Statement is 
only considered to be commercial premium subject to the Act ``to the 
extent coverage provided is for commercial property and casualty 
exposures'' \6\ (and provided it is not otherwise excluded by the Act). 
The definition of property and casualty insurance in Sec.  50.5(n)(1) 
provides, in part, that it means ``commercial lines within'' certain 
specified lines of insurance. We have specifically noted that personal 
insurance (insurance primarily designed for personal, family or 
household purposes) that is reported on one of the specified commercial 
lines of Statutory Page 14 should be excluded from an insurer's 
calculation of its direct earned premium.\7\ We have likewise applied 
this analysis in clarifying what constitutes commercial property and 
casualty insurance coverage for purposes of paying insured losses and 
determining compliance with the ``make available'' provision of the 
Act.
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    \6\ See 68 FR 9810.
    \7\ See Sec.  50.5(d)(1)(ii).
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    In applying the foregoing to the farm risks described by the farm 
mutual commenters, if the premium for a monoline policy written by such 
insurers is reported on one of the specified commercial lines of 
Statutory Page 14 of the NAIC Annual Statement (Fire, Allied Lines, 
etc.), the monoline coverage as a general rule is subject to TRIA. 
However, if the monoline policy only insures a personal insurance 
exposure (residential dwelling), or is otherwise excluded by the Act, 
the policy is not commercial property and casualty insurance within the 
meaning of the Act and is not subject to the Act. To the extent a 
monoline policy is a hybrid policy that insures both personal and 
commercial exposures, farm mutual insurers should look to Treasury's 
treatment of the direct earned premium for hybrid policies as a guide 
for how to treat the hybrid policy for other purposes under TRIA 
(determining claims for insured losses, complying with the ``make 
available'' provision, etc.).\8\
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    \8\ See Sec.  50.5(d).
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    Consistent with the Extension Act, the interim final rule excludes 
farm owners multiple peril insurance from the definition of property 
and casualty insurance. In response to the commenter that raised the 
question about its policy form, we note that the interim final rule 
does not directly address policy forms or how various state regulators 
treat particular forms for NAIC Annual Statement reporting purposes. 
Treasury assumes that the forms and reporting practices are appropriate 
under applicable state law. Whatever treatment is afforded particular 
policies by insurers in compliance with relevant state law is generally 
the guide for how such policies are treated under Treasury's 
regulations for what constitutes commercial property and casualty 
insurance, unless expressly excluded by the Act. Farm policies for 
which premiums are reported on the farmowners multiperil line are 
excluded from the Program.
    Since the concerns of the three commenters related to ``farm owners 
multiple peril insurance'' are addressed by applying Treasury's 
previous rulemaking and guidance, no changes have been made to the 
definition of property and casualty insurance in section 50.5(n)(2) of 
the interim final rule.

B. Interim Guidance Safe Harbors (Sec.  50.7)

    Section 50.7 of the current regulations provides that ``[a]n 
insurer will be deemed to be in compliance with the requirements of the 
Act to the extent the insurer reasonably relied on Interim Guidance 
prior to the effective date of applicable regulations.'' The interim 
final rule added ``Interim Guidance IV issued by Treasury on December 
29, 2005, and published at 71 FR 648 (January 5, 2006)'' to the list of 
applicable Interim Guidances.

