On October 17, 2007, the Senate Banking Committee approved legislation (“Senate Bill”) that would extend The Terrorism Risk Insurance Act of 2002 (“TRIA”) beyond its scheduled expiration at the end of this year. Last month, the House of Representative passed legislation that would extend TRIA (H.R. 2761) on terms that are much more generous than those provided by the Senate Bill. H.R. 2761 not only extends TRIA for a longer period than the Senate Bill but also expands the scope of the program in ways that are not contemplated by the Senate Bill. See discussion of an early version of H.R. 2761 in our Client Alert, dated June 27, 2007, entitled “Congress Considers A Second Extension Of The Terrorism Risk Insurance Act” available on our Website. This Client Alert compares the most important provisions of the two bills.
Congress enacted TRIA in November, 2002, in order to address concerns over the availability of affordable coverage against the risk of terrorism in the wake of the September 11th attacks. TRIA requires property and casualty insurers to offer terrorism coverage to commercial insureds and provides a backstop for such coverage in the form of a commitment that the federal government will reimburse a share of an insurer’s terrorism losses over a statutory deductible. See discussion of the TRIA program in our Client Alert, dated December 2, 2002, entitled “Terrorism Risk Insurance Act” available on our Website.
Extension of TRIA is controversial. Opponents point to the fact that the program was originally conceived as a temporary measure to allow the insurance industry to develop the capacity to provide terrorism coverage without government support. They argue that the industry will not develop this capacity as long as the federal government provides a backstop for terrorism coverage at taxpayer expense. Proponents of the program, including the property and casualty insurance industry, argue that terrorism risks are essentially uninsurable and that, in the absence of government support, the market for terrorism coverage would contract dramatically with very unfortunate consequences for the economy.
The more generous terms of H.R. 2761 reflect the views of many of TRIA’s proponents. The more modest program that would survive pursuant to the Senate Bill reflects a compromise between those who would prefer immediate termination of the program and those who would prefer an enlarged program to be put on a more permanent footing.
Period of Extension. The Senate Bill would extend the TRIA program for seven more years through December 31, 2014, while H.R. 2761 would extend the program for 15 years through December 31, 2022.
NBCR Coverage. H.R. 2761, but not the Senate Bill,would mandate that insurers offer coverage for terrorism losses resulting from nuclear, biological, chemical and radiological (“NBCR”) attacks. Many feel that the absence of such a mandate in the current program is a major gap in the protections that the program affords. However, insurance industry representatives have raised concerns that mandating coverage of the massive losses that could result from an NBCR attack would put the solvency of smaller insurance carriers at risk and thus discourage them from marketing terrorism coverage with the result that such a mandate could actually constrict the terrorism insurance market. Rather than mandating an offer of coverage for NBCR attacks, the Senate Bill requires the U.S. Comptroller General to study the capacity of private insurers to provide such coverage.
Coverage of Domestic Terrorism. At present, TRIA only applies to acts of terrorism committed by terrorists acting on behalf of foreign persons or interests. This limitation is a result of the roots of the original legislation in the fear of foreign terrorism in the wake of September 11th. Both H.R. 2761 and the Senate Bill would abolish this limitation and extend the program to acts of terrorism regardless of their source.
Group Life Insurance. At present, TRIA only applies to commercial property and casualty insurance. H.R. 2761 would extend the TRIA program to cover group life insurance as well. The group life insurance industry has argued the need for the inclusion of their policies in the TRIA program on the grounds that a terrorist attack resulting in the death of large numbers of insured employees could be devastating for their employer’s group life insurer. The Senate Bill does not expand the program to include group life insurance.
Program Trigger. At present, the federal backstop only applies to a terrorism event if aggregate industry losses from the event exceed $100 million. H.R. 2761 would reduce this trigger amount to $50 million with further reductions in the event of an NBCR attack or any attack resulting in aggregate industry insured losses exceeding $1 billion. The Senate Bill would maintain the trigger at $100 million.
Co-Payments and Deductibles. The current TRIA program reimburses insurers for 85 percent of their terrorism losses in excess of a statutory deductible equal to 20 percent of an insurer’s direct earned premiums on its commercial property and casualty policies for the prior year. Both the Senate Bill and H.R. 2761 would maintain co-payments and deductibles at these levels, except that H.R. 2761 would reduce deductibles in the event of an attack resulting in aggregate industry insured losses exceeding $1 billion and would reduce both deductibles and co-payments in the event of an NBCR attack.
Program Cap. TRIA currently provides that the aggregate insured losses from acts of terrorism in any program year shall not exceed $100 billion. However, there is wording in both the current legislation and in H.R. 2761 that could be construed to undermine the “hardness” of the program cap. Both provide that the $100 billion program cap on insured liabilities applies “until Congress shall act otherwise.” The Senate Bill enhances the “hardness” of the program cap by deleting all references to the possibility that Congress might “provide otherwise” and adding additional wording reiterating the application of the cap notwithstanding any other provision of federal or state law.
Post-Event Approval of Payments. The Congressional Budget Office estimated that the cost of a 15-year extension of the TRIA program would increase the federal deficit by $3.5 billion over five years and $8.4 billion over 10 years. This finding created a problem for the House under its “pay-as-you-go” spending limits. In order to deal with this problem, H.R. 2761 prohibits any federal compensation to insurers unless Congress, convening after a terrorism attack, approves such payments. Some industry representatives expressed concern that this provision calls into question the assurances of compensation otherwise promised by the legislation. The Senate Bill does not include such a post-event approval requirement.
It is anticipated that the Senate will act on the Senate Bill soon. The House will then have to either approve the Senate Bill or there will be a Senate and House conference to work out any differences. It appears at this stage that a bill very similar to the Senate Bill will be approved and sent to the President for signature with an effective date of January 1, 2008. Assuming legislation is enacted, our next Client Alert will analyze its key provisions.