44932 Federal Register / Vol. 69, No. 144 / Wednesday, July 28, 2004 / Rules and Regulations 

expense and research and development 

expenditures, respectively. Paragraphs 

(e)(4) through (e)(8) of this section 

contain rules with respect to the 

allocation of certain other deductions. 

Paragraph (e)(9) of this section lists 

those deductions which are ordinarily 

considered as not being definitely 

related to any class of gross income. 

Paragraph (e)(10) of this section lists 

special deductions of corporations 

which must be allocated and 

apportioned. Paragraph (e)(11) of this 

section lists personal exemptions which 

are neither allocated nor apportioned. 

Paragraph (e)(12) of this section 

contains rules with respect to the 

allocation and apportionment of 

deductions for charitable contributions. 

Examples of allocation and 

apportionment are contained in 

paragraph (g) of this section.

* * * * *

(12) [Reserved]. For further guidance, 

see § 1.861–8T(e)(12).

* * * * *

(g) General examples. * * * 

Example 18. * * * (i)(A) * * * 

(i)(B) In addition, X incurs expenses 

of its supervision department of 

$1,600,000.

* * * * *

■ Par. 3. Section 1.861–8T is amended as 

follows:

■ 1. Add new paragraph (e)(12).

■ 2. Add a new second sentence to 

paragraph (h). 

The additions read as follows:

§ 1.861–8T Computation of taxable income 

from sources within the United States and 

from other sources and activities 

(temporary).

* * * * *

(e) * * * 

(12) Deductions for certain charitable 

contributions—(i) In general. The 

deduction for charitable contributions 

that is allowed under sections 170, 

873(b)(2), and 882(c)(1)(B) is definitely 

related and allocable to all of the 

taxpayer’s gross income. The deduction 

allocated under this paragraph (e)(12)(i) 

shall be apportioned between the 

statutory grouping (or among the 

statutory groupings) of gross income and 

the residual grouping on the basis of the 

relative amounts of gross income from 

sources in the United States in each 

grouping. 

(ii) Coordination with § 1.861–14T. A 

deduction for a charitable contribution 

by a member of an affiliated group shall 

be allocated and apportioned under the 

rules of this section and § 1.861–

14T(c)(1). 

(iii) Treaty provisions. [Reserved] 

(iv) Effective date. (A) The rules of 

paragraphs (e)(12)(i) and (ii) shall apply 

to charitable contributions made on or 

after July 28, 2004. Taxpayers may 

apply the provisions of paragraphs 

(e)(12)(i) and (ii) to charitable 

contributions made before July 28, 2004 

but during the taxable year ending on or 

after July 28, 2004.

(B) The applicability of this section 

expires on or before July 27, 2007.

* * * * *

(h) * * * However, see paragraph 

(e)(12)(iv) of this section and § 1.861–

14T(e)(6)(ii) for rules concerning the 

allocation and apportionment of 

deductions for charitable contributions. 

***

■ Par. 4. Section 1.861–14T is amended 

by revising the section heading and 

adding paragraph (e)(6) to read as 

follows:

§ 1.861–14T Special rules for allocating 

and apportioning certain expenses (other 

than interest expense) of an affiliated group 

of corporations (temporary).

* * * * *

(e) * * * 

(6) Charitable contribution 

expenses—(i) In general. A deduction 

for a charitable contribution by a 

member of an affiliated group shall be 

allocated and apportioned under the 

rules of § 1.861–8T(e)(12) and paragraph 

(c)(1) of this section. 

(ii) Effective date. (A) The rules of this 

paragraph shall apply to charitable 

contributions made on or after July 28, 

2004 and, for taxpayers applying the 

second sentence of § 1.861–

8T(e)(12)(iv)(A), to charitable 

contributions made during the taxable 

year ending on or after July 28, 2004. 

(B) The applicability of this section 

expires on or before July 27, 2007.

* * * * *

Mark E. Matthews, 

Deputy Commissioner for Services and 

Enforcement. 

Approved: July 20, 2004. 

Gregory Jenner, 

Acting Assistant Secretary of the Treasury.