C. Disclosure (Sec. Sec.  50.12 and 50.17)

    The interim final rule incorporated guidance on compliance with 
disclosure requirements and revised safe harbor language with regard to 
the use of NAIC model disclosure forms.
    The Extension Act continues, as a condition for federal payments 
under the Act, the existing requirements contained in section 103(b) to 
provide disclosures ``at the time of offer, purchase, and renewal of 
the policy''. Some insurers faced certain operational difficulties with 
regard to policies processed in the latter part of Program Year 3 
(2005) for issuance or renewal effective in 2006. In some cases, 
policies were issued or renewed in 2006 in a form that already included 
coverage for terrorism risks, whether or not TRIA was extended. Because 
TRIA would have sunset as of December 31, 2005, disclosures were not 
provided with these policies.
    The Extension Act made no change to the requirement that 
disclosures are required as a condition for payment of the Federal 
share of compensation for insured losses. However, given the late date 
of enactment of the Extension Act, the interim final rule provided in 
section 50.12(e) that ``[i]f an insurer made available coverage for 
insured losses in a new policy or policy renewal in Program Year 3 for 
coverage becoming effective in Program Year 4, but did not provide a 
disclosure at the time of offer, purchase or renewal, then the insurer 
must be able to demonstrate to Treasury's satisfaction that it has 
provided a disclosure as soon as possible following January 1, 2006.''
    For an insurer to demonstrate to Treasury's satisfaction that it 
has provided disclosures as soon as possible following January 1, 2006, 
Treasury expects that an insurer will have provided disclosures by 30 
days after publication of the interim final rule in the Federal 
Register (June 10, 2006), barring unforeseen or unusual

[[Page 50345]]

circumstances. If not completed by that time, an insurer will be 
expected, when submitting a claim for the Federal share of 
compensation, to demonstrate why such disclosures could not be made by 
that date and why the insurer should be deemed to be in compliance with 
the Act's disclosure requirement.
    Pursuant to 31 CFR 50.17, insurers that have used NAIC Model 
Disclosure Forms that were in existence on April 18, 2003, were deemed 
to satisfy the disclosure requirements of section 103(b)(2) of the Act. 
Although the Extension Act made no change to the requirements for clear 
and conspicuous disclosure to 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, revisions were made 
to the Act that required rewording of the NAIC Model Disclosure Forms. 
The NAIC has since issued revised Model Disclosure Forms, dated January 
26, 2006, which if used by insurers, will be deemed to satisfy 
disclosure requirements of the Act and Treasury regulations. The 
interim final rule continued the safe harbor approach for use of the 
most current NAIC Model Disclosure forms deemed by Treasury to meet 
Program requirements. Insurers may also continue to use other forms to 
comply with the disclosure requirements.

