BUSH PERSUADES HOUSE GOP TO PASS TERRORISM INSURANCE BILL.

President Bush refused last week to take no for an answer from House Republican leaders who wanted to put off final action on the terrorism insurance bill until next year and succeeded in getting the Terrorism Risk Insurance Act through the House late Nov. 14 on a voice vote.

The bill is expected to pass the Senate swiftly as soon as debate ends on the Homeland Security bill, which could be as early as Nov. 19.

House action came a day after the president met with key Republican leaders at the White House. Even then, House Republican Conference Chairman J.C. Watts (R-OK) told reporters the bill likely would go over to the next Congress because some key Republican leaders wanted tougher liability provisions.

But Bush decided the bill should pass now with the compromise he had worked out with the House and Senate conferees prior to the elections and persuaded opponents not to block passage by promising the bill's liability provisions would be revisited when tort reform legislation is considered in the 108th Congress.

One opponent of the compromise, newly elected Republican Majority Leader Tom Delay (R-TX), made it clear what he expects the outcome of that future tort reform battle to be, saying, "We're going to lock the doors of the federal Treasury against the trial lawyers."

The agreement reached by Bush and the conferees on the bill's Section 107, litigation management, provides that if the secretary of the Treasury determines an act of terrorism has occurred, there would be a federal cause of action for property damage, personal injury or death resulting from the act.

The federal remedy would generally be the exclusive cause of action, preempting lawsuits under state law.

The federal Judicial Panel on Multidistrict Litigation would decide which district court or courts would hear the lawsuits. Substantive law would be derived from the state in which the act occurred unless inconsistent with or otherwise preempted by federal law.

Instead of an outright ban on punitive damages, the bill provides that any such awards "shall not count as insured losses" for purposes of the law.

And there is one exclusion from federal preemption:

"Nothing in this section shall in any way limit the liability of any government, an organization, or person who knowingly participates in, conspires to commit, aids and abets, or commits any act of terrorism" as defined by the law.

The U.S. government would have the right of subrogation, allowing it to recover funds it paid out from other payments to claimants.

House Judiciary Chairman F. James Sensenbrenner (R-WI) had refused to sign off on this compromise in the conference report, insisting the House conferees had gone too far in giving up provisions on punitive and non-economic damages included in the House-passed version of the bill. In particular, he insisted on setting limits on attorneys' fees drawn from the federal treasury.

After talking with the president, however, he decided not to block the bill so Speaker Dennis Hastert (R-IL) had the House Rules Committee report the bill out on a voice vote under a special rule waiving all points of order against the bill's conference report and against its consideration.

Before the vote took place, House Financial Services Committee Chairman Michael G. Oxley told lawmakers the nation had "survived Sept. 11 in part because our financial infrastructure held up so well, with insurance claims being quickly paid, and the existing reinsurance backstop preventing any major American insurer from going insolvent.

"However, if Congress does not pass this bill and another major terrorism attack occurs, thousands of businesses could go bankrupt, people won't be able to get coverage for their losses, and the government will have to step in at a much higher price and without an efficient payment mechanism to salvage the crisis."

He summarized the key elements of the conference bill as:

q Providing "full payback protection for American taxpayers, guaranteeing that the first $10-15 billion in losses will be paid by the insurance marketplace with the Treasury secretary fully able to recoup any additional amounts necessary."

q Incorporating "a transition period that provides immediate full commercial terrorism coverage for all American business consumers" while long-term contracts are being negotiated.

q Requiring insurers "to pay a sizable deductible before they are eligible for the federal funds," by increasing the deductible from 7 percent of their premiums in the first year to 15 percent in the third year.

q Providing "more disclosures and information to consumers, with more options to ensure that terrorism coverage is available in all commercial policies."

He said the bill continued "to provide strong penalties to punish insurers who defraud the government" and "to give victims of terrorist attacks the ability to enforce court judgments against terrorist assets." Although "the legal protections may not be as strong as I would desire, they are all improvements over existing law, and are very similar to those strongly approved in the Financial Services Committee over one year ago," he said.

The bill is expected to pass the Senate quickly, as it is essentially the same bill that passed the Senate unanimously June 18.