[FR Doc. 04–17079 Filed 7–27–04; 8:45 am] 

BILLING CODE 4830–01–P

DEPARTMENT OF THE TREASURY

31 CFR Part 50 

RIN 1505–AB08 

Terrorism Risk Insurance Program; 

Litigation Management

AGENCY: Departmental Offices, Treasury.

ACTION: Final rule.

SUMMARY: The Department of the 

Treasury (Treasury) is issuing this final 

rule concerning litigation management 

as part of its implementation of Title I 

of the Terrorism Risk Insurance Act of 

2002 (Act). That Act established a 

temporary Terrorism Insurance Program 

(Program) under which the Federal 

Government will share with commercial 

property and casualty insurers the risk 

of insured losses from certified acts of 

terrorism that occur on or before the 

date the Program ends, on December 31, 

2005. This final rule is the latest in a 

series of regulations that Treasury has 

issued to implement the Program and 

finalizes a proposed rule concerning 

litigation management related to insured 

losses under the Program.

DATES: This final rule is effective August 

27, 2004.

FOR FURTHER INFORMATION CONTACT:

David Brummond, Legal Counsel, or C. 

Christopher Ledoux, Senior Attorney, 

Terrorism Risk Insurance Program, (202) 

622–6770 (not a toll-free number).

SUPPLEMENTARY INFORMATION: 

I. Background 

A. Terrorism Risk Insurance Act of 2002 

On November 26, 2002, the President 

signed into law the Terrorism Risk 

Insurance Act of 2002 (Pub. L. 107–297, 

116 Stat. 2322). The Act was effective 

immediately. The Act’s purposes are to 

address market disruptions, ensure the 

continued widespread availability and 

affordability of commercial property 

and casualty insurance for terrorism 

risk, and to allow for a transition period 

for the private markets to stabilize and 

build capacity while preserving State 

insurance regulation and consumer 

protections. 

Title I of the Act establishes a 

temporary federal program of shared 

public and private compensation for 

insured commercial property and 

casualty losses resulting from an act of 

terrorism, which as defined in the Act 

is certified by the Secretary of the 

Treasury, in concurrence with the 

Secretary of State and the Attorney 

General. The Act authorizes Treasury to 

administer and implement the 

Terrorism Risk Insurance Program, 

including the issuance of regulations 

and procedures. The Act provides that 

the Program ends on December 31, 

2005. The Act also provides Treasury 

with certain continuing authority to take 

actions as necessary to ensure payment, 

recoupment, adjustments of 

compensation, and reimbursement for 

insured losses arising out of any act of 

terrorism (as defined under the Act) 

occurring during the period between 

November 26, 2002, and December 31, 

2005.

Federal Register / Vol. 69, No. 144 / Wednesday, July 28, 2004 / Rules and Regulations 44933

1The trade associations are: American Insurance 

Association (‘‘AIA’’), the American Association of 

State Compensation Insurance Funds (‘‘AASCIF’’), 

Council of Insurance Agents & Brokers (‘‘CIAB’’), 

The Financial Services Roundtable (‘‘FSR’’), 

Independent Insurance Agents & Brokers of 

America (‘‘IIABA’’), National Association of Mutual 

Insurance Companies (‘‘NAMIC’’), National 

Association of Professional Insurance Agents 

(‘‘PIA’’), Property Casualty Insurers Association of 

America (‘‘PCI’’), Reinsurance Association of 

America (‘‘RAA’’), and Surety Association of 

America (‘‘SAA’’).

Each entity that meets the definition 

of ‘‘insurer’’ (well over 2000 firms) must 

participate in the Program. The amount 

of federal payment for an insured loss 

resulting from an act of terrorism is to 

be determined based upon insurance 

company deductibles and excess loss 

sharing with the Federal Government, as 

specified by the Act and the 

implementing regulations. An insurer’s 

deductible increases each year of the 

Program, thereby reducing the Federal 

Government’s share prior to expiration 

of the Program. An insurer’s deductible 

is calculated based on a percentage of 

the value of direct earned premiums 

collected over certain statutory periods. 

