• Terrorism Risk Insurance Act ("TRIA") Extended
  • January 3, 2006 | Authors: James Edmund Datri; Jeremiah P. Sheehan
  • Law Firms: Manatt, Phelps & Phillips, LLP - Washington Office; Manatt, Phelps & Phillips, LLP - New York Office
  • Congress has approved and the President has signed the "Terrorism Risk Insurance Extension Act of 2005" (Public Law No. 109-144), which extends the expiration date of the Terrorism Risk Insurance Act of 2002 until December 31, 2007. It also increases the level of the required insurance industry retention and the magnitude of the loss caused by an act of terrorism that is required to trigger the program.

    The statute as originally enacted required insurers to offer terrorism coverage with respect to commercial policies and provided for reimbursement of insurers for a percentage of losses resulting from a certified act of terrorism, subject to deductibles and a cap of $100 billion. An act of terrorism which met other specified requirements could be certified by the Secretary of the Treasury if the resulting aggregate property and casualty insurance losses exceeded $5 million. The amendatory legislation adds a new requirement -- that the aggregate industry insured losses resulting from a single certified act of terrorism occurring after March 31, 2006 exceed $50 million in 2006 and $100 million in 2007.

    Most property-casualty and liability coverages continue to be covered. However, commercial automobile, burglary and theft, surety, professional liability, and farm owners multiple peril insurance are now specifically excluded from TRIA.

    This legislation provides that the terrorism insurance program mechanism will continue to provide reimbursement for 90% of covered insurer losses in calendar year 2006, after exhaustion of the insurer's deductible amount. That percentage will be reduced to 85% for calendar year 2007. The insurer deductible, currently 15% of direct earned premiums over the immediately preceding calendar year, will increase to 17.5% of direct earned premiums in 2006 and to 20% of direct earned premiums in 2007. The aggregate industry wide retention, $15 billion for the current year of the program, increases to $25 billion in 2006 and $27.5 billion in 2007. (If the aggregate amount of uncompensated losses exceeds this retention, there will be no mandatory recoupment of the federal share of compensation paid in the form of premium surcharges.)

    Finally, the newly enacted legislation provides that the President's Working Group on Financial Markets, in consultation with representatives of the National Association of Insurance Commissioners, the insurance and securities industries and representatives of policyholders, shall conduct an analysis of the long-term availability and affordability of terrorism risk insurance, including group life insurance and coverage for chemical, nuclear, biological and radiological events. The Working Group must submit a report to the Senate Committee on Banking, Housing, and Urban Affairs and the House Committee on Financial Services no later than September 30, 2006.

    Whether and how to extend this law had been the subject of considerable discussion and debate, and Congress waited until shortly before its expiration to act. Passage of this legislation can be viewed as a victory from the standpoint of representatives of insurance and other business groups that advocated extension of the program as a necessary government "backstop" to the private insurance market, since the law could have been permitted to expire or extended with a more significant reduction in the role of the federal government. On the other hand, efforts to expand the program to new lines of insurance did not succeed, and the potential level of federal participation has been reduced due to higher deductibles, lower reimbursement percentages and a significant increase in the triggering mechanism.