To:           All Property and Casualty Insurers

From:      Scott B. Lakin, Director, Missouri Department of Insurance

Re:          Missouri Compliance Issues Regarding Terrorism Exclusions in Response to the Terrorism Risk Insurance Act of 2002

Date:       March 18, 2003

In response to the events of September 11, 2001, the Department issued Bulletin 02-03 in an attempt to establish minimum guidelines for the use of terrorism exclusions/limitations in both commercial and personal lines of property and casualty insurance. The Department indicated in Bulletin 02-03 that it would "reevaluate its position if the President signs into law a federal backstop to address insurance losses attributed to acts of terrorism." Congress recently enacted and the President recently signed into law the Terrorism Risk Insurance Act of 2002 ("the Federal Act"), which provides a federal backstop for defined acts of terrorism and imposes certain obligations on insurers. In light of the Federal Act and as indicated in Bulletin 02-03, the intent of this bulletin is to clarify the guidelines for the use of terrorism exclusions/limitations in the state of Missouri and to advise of certain provisions of the Federal Act that may require insurers to submit a filing in this state. [Note: the critical terms highlighted in bold text below are defined in an attachment to this bulletin.]

COMMERCIAL LINES

The Federal Act provides a backstop only for defined acts of terrorism that are certified by the U.S. Secretary of the Treasury. Such losses are termed insured losses in the Federal Act. Terrorism losses not meeting the definition of insured losses in the Federal Act, including those losses that fail to be insured losses solely because they fall below the Federal Act's $5 million threshold, will be referred to in this bulletin as non-certified losses. Insured losses and non-certified losses will be treated differently in Missouri.

Treatment of Insured Losses

All insurers are required to participate in the Terrorism Insurance Program ("the Program") under the Federal Act and make available coverage for insured losses in all of their covered commercial lines policies. Such coverage should not differ materially from the terms, amounts or other coverage limitations applicable to losses arising from events other than acts of terrorism. The Federal Act voids any terrorism exclusion in a contract for property and casualty insurance that was in force on the date of enactment of the Federal Act, November 26, 2002, to the extent that it excludes losses that would otherwise be insured losses under the Federal Act.

In addition, the Federal Act allows insurers to "reinstate a preexisting provision in a contract for commercial property and casualty insurance that is in force on the date of enactment of the Act and that excludes coverage for acts of terrorism" but only when one of two conditions are met. Either:

1. The insurer has received a written statement from the insured that affirmatively authorizes the reinstatement of the exclusion;
   or
2. The insurer has provided notice to the insured at least 30 days before any such reinstatement of an exclusion disclosing that the insured has the option of purchasing terrorism coverage and the insured has failed to pay any increased premium charged by the insurer for providing that coverage.

Treatment of Non-Certified Losses

For non-certified losses, commercial property and casualty insurers must continue to provide, at a minimum, the amount of coverage prescribed in Bulletin 02-03. Accordingly, commercial property and casualty insurance exclusions that limit coverage for non-certified losses should be either identical in substance or more advantageous to the policyholder than the non-certified loss exclusions described in the definition of that term attached to this bulletin. The Department will continue to object to any commercial property and casualty exclusion limiting coverage for non-certified losses that fails to meet these minimum standards.

As indicated in Bulletin 02-03, the Department in no way endorses or advocates the use of terrorism exclusions for non-certified losses. It is unclear at this time whether and to what extent there is any demand by commercial policyholders for coverage of the types of losses not covered under the Federal Act that would exceed the amount of coverage provided under the non-certified loss exclusions. However, the Department can certainly conceive of policyholders who might desire such coverage. Therefore, the Department urges insurers to consider making such coverage available to commercial policyholders on a voluntary basis, rather than automatically excluding such losses. The Department presumes that the competitive marketplace will make such coverage available at an appropriate price should the demand for the coverage exist.

Disclosure Requirements

Disclosure notices are required for new and renewal business. Section 103(b)(2) of the Federal Act requires insurers to provide a clear and conspicuous disclosure to the policyholder of the premium charged for covering insured losses and that advises the policyholder that a federal program exists whereby the federal government will share significant portions of major insured losses with insurers. The U.S. Department of the Treasury ("Treasury") intends to propose regulations that will clarify how an insurer can demonstrate that the disclosures have been provided in compliance with the Federal Act. Disclosure notices that are intended to become a part of the insurance contract should be filed with this Department in accordance with Section 379.321, RSMo. The Department suggests the following disclosure for insured losses:

Coverage for acts of terrorism is already included in your current policy. You should know that, effective November 26, 2002, under your existing coverage, any losses caused by certified acts of terrorism would be partially reimbursed by the United States Government under a formula established by federal law. Under this formula, the United States pays 90% of covered terrorism losses exceeding the statutorily established deductible paid by the insurance company providing the coverage. The portion of your annual premium that is attributable to coverage for acts of terrorism is $ ______.