Once an insurer has met its individual 

deductible, the federal payments cover 

90 percent of insured losses above the 

deductible, subject to an annual 

industry-aggregate limit of $100 billion. 

The Program provides a federal 

reinsurance backstop for three years. 

The Act provides Treasury with 

authority to recoup federal payments 

made under the Program through 

policyholder surcharges, up to a 

maximum annual limit. The Act also 

prohibits duplicative payments for 

insured losses that have been covered 

under any other federal program. 

The mandatory availability or ‘‘make 

available’’ provisions in section 103(c) 

of the Act require that, for Program Year 

1, Program Year 2, and, if so determined 

by the Secretary of the Treasury, for 

Program Year 3, all entities that meet 

the definition of insurer under the 

Program must make available in all of 

their property and casualty insurance 

policies coverage for insured losses 

resulting from an act of terrorism. This 

coverage cannot differ materially from 

the terms, amounts and other coverage 

limitations applicable to losses arising 

from events other than acts of terrorism. 

On June 18, 2004, the Secretary of the 

Treasury announced his determination 

to extend the make available 

requirements through Program Year 3. 

As conditions for federal payment 

under the Program, insurers must 

provide clear and conspicuous 

disclosure to policyholders of the 

premium charged for insured losses 

covered by the Program and the Federal 

share of compensation for insured losses 

under the Program. In addition, the Act 

requires that insurers submit claims and 

make certain certifications to Treasury. 

Treasury has recently published in the 

Federal Register a final rule concerning 

claims for Federal payment under the 

Program. See 69 FR 39296 (June 29, 

2004). 

Section 107 of the Act also contains 

specific provisions designed to manage 

litigation arising out of or resulting from 

a certified act of terrorism. If the 

Secretary determines that an act of 

terrorism under section 102 has 

occurred, section 107 establishes an 

exclusive Federal cause of action and 

remedy for property damage, personal 

injury, or death arising out of or relating 

to the act of terrorism. Section 107 also 

preempts certain State causes of action 

and provides that amounts awarded in 

actions for property damage, personal 

injury, or death that are attributable to 

punitive damages shall not count as 

‘‘insured losses’’ (and thus shall not be 

paid) under the Program. The Act also 

gives the United States the right of 

subrogation with respect to any 

payment or claim paid by the United 

States under the Program. In connection 

with the implementation of the 

litigation management provisions of the 

Act, the President directed the Secretary 

to use his authority under the Act to 

propose a rule that would require 

insurers to obtain Treasury’s advance 

approval before settling certain Federal 

causes of action described in section 

107 of the Act. See 38 Weekly Comp. 

Pres. Doc. 2097 (Nov. 25, 2002); 2002 

WL 14548111 (Dec. 2, 2002) (also 

accessible at http://www.treasury.gov/

trip). 

Throughout the implementation of the 

Program, Treasury has been guided by 

several goals. First, Treasury strives to 

implement the Act in a transparent and 

effective manner that treats comparably 

those insurers required to participate in 

the Program and provides necessary 

information to policyholders in a useful 

and efficient manner. Second, in accord 

with the Act’s stated purposes, Treasury 

seeks to rely as much as possible on the 

State insurance regulatory structure. In 

that regard, Treasury has coordinated 

the implementation of aspects of the 

Program with the National Association 

of Insurance Commissioners (NAIC). 

Third, to the extent possible within 

statutory constraints, Treasury seeks to 

allow insurers to participate in the 

Program in a manner consistent with 

procedures used in their normal course 

of business. Finally, given the 

temporary and transitional nature of the 

Program, Treasury is guided by the Act’s 

goal that insurers develop their own 

capacity, resources, and mechanisms for 

terrorism insurance coverage when the 

Program expires. 