The major opponent of the bill in the Senate is Sen. Phil Gramm (R-TX), the ranking member of the Senate Banking Committee, who has criticized the bill for shifting billions of dollars of risk from the insurance companies to the taxpayer and for reducing the incentive insurance companies have "to spread the risk, to syndicate, to develop reinsurance."

Although Gramm will not sign the conference report, he has said he will not block passage of the bill.

Anticipating the bill could be signed into law next week, the National Association of Insurance Commissioners recommended all commercial property/casualty insurers take immediate steps to prepare for complying with the provisions of the act.

"The act requires insurers to move quickly to provide rate quotes for new policies and send disclosure notices to existing policyholders," said Iowa Insurance Commissioner and NAIC President Terri Vaughan.

She said insurers should immediately determine what rates they will charge for providing coverage for acts of terrorism beneath the federal participation thresholds and promised NAIC's Property and Casualty Insurance Committee would be issuing a bulletin with specific steps they should take.

The legislation would cover all commercial property/casualty lines, including workers' compensation and business interruption, and prohibits any reimbursement to them under the federal backstop unless they have provided "clear and conspicuous disclosure to the policyholder of the premium charged for terrorism coverage and the federal share of compensation."

These insurers would be required to make this disclosure to the policyholder at the time of offer, purchase and renewal of the policy.

If the policy is issued more than 90 days after the law goes into effect (which will be Jan. 1, 2003, if the bill is signed into law this year), this information must be made as a separate line item. For policies issued before the law went into effect, the disclosure must be made within 90 days of the date the law goes into effect.

The conferees said they were requiring this disclosure "to enhance the competitiveness of the marketplace by better enabling consumers to comparison shop for terrorism insurance coverage, and to make policyholders better aware that the federal government will be sharing the costs of such coverage with the insurers, thereby reducing the insurers' exposure."

The bill also voids any commercial property/casualty terrorism insurance exclusions and any state approval of such exclusions that are in force when the law goes into effect to the extent they exclude losses that would otherwise be insured losses.

Conferees said this nullification provision was intended "to create immediate terrorism coverage for commercial property and casualty policyholders upon enactment for a short window of time, while allowing insurers to immediately send notices of the increased premium for such coverage and giving policyholders the option within 30 days of such notice to pay such increased premium or allow reinstatement of any preexisting terrorism exclusion." After this initial transition period, states would once again have full authority to regulate insurers participating in the federal program.

The program, which is to be established within the Department of the Treasury, gives the secretary authority to assess civil penalties on participating insurers for submission of false or misleading information or for failure to repay any amount the secretary requires to be repaid, or for other failure to comply with the law's provisions.

The program is to last for two years, with the secretary having authority to extend it for an additional third year before it expires. Insurers would not qualify for the federal assistance unless they suffer losses above deductibles, based on a percentage of direct written premiums, of 7 percent in 2003, 10 percent in 2004 and 15 percent in 2005. The assistance would not go into effect unless a terrorist attack resulted in at least $5 million of insured losses.

Total federal coverage would be capped at $100 billion, and insurers would have to repay any assistance up to $10 billion in 2003, $12.5 billion in 2004 and $15 billion in 2005. The Treasury secretary would collect the repayments by applying a surcharge of up to 3 percent of premium and would have discretion over the timing of the repayments.

The conferees broadened participation in the program by giving the Treasury secretary authority to apply the provisions to state residual-market insurance entities and state workers' compensation funds as well as discretion to apply the legislation to various classes of captives and self-insurance programs, such as workers' compensation self-insurance programs and state workers' compensation reinsurance pools.

Under the conference bill, the Treasury secretary also would be "directed to conduct an expedited study to determine whether adequate and affordable catastrophe reinsurance for acts of terrorism is available to group life insurers and whether the threat of terrorism is reducing the availability of group life insurance for consumers."

If the study shows there is a need for a federal backstop for group life insurers, the secretary would be authorized to include them in the program.

The bill also directs the secretary to conduct a separate study to determine if other insurance lines, such as individual life and personal lines, also have a need for a federal backstop to cover the threat of terrorism losses, but does not authorize their inclusion in the program by regulation if a need is documented. Instead, the Treasury secretary would submit his findings to Congress within nine months after enactment.

All insurance trade associations hailed the passage as positive, although some voiced concern over the consumer notice and disclosure provisions of the bill and the lack of coverage for personal lines.