The Department is concerned that policyholders who are notified that their policies are in part covered by the federal backstop may erroneously conclude that they are covered for all terrorism losses, which would not be the case if exclusions covering non-certified losses were attached to or included in the policy. In such cases, the policyholder would not be covered, for example, for losses above the $25 million dollar threshold if the terrorist act were determined not to have been committed on behalf of any foreign person or foreign government. In order to avoid any confusion on the part of policyholders regarding the extent of the terrorism coverage under their policies, and also to avoid the potential for litigation over the extent of that coverage should a non-certified loss occur, the Department will require the use of the following disclosure language, or wording that is substantially similar thereto, in those cases where polices have exclusions for non-certified losses:

Note: Be advised that while this policy does provide coverage for certain terrorism losses in compliance with the Federal Terrorism Risk Insurance Act of 2002, it does not cover all types of terrorism losses, and in fact, excludes coverage for certain losses, such as those that are the result of a terrorist act that was not committed on behalf of any foreign person or foreign government and exceeds an aggregate cost to the insurance industry of $25 million. You are not covered for such losses unless your insurance company has offered you additional terrorism coverage for such losses and you have paid an additional premium for that coverage, if required to do so by the insurance company.

Standard Fire Coverage for Commercial Lines

Requirements for fire coverage are established by Missouri statute and where applicable, must meet or exceed the provisions of the Standard Fire Policy in accordance with Missouri Regulation 20 CSR 500-1.100. These legal requirements cannot be waived. Thus, insurers cannot exclude "fire following terrorism" in a fire insurance policy.

Workers' Compensation Coverage

This Department will not accept any filings for terrorism exclusions or limitations for workers' compensation policies. This does not apply to exclusions or limitations for insured losses that exceed the $100 billion cap as mentioned in the Federal Act.

Commercial P&C Forms Relating to Terrorism Coverage

Insurers should file, as soon as reasonably practicable, revised terrorism disclosure forms to clearly distinguish between coverage for insured losses and non-certified losses and should apply the new forms at the earliest possible renewal. All other commercial property and casualty forms should be filed in accordance with Section 379.321 RSMo. Forms are to be filed within 10 days after their use.

Because the Federal Act waives any prior approval requirement for terrorism disclosure forms for workers' compensation insurance for the first year of the act, such forms should, for the time being, be filed in accordance with Section 379.321 RSMo.

Commercial P&C Rates Relating to Terrorism Coverage

Commercial property and casualty insurance rates relating to terrorism coverage will be filed in accordance with Section 379.321 RSMo; such rates are to be filed within 10 days after their use and filed for informational purposes only. The Federal Act does not pre-empt this statute; therefore, insurers should adhere to Section 379.321.6(2), which requires a 60-day notification to be mailed to the insured when the insurance premium renewal is increased 25% or more from the previous term. This includes any additional charges for terrorism coverage.

Workers' compensation rates should be filed in accordance with Section 287.930, RSMo, et al.; such rates are to be filed within 30 days after their use. Note: Any additional amount of premium charged for any terrorism coverage will be subject to Missouri's Second Injury Fund Surcharge.

Section 106 of the Federal Act specifically provides that the Act does not preempt any state's ability to invalidate a rate as excessive, inadequate or unfairly discriminatory. Any terrorism-related rate filing should provide sufficient information for the Department's reviewer to determine what price would be charged to a business seeking to cover both insured losses and non-certified losses. Insurers may choose to use rating plans that take into account other characteristics such as geography, building profile, proximity to target risks and other reasonable rating factors. The insurer should state in the filing the justification of the rates and rating systems that it chooses to apply. The supporting documentation should be sufficient for the reviewer to determine if the rates are excessive, inadequate or unfairly discriminatory.

PERSONAL LINES

The Federal Act does not address the use of terrorism exclusions in personal lines of property and casualty insurance. Accordingly, the Department's position on the use of terrorism exclusions in personal lines remains unchanged. As indicated in Bulletin 02-03, the Department will generally not accept a personal lines terrorism exclusion except in very limited instances involving unique company circumstances. Any company filing a personal lines form with a terrorism exclusion will be contacted by the Department staff, will be advised of the unacceptability of the filing, and will be asked to withdraw the filing unless the company can provide sufficient evidence to demonstrate (a) that the company is unable to secure necessary reinsurance without a terrorism exclusion, and (b) that the inability to exclude the risk of terrorism will adversely affect the company's solvency. Should a company refuse or fail to act on this request, the Department will initiate proceedings to disapprove the filing.