B. Previously Issued Regulations

To assist insurers, policyholders, and 

other interested parties in complying 

with immediately applicable 

requirements of the Act, Treasury issued 

interim guidance to be relied upon by 

insurers until superseded by 

regulations. These notices of interim 

guidance have now been superseded by 

final regulations. The scope of the 

Program, key definitions, and other 

provisions laying the groundwork for 

Program implementation are at Subparts 

A, B, and C of 31 CFR part 50 (68 FR 

41250; 68 FR 59720). Treasury’s final 

rule applying provisions of the Act to 

State residual market insurance entities 

and State workers’ compensation funds 

is at Subpart D of 31 CFR Part 50 (68 

FR 59715). The final rule setting forth 

procedures for filing claims for payment 

of the Federal share of compensation for 

insured losses is at Subpart F of 31 CFR 

part 50, and Subpart G of 31 CFR part 

50 contains the final rule concerning 

information to be retained as related to 

the handling and settlement of claims to 

enable Treasury to perform financial 

and claim audits (both at 69 FR 39296). 

C. The Proposed Rule (Litigation 

Management) 

Treasury published a proposed 

litigation management rule in the 

Federal Register at 69 FR 25341 on May 

6, 2004 to implement the provisions in 

section 107 of the Act. The proposed 

litigation management rule required 

insurers to seek Treasury’s advance 

approval of settlements of certain 

Federal causes of action involving 

insured losses and proposed 

clarifications of litigation management 

aspects related to the Program. 

II. Summary of Comments and Final 

Rule 

Treasury received four comments 

about the proposed rule; however, one 

of these comments was jointly 

submitted by an ad hoc industry 

working group that included insurance 

industry organizations, insurance 

companies, and property-casualty 

insurance industry trade associations 

and their member companies.1

Comments were also received from a 

large commercial property-casualty 

insurance company; a large market of 

London-based insurers and reinsurers; 

and a real estate industry association. In 

addition, Treasury received a copy of a 

published Procedural Order from the 

Judicial Panel on Multidistrict 

44934 Federal Register / Vol. 69, No. 144 / Wednesday, July 28, 2004 / Rules and Regulations 

Litigation, which adopted certain 

procedures for litigation under the Act.

In general, the proposed rule was 

received quite favorably by the real 

estate industry trade group, which 

commented that the rule would screen 

proposed settlements against litigation 

abuse and fulfill Congress’s intent that 

taxpayer funds are not used to pay 

punitive damage claims. In contrast, the 

joint comment from the ad hoc industry 

working group criticized aspects of the 

proposed rule as described more fully 

below and urged that the settlement 

approval provisions be dropped, or 

alternatively, that changes be made to 

them in the final rule. Two other 

commenters provided suggested 

changes and clarifications to certain 

aspects of the proposed rule. 

After review and careful 

consideration of all comments, Treasury 

has decided to promulgate a final rule 

with several modifications and 

clarifications as discussed below. 

A. Exclusive Federal Cause of Action 

and Remedy (Section 50.80) 

Section 107(a)(1) states that ‘‘[i]f the 

Secretary makes a determination 

pursuant to section 102 that an act of 

terrorism has occurred, there shall exist 

a Federal cause of action for property 

damage, personal injury, or death 

arising out of or resulting from such act 

of terrorism, which shall be the 

exclusive cause of action and remedy 

for claims for property damage, personal 

injury, or death arising out of or relating 

to such act of terrorism, except as 

provided in paragraph (b).’’ Section 

107(b) provides that nothing in the 

litigation management provisions of 

section 107 shall in any way limit the 

liability of any government, 

organization, or person who knowingly 

participates in, conspires to commit, 

aids and abets, or commits any act of 

terrorism certified as such under the 

Act. Section 50.80 of the proposed rule 

was based on these provisions of the 

Act. 

Section 50.80(a) of the proposed rule 

provided that ‘‘[u]pon certification of an 

act of terrorism pursuant to section 

102,’’ there shall exist a Federal cause 

of action. The ad hoc industry working 

group raised a concern that the 

proposed language differed from that of 

the Act. The comment expressed 

concern that the proposed rule’s use of 

the word ‘‘upon’’ instead of ‘‘if’’ could 

be interpreted to mean that the 

exclusive Federal cause of action 

accrues at the time of certification rather 

than at the time of occurrence of the 

event later certified. 

