The business of terrorism: the Terrorism Risk Insurance Act of 2002.

Since the terrorist attacks of September 11, 2001, the economy has been harmed by the withdrawal of many insurance companies from the marketplace for terrorism risk insurance. As a result, on November 26, 2002, President Bush signed into law the Terrorism Risk Insurance Act of 2002 (TRIA). (1) The act is intended to create a terrorism insurance market that will serve the needs of the insured while managing the risk to the insurance industry.

An analysis conducted by various major insurance providers revealed that the recent withdrawal of certain insurance carriers from the marketplace was caused in large part by the uncertainty arising from the industry's risk exposure to future terrorist attacks. Such uncertainty has led to the cancellation of construction projects, increased premiums, and substantial risk shifting among insured and their insurers. (2)

Purpose of TRIA

With the threat of future terrorist attacks looming, the federal government sought to reduce the economic risks and consequences associated with terrorism by restoring insurance capacity to the marketplace. Thus, Congress passed an unprecedented bill that provides for the federal government and the insurance industry to share the risk of loss from future terrorist attacks. (3) In a nutshell, the bill spells out the deductible and coinsurance features under which insurers will share losses with the federal government. Further, it provides a federal backstop for certain acts of terrorism through a temporary federal program whereby the federal government will share the risk of loss from future terrorist attacks with the insurance industry. Importantly, this system of shared public and private compensation is limited to insured commercial property and casualty losses arising from acts of terrorism under the act. Consequently, private policies, such as home or auto, are excluded. (4)

The overall intent of the act is to promote new construction and spur economic activity while creating a terrorism insurance market on which the industry could build, thus benefitting both the insured and the insurer. The program will be administered by the U.S. Department of Treasury and will sunset on December 31, 2005.

Compliance

In an effort to assist insurers in complying with TRIA, the National Association of Insurance Commissioners has adopted two model disclosure forms. (5) The model disclosure forms are designed to assist insurers in meeting their obligations under the act as well as to inform policyholders of the status of current coverage. In some cases, the insured is afforded the opportunity to make a selection regarding future insurance coverage for acts of terrorism. Significantly, the legislation stops short of mandating the manner in which the states regulate rates and fees. Such matters, it appears, were deemed best left to the states to determine, possibly to prelude a state's rights debate.

Terrorist Act Defined

The act goes to great lengths to define a "terrorist act." Simply stated, TRIA covers only acts of terrorism conducted by or for a foreign interest. This means that the atrocities of the type committed in Oklahoma City would not fall under the act. In order for an incident to be considered a "terrorist act," the following criteria must be met:

(1) The commission of a violent act or an act that is dangerous to human life, property, or infrastructure;

(2) The act must have resulted in damage (a) within the United States, (b) outside of the United States in cases of aircraft or vessels, or (c) to a United States diplomatic mission; and

(3) The act must have been committed by an individual or individuals acting on behalf of any foreign person, or foreign interest, as part of an effort to coerce the civilian population of the United States or to influence the policy, or affect the conduct of the United States government by coercion. (6)

These criteria are subject to adjustment in one important respect. The U.S. Secretary of the Treasury, in concurrence with the U.S. Secretary of State and the Attorney General of the U.S., reserves the right to determine just what constitutes an "act of terrorism." This right or authority may not be delegated. It is equally important to note that a certification of, or failure to, certify an incident as an act oo terrorism is final. As such, it is not subject to judicial. (7) review. The absence of review or an appellate remedy has not been well received by many members of the insurance industry. (8)

Implications for the Business Community

Under TRIA, affected insurance companies must make coverage for insured losses from acts of terrorism under the program available to their policyholders. Any existing policies with terrorism exclusions have been temporarily voided by the act. (9) Carriers were required to make formal offers for coverage to policyholders by February 26, 2003. The law does provide that some carriers may charge an additional premium for the coverage and others may make no charge. Insurers may not exclude workers' compensation policies from terrorism coverage. (10) Insurers, however, may exclude federal crop insurance, private mortgage insurance, medical malpractice insurance, flood insurance, livestock insurance, and health and life insurance. The law requires insurance companies to disclose to policyholders the premium charged for terrorism risk insurance and the federal share of compensation provided under the law. (11)