Expedited Treatment of Terrorism-Related Filings

All terrorism filings that are consistent with this bulletin, state law and the Federal Act will receive expedited treatment. Insurers may use the "Expedited Filing Transmittal Document - For Terrorism Risk Insurance Forms and Pricing" as developed by the NAIC and found on its website. To be complete, an expedited filing must contain and include the following:

• A completed Expedited Filing Transmittal Document for each insurer or advisory organization.
• One copy of each policy form or endorsement that the insurer intends to use, unless the insurer has given an advisory organization authorization to file them on its behalf.
• A copy of the rates and rating systems along with the supporting documentation, if required.
• A copy of any disclosure notices that will be used to convey information to policyholders in this state.
• A postage-paid, self-addressed envelope large enough to accommodate the return.

This Department supports the use of the SERFF system and encourages all insurers to use SERFF to file the terrorism rates and forms; an expedited filing form will be available in that system for your use.

The expedited process for terrorism filings will continue in effect until December 31, 2003, but the standards applicable to such filings will continue to be utilized by the Department until the Federal Act expires on December 31, 2005, unless Congress extends the duration of the Federal Act. The Department strongly advises all interested persons to independently review the Federal Act and to promptly take all necessary actions to ensure compliance with both state and federal law. Should you have any questions or comments regarding this matter, please contact the Property and Casualty Section at (573) 751-3365 or at insurance.mo.gov.

Relevant Terrorism Definitions

Insurer: Any entity and affiliate thereof that:

1. Is licensed or admitted to engage in the business of providing primary or excess insurance in any State;
2. Is an eligible surplus line carrier listed on the Quarterly Listing of Alien Insurers of the NAIC, or any successor thereof;
3. Is approved for the purpose of offering property and casualty insurance by a Federal agency in connection with maritime, energy or aviation activity;
4. Is a State residual market insurance entity or State workers' compensation fund; or,
5. That receives direct earned premium for any type of commercial property and casualty insurance coverage.

Source: NAIC model bulletin--11/26/02, Terrorism Risk Retention Act of 2002
www.naic.org/pressroom/releases/EmergencyResponse.htm
www.treasury.gov/offices/domestic-finance/financial-institution/terrorism-insurance

Notably, the federal definition of insurer would include a Chapter 380 Missouri Mutual insurance company for purposes of the Federal Act.

Insured Loss: any loss resulting from an act of terrorism (including an act of war, in the case of workers' compensation) that is covered by primary or excess property and casualty insurance issued by an insurer if such loss:

1. Occurs within the United States; or,
2. Occurs to an air carrier (as defined in section 40102 of title 49, United States Code), to a United States flag vessel (or a vessel based principally in the United States, on which United States income tax is paid and whose insurance coverage is subject to regulation in the United States), regardless of where the loss occurs, or at the premises of any United States mission.

Source: NAIC model bulletin--11/26/02, Terrorism Risk Insurance Act of 2002
www.naic.org/pressroom/releases/EmergencyResponse.htm
www.treasury.gov/offices/domestic-finance/financial-institution/terrorism-insurance

Non-certified Loss: any loss resulting from a violent act or an act that is dangerous to human life, property, or infrastructure that is committed by an individual or individuals and that appears to be part of an effort to coerce a civilian population or to influence the policy or affect the conduct of any government by coercion, and the act is not certified as a terrorist act pursuant to the Federal Terrorism Risk Insurance Act of 2002.

Non-certified Loss Exclusions:

For property insurance:

1. Exclusions for acts of terrorism only apply if the acts of terrorism result in industry-wide insured losses that exceed $25,000,000 for related incidents that occur within a 72 hour period;
2. Exclusions for acts of terrorism are not subject to the limitations above if:
   • The act involves the use, release or escape of nuclear materials or that directly or indirectly results in nuclear reaction or radiation or radioactive contamination;
   • The act is carried out by means of the dispersal or application of pathogenic or poisonous biological or chemical materials; or
   • Pathogenic or poisonous biological or chemical materials are released, and it appears that one purpose of the terrorism was to release such materials.

For liability insurance:

1. Exclusions for acts of terrorism only apply if the acts of terrorism result in industry-wide insured losses that exceed $25,000,000 for related incidents that occur within a 72-hour period; or,
2. Fifty or more persons sustain death or serious physical injury for related incidents that occur within a 72-hour period. For purposes of this provision, serious physical injury means:
   • Physical injury that involves a substantial risk of death;
   • Protracted and obvious physical disfigurement; or,
   • Protracted loss of or impairment of the function of a bodily member or organ.

Exclusions for acts of terrorism are not subject to the limitations above if:

• The act involves the use, release or escape of nuclear materials, or that directly or indirectly results in nuclear reaction or radiation or radioactive contamination;
• The act is carried out by means of the dispersal or application of pathogenic or poisonous biological or chemical materials; or,
• Pathogenic or poisonous biological or chemical materials are released, and it appears that one purpose of the terrorism was to release such materials.

Source: NAIC model bulletin--11/26/02
www.naic.org/pressroom/releases/EmergencyResponse.htm