In response to this comment Treasury 

is slightly modifying section 50.80 of 

the final rule to clarify intent and to 

more closely mirror the statutory 

language by changing the word ‘‘upon’’

to ‘‘if’’ in section 50.80(a) of the final 

rule.

The ad hoc industry working group 

also addressed section 50.80(b) of the 

proposed rule, which was based on 

section 107(e). Section 107(e) provides 

that the litigation management 

provisions of section 107 only apply to 

actions for property damage, personal 

injury, or death that arise out of or result 

from acts of terrorism that occur or 

occurred during the effective period of 

the Program. Section 50.80(b) of the 

proposed rule described the effective 

period of the Program ‘‘as set forth in 

section 108 of the Act.’’ Section 108(a) 

establishes only the Program’s 

termination date and not the ‘‘effective 

period.’’ The ad hoc industry working 

group expressed concern that the 

proposed rule may create uncertainty as 

to whether the Secretary has authority 

to certify after the termination date an 

act that occurs on or before the 

termination of the Program. After 

considering this comment, Treasury 

made a technical correction to section 

50.80(b) of the final rule to conform to 

the precise language of the Act. 

B. Preemption of State Causes of Action 

(Section 50.81) 

Section 107(a)(2) preempts all State 

causes of action for property damage, 

personal injury, or death arising out of 

or resulting from an act of terrorism that 

are otherwise available under State law, 

except as provided in paragraph (b) of 

the Act (i.e., not affecting the liability of 

any government, organization, or person 

who knowingly participates in, 

conspires to commit, aids and abets, or 

commits any act of terrorism). The ad 

hoc industry working group pointed out 

that the language of the proposed rule 

differed from that in the Act. Section 

107(a)(2) states that ‘‘[a]ll State causes of 

action of any kind for property damage, 

personal injury, or death arising out of 

or resulting from an act of terrorism that 

are otherwise available under State law 

are hereby preempted, * * *.’’ Tracking 

the time at which the exclusive Federal 

cause of action comes into existence, 

section 50.81 of the proposed rule stated 

that ‘‘upon certification’’ of an act of 

terrorism, all State causes of action for 

property damage, personal injury, or 

death arising out of or resulting from an 

act of terrorism were preempted. The 

comment explained that the Act itself 

preempts State causes of action. 

Treasury agrees that the Act preempts 

all State causes of action for property 

damage, personal injury, or death 

‘‘arising out of or resulting from an act 

of terrorism,’’ but such causes of action 

can only be identified as ‘‘arising out of 

or resulting from an act of terrorism’’

after an act is certified by the Secretary 

as an ‘‘act of terrorism.’’ Because the 

certification is inextricably linked to the 

classification of the causes of action to 

which the preemption applies, the 

proposed rule described the preemption 

as being dependent upon the 

certification of an act of terrorism by the 

Secretary. After considering the 

comment, Treasury determined to revise 

section 50.81 to mirror the language in 

section 107(a)(2). 

C. Program Procedures for Notifying the 

Judicial Panel on Multidistrict Litigation 

Section 107(a)(4) provides that for 

each act of terrorism certified by the 

Secretary pursuant to section 102, the 

Judicial Panel on Multidistrict Litigation 

(Judicial Panel) shall designate one 

district court or, if necessary, multiple 

district courts of the United States that 

shall have original and exclusive 

jurisdiction over all actions for any 

claim (including any claim for loss of 

property, personal injury, or death) 

relating to or arising out of an act of 

terrorism. The Act also provides that the 

Judicial Panel is to designate the district 

court or courts not later than 90 days 

after the occurrence of an act of 

terrorism. 

In the proposed rule, Treasury 

recognized that it is the Secretary’s 

certification of an act of terrorism that 

triggers the existence of the exclusive 

Federal cause of action and the need for 

the Judicial Panel to designate a district 

court or courts for the consolidation of 

actions. Treasury expressed an intent to 

notify the Judicial Panel as soon as 

practicable following any certification of 

an act of terrorism and invited 

comments on other appropriate 

operational procedures. 