D. Make Available (Sec. Sec.  50.20 and 50.21)

    For Program Year 4 (Calendar 2006) and Program Year 5 (Calendar 
2007) insurers are required to continue to ``make available'' coverage 
for insured losses as required by TRIA and Treasury regulations. 
Amendments to the ``make available'' requirement in section 103(c) of 
the Act are simply conforming amendments that continue the requirement 
through Program Years 4 and 5. Thus, insurers issuing or renewing 
commercial property and casualty insurance policies in Program Years 4 
and 5 must continue to offer coverage for insured losses resulting from 
an act of terrorism, as required by section 103(c) of the Act and 31 
CFR 50.20 to 50.24, if they wish to have their insured loss claims 
eligible for the Federal share of compensation in the extended Program 
Years.
    In its Interim Guidance IV published on January 5, 2006, Treasury 
addressed the ``make available'' requirement with regard to the 
transition from Program Year 3, originally the last year of the 
Program, to the extended Program Years 4 and 5. In that issuance, 
Treasury noted that the Extension Act made no changes to the ``make 
available'' requirement for insurers. Treasury provided guidance on how 
insurers could comply with Program requirements given operational 
difficulties arising from the Extension Act passage late in the year.
    In addition Treasury Interim Guidance IV clarified that no 
additional ``make available'' offer is required if terrorism coverage 
for the duration of the policy term was offered for policies issued or 
renewed in 2005. It also explained how an insurer could comply with 
``make available'' requirements under the following scenarios where:
    (1) A policy's terrorism coverage expired on December 31, 2005, but 
the remainder of the policy continued in force in 2006,
    (2) A policy did not provide terrorism coverage after December 31, 
2005, but the policyholder had rejected an offer of terrorism coverage 
for the portion of the policy term prior to December 31, and
    (3) A policy renewal or application was processed in 2005 for 
coverage becoming effective in 2006 and the insurer did not ``make 
available'' terrorism coverage for Program Year 4 as contemplated by 
the Extension Act.
    The interim final rule generally incorporated this interim guidance 
into the TRIA ``make available'' provisions. Section 50.21(b) was added 
to address the special Program Year 4 requirements for scenarios (1) 
and (2) above. For scenarios (1) and (3), where an insurer must make an 
offer of coverage, section 50.21(d) (formerly 50.21(c)) was amended to 
provide that the insurer must be able to demonstrate to Treasury's 
satisfaction that it has provided an offer of coverage for insured 
losses by January 1, 2006, or as soon as possible following that date. 
In demonstrating to Treasury's satisfaction that it has provided an 
offer of coverage for insured losses as soon as possible after January 
1, 2006, Treasury considers January 31, 2006, to be the latest 
reasonable date for offers of coverage, barring unforeseen or unusual 
circumstances. If not provided by January 31, 2006, Treasury would 
expect an insurer to demonstrate why the offer could not be made by 
that date when submitting a claim for Federal compensation under the 
Program.
    The interim final rule incorporated technical amendments to section 
50.20 that extend the ``make available'' requirements into Program 
Years 4 and 5. Section 50.20(c) also provided that ``property and 
casualty insurance coverage for insured losses does not have to be made 
available beyond December 31, 2007 (the last day of Program Year 5), 
even if the policy period of insurance coverage for losses from events 
other than acts of terrorism extends beyond that date''.
Umbrella and Excess Policies
    In the Supplementary Information section of the preamble 
accompanying the interim final rule, Treasury provided guidance 
regarding the ``make available'' and disclosure requirements for excess 
or umbrella liability policies in light of the Extension Act's deletion 
of certain types of insurance from the definition of property and 
casualty insurance. The guidance reflected earlier rulemaking and that 
as a general rule, excess or umbrella liability policies are property 
and casualty insurance within the meaning of TRIA. Section 102(12)(A) 
of the Act defines the term ``property and casualty insurance'' as 
meaning commercial lines of property and casualty insurance ``including 
excess,'' unless otherwise excluded from the definition under Section 
102(12)(B). Premiums for commercial excess and umbrella insurance 
policies are normally reported on Line 17--Other Liability in the NAIC 
Annual Statement.\9\ Although generally reported on a line which is 
included in the Program, in interim guidance Treasury advised that 
excess or umbrella insurance is commercial property and casualty 
insurance only to the extent it provides coverage above primary or 
underlying coverage that is a type of insurance included in the 
Program, and not specifically excluded from the definition of property 
and casualty insurance itself. However, where the commercial property 
and casualty coverage segment of an excess or umbrella liability policy 
is merely incidental to the remaining non-TRIA coverage under the 
policy, an insurer may treat the entire policy as not providing 
property and casualty insurance within the meaning of TRIA and 
Treasury's regulations.\10\ In such elections, the TRIA ``make 
available'' and disclosure requirements will not apply and no losses 
from the commercial coverage segment of such policies will be paid by 
Treasury.
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    \9\ See 68 FR 59725.
    \10\ See 31 CFR 50.5(d)(1)(iii): ``For purposes of the Program, 
commercial coverage combined with coverages that otherwise do not 
meet the definition of property and casualty insurance is incidental 
if less than 25 percent of the total direct premium is for such 
coverage.''
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    One comment submitted by an insurance trade organization requested 
that Treasury give ``due consideration to the possibility that property 
casualty insurers, in good faith, might have treated commercial 
umbrella and excess insurance policies differently under the TRIA 
Extension than the Federal Register guidance''. As an example, the 
comment states that, ``as premiums from

