Terrorism

Many insurance companies have placed exclusions for terrorism losses on their policies since 9-11-01. On November 26, 2002 President Bush signed into law the Terrorism Risk Insurance Act of 2002. This Act temporarily invalidates these exclusions.

The Act sets up a temporary federal "reinsurance" program for sharing with insurance companies the risk of loss from certain acts of terrorism. The Secretary of the Treasury, in concurrence with the Secretary of State and Attorney General, certifies an event as an "act of terrorism." To be certified as an "act of terrorism," the act must fit specific criteria. Acts that fit these criteria but that occur in the course of a declared war won't qualify.

The Act applies to insured losses from acts of terrorism for primary and excess commercial lines insurance, including workers' compensation and bonds. The Act does not apply to personal lines, crop, livestock, mortgage, financial guaranty, medical malpractice, flood, or life and health insurance. All commercial insurers writing insurance in the United States must participate in this program and offer insurance for terrorism risks as defined by the Act. All terrorism exclusions currently in force on commercial property and casualty policies are voided November 26, 2002 to the extent that they eliminate coverage for "certified acts of terrorism". Exclusions that deal with terrorist activity outside the scope of the Federal program such as domestic terrorism are not voided. Terrorism losses must exceed a $5 million threshold to trigger the Act.

Your insurance company must provide notice to you of the premium for providing coverage under the program within 90 days of November 26, 2002 for policies already in effect on that date. You will be receiving notice and you will need to respond to it either by paying the premium or rejecting terrorism coverage. For more specific information see the questions and answers below.

Terrorism Act of 2002
Questions and Answers

Notification Procedure

• Why isn't MHBT sending the notice to you on our companies' behalf--just like we do the binder and policy?

  The Act requires that insurers make prompt notification to you of your right to continue the suspension of the terrorism exclusion or limitation through the timely payment of an additional premium. Direct communication allows for prompt notice to you and timely records of your decision with regard to the additional premium.

• What will you receive?

  The Act requires immediate notification to you regarding any existing terrorism exclusions or limitations so that you are promptly presented with the option to continue the suspension of the exclusions or limitations. By the end of February 2003, you will receive notice stating the original terrorism premium and the federal participation of any terrorism losses as required by the Act.

• What will happen if your account is Surplus Lines? Is the process different?

  For surplus lines, insurers are sending the notices to both the broker of record and you, just as with admitted business. For surplus lines, you are directed to remit the premium to MHBT rather than directly to the insurance company. We are directed to separately invoice any premium tax due, stamping fees, etc.

Your Obligations

• What is it exactly that you have to do?

  When you receive a reinstatement notice, you must decide within thirty (30) days whether to pay the optional additional premium or to allow the terrorism exclusion or limitation to be reinstated in full as described in the notice. The reinstatement notice informs you of the exact date by which you must pay the additional premium if you elect to do so. You may also send written direction to the company requesting reinstatement.

• Do you need to return a declination if you do not choose to purchase the coverage?

  Yes, you should return the selection or rejection of terrorism coverage form to the insurer. If the form is returned rejecting terrorism coverage, the exclusion will be reinstated as of November 26, 2002, the date of the Act. Important: If the notice is not returned from you by the due date shown on that form, the terrorism exclusion will be reinstated as of November 26, 2002.

• Can you reply to the notice through MHBT?

  Yes, it is best for you to reply directly to your insurance carrier in the way they provide but we will be able to reply to the insurer on your behalf, if necessary.

Premium Payment

• What is the premium payment procedure?
  
  The reinstatement notice will include specific instructions for payment directly to the companies unless your policy is surplus lines. In that case payment will be to MHBT.
  .
• Why aren't the payment terms the same as the policy's payment terms?

  This optional additional premium will be treated as an endorsement and is required to be paid in full in accordance with the reinstatement notice.

• Why aren't the payment procedures the same as for the surplus lines brokers?

  There are administrative and regulatory differences when dealing with surplus lines brokers. For example, the surplus lines broker is responsible for collecting and remitting any premium tax.

• If you don't make the payment deadline, can you still buy the coverage?