On June 1, 2004, the Judicial Panel 

issued a Procedural Order in In re 

Terrorism Risk Insurance Act of 2002 

Litigation,—F.R.D.—, 2004 WL 1252476 

(Jud. Pan. Mult. Lit. June 1, 2004) (also 

accessible at http://www.treasury.gov/

trip). As reflected in its Order, the Panel 

stated that the 90-day period for the 

Judicial Panel to designate the court or 

courts, as prescribed in section 107(a)(4) 

of the Act, begins on the date the 

Secretary certifies the act of terrorism. 

Also, pursuant to its cited rulemaking 

authority under 28 U.S.C. 1407(f) and in 

response to the proposed rule, the 

Judicial Panel adopted procedures for 

litigation under the Act. The Order 

directs all interested parties to notify the 

Judicial Panel of their suggestions 

regarding what district court or courts 

should be designated within 20 days of 

Federal Register / Vol. 69, No. 144 / Wednesday, July 28, 2004 / Rules and Regulations 44935

the date of certification. In addition, the 

Judicial Panel orders the Secretary, on 

the date the Secretary certifies an act of 

terrorism, to notify: (1) The public about 

the Judicial Panel’s Order (through 

general media channels, such as Internet 

and press releases to broadcast and print 

media, ‘‘augmented by direct notice to 

the parties in any already existing 

litigation known to the Treasury 

Secretary’’) and (2) the Clerk of the 

Judicial Panel that such public notice 

has occurred. 

As the Judicial Panel’s Order 

establishes the procedures Treasury and 

others are to follow once an act is 

certified as an act of terrorism, there is 

no need for Treasury to set out 

procedural requirements in the final 

rule. 

D. Failure To Litigate in Federal Court 

Pursuant to the Act 

In implementing the section 107(a) 

provisions concerning exclusive 

jurisdiction, Treasury solicited 

comment in the preamble to the 

proposed rule on whether it would be 

appropriate or necessary to promulgate 

a rule to facilitate the filing and transfer 

of civil actions involving Federal causes 

of action to the Federal district court(s) 

designated by the Judicial Panel. Such 

a rule could provide that any amounts 

awarded in any civil action relating to 

or arising out of an act of terrorism that 

are not awarded by the district court or 

courts designated by the Judicial Panel 

would be ineligible for compensation 

under the Program, regardless of 

whether the amounts awarded would 

otherwise be insured losses covered by 

commercial property and casualty 

insurance issued by an insurer. 

The ad hoc industry working group 

commented that such a rule was 

unnecessary and suggested that cases 

pending in non-designated courts would 

be removed to Federal court or 

dismissed and any awards by nondesignated courts would be a legal 

nullity. Another commenter 

representing a market of London-based 

insurers and reinsurers suggested that if 

such a rule where adopted, an exception 

be made for court awards made (and 

paid by insurers) prior to the 

certification of an act of terrorism and 

presumably before a Federal district 

court is designated. After considering 

the issue and comments, Treasury has 

decided not to address this issue at this 

time, but will continue to study the 

issue to determine if any further 

clarification or procedures are needed. 

E. Treasury’s Advance Approval of 

Settlements (Section 50.82) 

Sections 50.82 and 50.83 of the 

proposed rule provided for the advance 

approval of settlements of certain 

Federal causes of action arising out of or 

resulting from certified acts of terrorism. 

As noted earlier, Treasury received a 

memorandum from the President related 

to this issue. The President’s 

Memorandum directed the Secretary to 

propose a rule requiring insurers to 

obtain the advance approval of Treasury 

of any proposed settlements of causes of 

action described in section 107 of the 

Act arising out of or resulting from an 

act of terrorism. 

The proposed rule required advance 

approval by Treasury of proposed 

settlements of certain causes of action 

described in section 107, to the extent 

liability for such causes of action is 

covered by or paid, in whole or in part, 

by an insurer pursuant to coverage for 

insured losses under the Program. As 

proposed, such settlements were only 

required to be submitted for advance 

approval if the insurer intends to submit 

the settlement as part of its claim for 

federal payment under the Program.

