Originally published in Financial Services Advisory Update, Volume 3, No. 1 February 2006

On December 22, 2005, President Bush signed into law the Terrorism Risk Insurance Extension Act of 2005, extending through December 31, 2007, the US Terrorism Risk Insurance Program under which the United States assists in compensating for insured commercial property and casualty losses resulting from an act of terrorism certified as such by the Secretary of the Treasury.

As they have since the Terrorism Risk Insurance Act (TRIA) was originally enacted in 2002, insurers will be required to continue to "make available" coverage for insured losses as required by TRIA and Treasury regulations. Thus, insurers issuing or renewing commercial property and casualty insurance policies in 2006 and 2007 must continue to offer coverage for insured losses resulting from an act of terrorism in order for their insured loss claims to be eligible for the federal share of compensation.

Some of the key features of the 2005 legislation are:

  • Changed Definitions—A revised definition of "Property and Casualty Insurance" now excludes commercial automobile insurance, burglary and theft insurance, surety insurance, professional liability insurance, and farm owners multi-peril insurance. Note that while the definition excludes professional liability insurance, it explicitly retains directors and officers liability insurance. The explicit addition of directors and officers insurance as a covered line of insurance is a statutory clarification that directors and officers liability insurance is distinct from professional liability insurance, and therefore qualifies for coverage under TRIA.
  • New "Program Trigger"—Creation of a new "Program Trigger" for any certified act of terrorism occurring after March 31, 2006, that acts like an industry-wide deductible and prohibits payment of federal compensation unless the aggregate industry insured losses resulting from that act of terrorism exceed $50 million for 2006 and $100 million for 2007. The new Program Trigger provision does not apply to acts of terrorism occurring on or before March 31, 2006, but will apply to such acts that occur thereafter.
  • Change in Federal Share—Even if the industry-wide deductible is met, an insurer must meet its own insurer deductible, which is set as the value of an insurer’s direct earned premium for commercial property and casualty insurance (as the definition is now revised) over the immediately preceding calendar year multiplied by 17.5% for 2006 and 20% for 2007. Subject to the respective $50 million and $100 million "triggers," the federal share of compensation for insured losses is 90% of that portion of the amount of insured losses that exceeds the applicable insurer deductible in 2006 and decreases to 85% of such amount in 2007.

In 2006, only an insurer’s insured losses resulting from certified acts of terrorism occurring between January 1 and March 31, 2006, and the insurer’s insured losses resulting from Program Trigger events after March 31, will count towards satisfaction of the insurer deductible. In 2007, only an insurer’s insured losses resulting from Program Trigger events occurring in that year will count towards satisfaction of the insurer deductible.

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