  No, you must timely remit the optional additional premium or the terrorism exclusion or limitation will be reinstated in full immediately following the premium due date.

Terms & Conditions

• Is the terrorism coverage quote negotiable?

  You must pay the stated premium in order to avoid reinstatement of the terrorism exclusion or limitation. However, the underwriter may wish to discuss mid-term rate and coverage alterations for terrorism.

• How do deductibles apply?

  If you elect to pay the optional additional premium, the policy's deductibles, limits, other exclusions and conditions apply to any loss by an act of terrorism (as defined by the Act) just as they would to any other type of loss.

• If we are negotiating terms for you is your decision deadline automatically extended?

  No, however, you and the company may agree to terms after the reinstatement of the exclusion or limitation. You may elect to pay the premium in accordance with the notice in order to secure coverage and then continue negotiations that may lead to an alternative coverage structure.

• What if your policy has no terrorism exclusion? Should you expect one in the future?

  For the most part, insurers will make available coverage without terrorism exclusion as required by the Act. At this time, we expect that general policies that did not have exclusions prior to the Act will not be offered terrorism exclusion in the future.

• Will the exclusionary language be changed in the future?

  We anticipate that the industry will develop two main exclusions. The first is a "certified" act of terrorism exclusion that excludes those losses covered by the Act (primarily foreign terrorism in the United States). The second is a "non-certified" act of terrorism exclusion that excludes terrorism losses not covered by the Act (primarily domestic terrorism and terrorism abroad). Other exclusions and limitations are likely to be developed.

• What happens if there is a war? What if the terrorism is biological or nuclear? Would a nuclear exclusion override the terrorism coverage? How will the other terms of the policy interact with terrorism coverage?

  All limits, conditions, and exclusions contained in the policy apply to a terrorism loss equally as to other types of losses.

• Why isn't terrorism being offered on a separate policy?

  The Act is structured to require the availability of coverage for loss resulting from acts of terrorism on the same terms as loss from other events. This approach makes stand-alone terrorism coverage difficult to develop.

• I understand that the terrorism exclusion is "partially" suspended as a result of the Act. Since the Act only applies to terrorism by foreign interests, is the exclusion or limitation still in force for domestic terrorism?

  Yes, the suspension of the existing terrorism exclusion or limitation only applies to "acts of terrorism" as defined in the Act. "Domestic terrorism" as well as certain other terrorism events is not contained within this definition.

Pricing

• What is the method for determining the premium? What rating base is used?

  The premium for the exposure presented by acts of terrorism is generally calculated uniquely for each individual risk, by line of business, based upon the probability of each designated location or insured risk to suffer a loss from an act of terrorism. For example, the criteria may include concentration of values, occupancy characteristics, and the proximity to other terrorist-attractive risks. A percentage of premium basis may be used for some lines or risks.

• If the Federal Government reinsures companies why are they even charging a premium?

  The federal "reinsurance" attaches at an increasing high loss point and within three years disappears. The premium is necessary to address the insurer's large retention under the federal program.

Claims

• Who determines if there actually is a terrorism event?

  The Secretary of Treasury is responsible to certify an act as an "act of terrorism."

• How are claims going to be handled?

  The insurance company will handle claims resulting from acts of terrorism in the normal manner.

• If there are delays determining the event status will that impact claim handling?

  A delay while Treasury deliberates certification as a terrorist act is possible if the policy contains a terrorism exclusion or limitation.

Future Renewals

• If we declined the coverage for the pro-rata portion of the 2002 policy will we be offered coverage for the 2003 renewal?

  Yes, most companies will make available coverage without a terrorism exclusion or limitation at renewal in 2003.

Additional Information

For a full copy of the Act click here .

For more information, click here for the U.S. Department of the Treasury Terrorism Resource website.

*This information regarding the Terrorism Risk Insurance Act of 2002 is not intended to provide specific advice about individual legal, business or other questions. It was prepared solely for use as a guide, and is not a recommendation that a particular course of action be followed. If specific legal or other expert advice is required or desired, the services of an appropriate, competent professional, such as an attorney, should be sought.*

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