A real estate industry association 

supported the rule as proposed, which 

it described as important procedures for 

scrutinizing proposed settlements and 

‘‘excellent rules for implementing 

Congress’s charge that TRIA funds are 

not used to fund punitive damage 

claims.’’ As described below, other 

commenters disagreed. 

1. Rulemaking Authority 

As a threshold matter, the ad hoc

industry working group contended that 

the advance approval of settlements 

requirement exceeded Treasury’s 

rulemaking authority. They provided no 

specific support for this position. The 

working group comment advocated 

elimination of the settlement preapproval requirements in their entirety 

or other alternatives described below. 

For the reasons stated in the preamble 

to the proposed rule, Treasury believes 

that it has the requisite legal authority 

to promulgate this rule, including the 

settlement approval provisions. See 69 

FR 25341, 25344. The Act authorizes 

Treasury to administer the Program, 

investigate and audit claims, and pay 

the Federal share of compensation for 

insured losses. (see section 104(a)). 

Under section 104(a)(2) the Secretary is 

authorized to prescribe regulations to 

administer and implement the Program 

effectively. More specifically, under 

section 103(b)(3), Treasury is authorized 

to prescribe reasonable procedures 

concerning insurers’ processing of 

claims for insured losses. Treasury 

believes that the procedures that this 

rule adds to the insurers’ claims process 

are necessary in order to administer and 

implement the Program effectively. 

Pursuant to its administrative authority 

under the Act and to protect the 

interests of the United States, Treasury 

is finalizing sections 50.82 and 50.83 of 

the proposed rule, but with 

modifications as described below. 

2. General Objections to the Rule 

One insurer that commented 

criticized the proposed rule (and the 

claims regulations found in Subpart F) 

generally as being a departure from the 

more traditional ‘‘follow the fortunes’’

(sometimes also referred to as ‘‘follow 

the settlements’’) approach employed by 

reinsurers. The ad hoc industry working 

group raised this point as well. That 

group stated that through the proposed 

rule, Treasury would be substituting its 

judgment for that of the insurer in 

settling claims while introducing 

tremendous complexities into the 

claims process and that the regulations 

governing claims procedures (Subpart F) 

provide sufficient safeguards and 

already expose insurers to the risk of 

having an already settled cause of action 

denied. 

To fulfill the purposes of the Act and 

its role as administrator, Treasury 

expects to be notified of covered 

settlements, to review them, and to 

make its objections (if any) known to the 

insurer. Treasury has tried to tailor its 

review and requests for information, as 

much as possible and with some 

exceptions, to the type of information 

typically gathered by the insurer as part 

of the claims adjustment process. 

The ad hoc industry working group 

also stated that the rule does not reflect 

reinsurance best practices and is not 

modeled after the customary business 

practices of insurers and reinsurers. As 

we have often stated, Treasury seeks to 

administer the Program in a manner 

consistent with procedures insurers use 

in the normal course of business to the 

extent possible within statutory 

constraints. Given the unique 

characteristics of this Federal Program, 

the settlement approval aspects of this 

rule are appropriate. Though the 

Program is often thought of as being 

similar to an excess-of-loss quota share 

reinsurer, the Program is truly a Federal 

financial backstop funded by public 

monies which, unlike a traditional 

reinsurer, does not share in premiums 

and can recoup its payments as 

prescribed in section 103(e)(7) of the 

Act. Reinsurers evaluate and choose the 

insurers they reinsure, consider the 

claims handling and loss experience of 

44936 Federal Register / Vol. 69, No. 144 / Wednesday, July 28, 2004 / Rules and Regulations 

their reinsureds, and reassess those 

relationships during renewal audits. 

Treasury does not have a similar private 

market relationship with insurers. 

Moreover, Treasury does not believe 

that it has strayed inappropriately from 

reinsurance practices. Treasury is aware 

that some reinsurance treaties contain 

claims-cooperation clauses that allow 

reinsurers to receive early notification 

and the discretionary right to associate 

in the control, defense, and litigation of 

claims. 