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these policies are reported on line 17 of the NAIC annual Statement (a 
line that is included within the Federal program), insurers could have 
reasonably assumed that those policies would either be included 
entirely in the program or that the policies would be included unless 
there was no possibility of a covered claim from the underlying 
policy''.
    Treasury acknowledges that, if an insurer, prior to the publication 
of the interim final rule, relied on the assumptions in the above 
example in carrying out its ``make available'' and disclosure 
obligations (if any) the insurer would be considered to be reasonably 
compliant with Program requirements. However, in no circumstance can 
losses associated with an underlying coverage that is excluded from the 
Program form the basis for a claim for the Federal share of 
compensation.
    Commenters asked Treasury to reconsider the position that ``excess 
or umbrella insurance is commercial property and casualty insurance 
included in the Program only to the extent it provides coverage above 
primary or underlying coverage that is a type of insurance included in 
the Program''. One of these comments suggests that ``this position 
makes some sense within the insurance context of how umbrella/excess 
and the underlying coverage are typically consistent, [but] one could 
also make a case for commercial umbrella/excess being totally included 
under TRIA--even when written over exempted coverages--if the goal was 
to make the provisions of TRIA apply as broadly as the law will allow 
and thus encouraging as much terrorism coverage as possible in the 
marketplace''.
    Treasury considered and rejected this alternative prior to issuing 
the interim final rule. After reconsideration based on the comments, we 
continue to believe that the better interpretation of the statutory 
authority and intent, given that the Extension Act restricted the types 
of insurance included under the Program, is as stated in the preamble 
to the interim final rule. Therefore, no change is being made to the 
final rule.

E. Federal Share of Compensation (Sec.  50.50)

    The interim final rule added several provisions to section 50.50 to 
reflect the addition of the new Program Trigger provision to the Act. 
Under section 103(a) of TRIA, the Secretary is required to pay the 
Federal share of compensation for insured losses in accordance with 
section 103(e) of the Act. The Extension Act amended subsection (e) to 
provide, in part, that no compensation shall be paid by the Secretary 
under subsection (a) unless the aggregate industry insured losses from 
a certified act of terrorism occurring after March 31, 2006, exceed 
certain amounts. This provision was intended to ensure that there would 
be no Federal compensation unless the aggregate industry losses from an 
act of terrorism exceed these amounts.
    The interim final rule incorporated a technical amendment to 
renumbered Sec.  50.50(a) (formerly 50.50(d)) to provide that the 
Federal share of compensation in Program Year 5 shall be ``85 percent 
of that portion of the insurer's aggregate insured losses that exceed 
its insurer deductible during Program Year 5,'' (subject to any 
adjustments in Sec.  50.51 and the cap of $100 billion as provided in 
section 103(e)(2) of the Act). A new provision was also added to 
renumbered Sec.  50.50(d) (formerly 50.50(a)) that reiterates, as a 
condition for Federal compensation for insured losses, a basic 
insurance principle that, ``[t]he insurer offered the coverage for 
insured losses and the offer was accepted by the insured prior to the 
occurrence of the loss''.
    New Sec.  50.50(b) incorporated the Program Trigger limitations on 
the amount of Federal compensation payable under the Act. To implement 
these limitations, Sec.  50.50(g) stated that Treasury will determine 
the amount of aggregate industry insured losses, and that if the 
aggregate industry insured losses exceed the applicable Program Trigger 
amounts, Treasury will publish notice in the Federal Register that the 
act of terrorism is a Program Trigger event. As noted in the previously 
issued Interim Guidance, Treasury also expects to provide notification 
through press releases and postings on the TRIP Web site.
    Section 50.50(c) clarified that in the provisions dealing with 
claims procedures, subpart F, insured losses or aggregate insured 
losses for acts of terrorism after March 31, 2006 will be limited to 
those insured losses resulting from Program Trigger events. This 
limitation on insured losses controls any determinations of, or 
calculations leading to, a Federal share of compensation under the Act 
including any adjustments of the Federal share, and applies to 
submissions of an insurer in conjunction with Initial Notices of Loss 
and Certifications of Loss and payments of the Federal share.
    The Program Trigger provision also has a direct bearing on which 
insured losses count towards satisfaction of the insurer deductible. In 
Program Year 4, and similarly, in Program Year 5, only an insurer's 
insured losses resulting from Program Trigger events in the year will 
count towards satisfaction of the insurer deductible.