Unlike the deference afforded to the states in terms of policy fee setting, the act provides for preemption of state policy language approvals related to current exclusions for acts of terrorism. Once an insurer makes an offer to provide coverage and quotes a price for that coverage, a business can decide to accept the offer and pay the applicable premium for the terrorism coverage or allow the insurer to exclude coverage for acts of terrorism. When faced with such decisions, many business clients will turn to their attorney for guidance. While recognizing that the terrorist threat is a very real one, it is imperative that an attorney maintain a measure of calm when counseling business clients as to the implications of the act, and, where appropriate, when assisting them in establishing the amount or even the necessity of such insurance. Such decisions must be based upon an assessment of the "real" risk involved, the nature of the business, and the fiscal effects that such policy premiums can have on the bottom line, among other things.

Litigation Management

In an effort to maintain control over the litigation process, TRIA preempts all state causes of action of any kind for property damage, personal injury, or death arising out of or resulting from an act of terrorism. Once the Secretary of the Treasury makes a determination that an act of terrorism has occurred, an exclusive federal cause of action arises for property damage, personal injury, and death arising out of or relating to the act. Such causes of action must be litigated in the federal district court located in the state where the terrorist act arose. If several states are targeted, the Judicial Panel on Multi-District Litigation shall select and assign the district court based upon the convenience of the parties, and the just and efficient conduct of the proceedings. (12)

Satisfactions of Judgments

If a person has obtained a judgment against a terrorist party on a claim based upon an act of terrorism, any blocked assets (assets frozen or seized by the United States) of the terrorist party are subject to execution or attachment in aid of execution to satisfy the judgment (13) obtained. The judgment may be against a terrorist party or organization, or a terrorist state. The most recent state to be classified as a "terrorist state" is Iraq. (14)

Summary

TRIA swept through Congress with deliberate speed. Although it has served to provide relief and terrorism insurance coverage to individual policyholders, the jury is still out as to whether it will spur economic activity by expanding the market for commercial insurance coverage. Analyzing such insurance coverage from a purely business point of view, the risk of terrorism must be treated like any other risk: Some companies require more insurance, others less, depending upon the nature of their businesses. Every business lawyer should be aware, if not fully cognizant, of the significant parts of the act in order to properly advise their business clients of the implications of the act, particularly as they relate to the benefits and costs of such insurance coverage.

(1) Terrorism Risk Insurance Act of 2002, H.R. 3210 [section] 101(x). See also 31 C.F.R. Part 50.

(2) Jeff Woodward, TRIA, International Risk Management Institute magazine, December 2002.

(3) Terrorism Risk Insurance Act of 2002, H.R. 3210 [section] 101(b).

(4) Id. at [section] 101(b)(1)(2).

(5) Minutes of the Property and Casualty Committee of the National Association of Insurance Commissioners, December 10, 2002.

(6) Terrorism Risk Insurance Act of 2002, H.R. 3210 [section] 102(1)(A).

(7) Id. at [section] 102(1)(C).

(8) A straw poll conducted of members of the Public Risk Management Association and the Risk and Insurance Management Association revealed that many members have concern and consternation over the mechanics of TRIA and its effects on the market, as well as the individual insured.

(9) Terrorism Risk Insurance Act of 2002, H.R. 3210 [section] 105(x).

(10) Id. at [section] 102(12)(a).

(11) Id. at [section] 102(12)(b)(i).

(12) Id. at [section] 107.

(13) Id. at [section] 107(a).

(14) Daliberti a J.P. Morgan Chase & Co., 2003 WL 340734 (S.D.N.Y), decided in February 2003. The court ruled that the Republic of Iraq has been designated a terrorist state by the U.S. Department of Treasury, thus making it a terrorist party under [subsection]201(a) and (d)(4) of TRIA.

Joseph. G. Jarret is the Polk County attorney. He is a certified Florida Supreme Court mediator and arbitrator, and a former US. Army combat arms (airborne) officer. He holds a B.S. in criminal justice front Troy State University, a masters in public administration from Central Michigan University, a juris doctor from Stetson Law School, and a postgraduate certificate in public management from the University of South Florida.

This column is submitted on behalf of the Business Law Section, John D. Emmanuel, chair, and Kevin H. Sutton. and Joseph R. Gomez, editors.