F. Determination of Affiliations (Sec.  50.55)

    Section 50.55 provides that for the purposes of claims procedures 
and the determination of the Federal share of compensation ``an 
insurer's affiliates for any Program Year shall be determined by the 
circumstances existing on the date of occurrence of the act of 
terrorism that is the first act of terrorism in a Program Year to be 
certified by the Secretary for that Program Year.'' The purpose of this 
regulation, when promulgated in 2005, was to clarify the point in time 
when insurer affiliations would be determined in order to facilitate 
the calculation of insurer deductibles and the payments of the Federal 
share of compensation for Program Years in which affiliations could 
change over time. Since this has meaning only if there is a potential 
Federal share of compensation, the interim final rule incorporated an 
amendment clarifying that if the first certified act of terrorism 
occurs after March 31, 2006, it must also be a Program Trigger event to 
be used for determining affiliations under the rule.

G. Federal Cause of Action; Approval of Settlements

    The Extension Act added section 107(a)(6) to TRIA, which provides 
that procedures and requirements established by the Secretary under 31 
CFR 50.82, as in effect on the date of issuance of that section in 
final form [July 28, 2004], shall apply to any Federal cause of action 
described in section 107(a)(1). This provision was added to new Sec.  
50.85 of the interim final rule.
    Section 50.82 of the regulations requires insurers to submit to 
Treasury for advance approval certain proposed settlements involving an 
insured loss, any part of the payment of which the insurer intends to 
submit as part of its claim for federal payment under the Program. 
Thus, Treasury would not expect insurers to submit any proposed 
settlement if the insured losses would not be eligible for payment, as 
would be the case if the losses resulted from a post-March 31, 2006 
certified act that was not a Program Trigger event. However, if there 
is uncertainty whether or not a certified act will become a Program 
Trigger event, an insurer may wish to err on the side of caution and 
submit a proposed settlement for prior approval in order to preserve 
any subsequent eligibility for Federal compensation for insured losses 
under the Program. Otherwise the insured will

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be ineligible for later payment if the Program Trigger is reached.

III. Procedural Requirements

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

    This final rule is a significant regulatory action and has been 
reviewed by the Office of Management and Budget under the terms of 
Executive Order 12866.

Regulatory Flexibility Act

    Pursuant to the Regulatory Flexibility Act, 5 U.S.C. 601 et seq., 
it is hereby certified that the final rule will not have a significant 
economic impact on a substantial number of small entities. The final 
rule implements changes prescribed or authorized by the Extension Act. 
The Act itself requires all insurers receiving direct earned premium 
for any type of property and casualty insurance, as defined in the 
Extension Act, to participate in the Program. This includes all 
insurers regardless of size or sophistication. The Extension Act also 
defines property and casualty insurance to mean commercial lines of 
insurance without any reference to size or scope of the insurer or the 
insured. The disclosure and ``make available'' requirements are 
required by the Act. The rule allows all insurers, whether large or 
small, to use existing systems and business practices to demonstrate 
compliance. Treasury is required to pay the Federal share of 
compensation to insurers for insured losses subject to the new Program 
Trigger provisions in the Act. The requirement that insurers seek 
advance approval of certain settlements is now required by the Act. Any 
economic impact associated with the final rule flows from the Extension 
Act and not the final rule. However, the Act and the Program are 
intended to provide benefits to the U.S. economy and all businesses, 
including small businesses, by providing a federal reinsurance backstop 
to commercial property and casualty insurance policyholders and 
spreading the risk of insured losses resulting from an act of 
terrorism. Accordingly, a regulatory flexibility analysis is not 
required.

List of Subjects in 31 CFR Part 50

    Terrorism risk insurance.

Authority and Issuance

0
For the reasons set forth above, the interim final rule revising 
subparts A, B, C, F, and I of 31 CFR part 50, which was published at 71 
FR 27564 on May 11, 2006, is adopted as a final rule without change.

    Dated: August 9, 2006.
Emil W. Henry, Jr.,
Assistant Secretary of the Treasury.
 [FR Doc. E6-14180 Filed 8-24-06; 8:45 am]
BILLING CODE 4811-37-P