The ad hoc industry working group 

comment also stated that the proposed 

rule would expose insurers to bad faith 

claims and/or violations of State unfair 

claims practices standards which 

generally require them to promptly 

settle claims. The working group 

comment contends that the rule as 

proposed could expose insurers to 

liability for extra-contractual obligations 

(i.e., punitive or exemplary damages) 

and/or damages in excess of policy 

limits if imposed by a court due to the 

insurer’s delay or failure to settle 

because of Treasury’s actions under this 

rule. The comment also pointed out 

that, by operation of sections 50.50(a) 

and 50.5(e)(4)(ii) and (iii) of the claims 

procedures regulations, Treasury does 

not share in extra-contractual or excess 

of policy limits type damages. If 

Treasury promulgates a final rule, the 

ad hoc industry working group 

suggested that Treasury should also 

share in these damages; pay one 

hundred percent of any liability of the 

insurer above the amount the insurer 

proposed settling the cause of action; or 

grant insurers qualified immunity from 

state law claims standards. 

Treasury believes the hypothetical 

scenario suggested by the ad hoc

industry working group in its comment 

may be overstated. First, the rule 

envisions a settlement approval process 

that normally will occur within 30 days. 

The information sought is that typically 

assembled by the insurer’s claim 

professionals in handling and adjusting 

claims and should not delay 

settlements. Settlements can still be 

effectuated promptly and the additional 

processes required by this rule seem 

unlikely to lead to the types of 

inordinate delays typically associated 

with bad faith damages being awarded 

or State regulatory actions being 

brought. Insurers could inform the State 

regulatory officials and court that they 

are following Federal regulation and 

nothing in this rule prevents an insurer 

from settling a cause of action without 

or despite Treasury’s pre-approval, 

doing so only precludes compensation 

under the Program. Treasury declines to 

adopt the ad hoc working group’s 

suggestions.

3. Thresholds for Pre-Approval of 

Certain Proposed Settlements 

The proposed rule required an insurer 

to seek Treasury’s advance, written 

approval where an insurer (directly or 

through its insured) intends to settle a 

Federal cause of action involving thirdparty claims (by a third-party against an 

insured and/or the insurer) for property 

damage, personal injury, or death 

arising out of or resulting from an act of 

terrorism when—

• All or part of the settlement amount 

is expected to be part of the insurer’s 

claim for federal payment under the 

Program; and 

• Any portion of the proposed 

settlement amount that is attributable to 

liability for personal injury or death is 

$1 million or more, or that is 

attributable to liability for property 

damage (including loss of use) is $5 

million or more, regardless of the 

number of third-party claims being 

settled. 

In the preamble to the proposed rule, 

Treasury specifically requested 

comments on these monetary 

thresholds. The real estate industry 

association supported the thresholds as 

proposed. Another suggested that the 

thresholds were too low and that they 

should be raised to $10 million for both 

property and casualty claims. Upon 

consideration of the views of the 

commenters and Treasury’s further 

assessment of the administrative costs 

and operational issues associated with 

the advance approval of too large a 

number of settlements, Treasury has 

decided to adjust the monetary 

thresholds set out in paragraphs (a)(1) 

and (2) of section 50.82 of the final rule. 

As now finalized, insurers will be 

required to submit for advance approval 

by Treasury settlements where the 

amount attributable to the insured’s 

liability for personal injury or death is 

$2 million or more, or that is 

attributable to liability for property 

damage is $10 million or more. 

Treasury is setting these monetary 

thresholds (below which an insurer is 

not required to seek pre-approval by 

Treasury) pursuant to section 104(a)(2) 

of the Act which authorizes the 

Secretary to prescribe regulations to 

administer and implement the Program 

effectively. In balancing between the 

need to protect the interests of the 

United States with the effective 

administration of the Program, Treasury 

believes it appropriate to raise the 

thresholds. In addition, Treasury notes 

that settlements that are reviewed and 

approved (or deemed approved), or that 

are not required to be submitted for 

prior approval, are all still subject to 

later Treasury review, like any other 

claim, at the point of claim submission 

by the insurer or at the time of any audit 

(see Subparts F and G). 

In raising the settlement thresholds in 

section 50.82(a) of the final rule, 

Treasury expressly retains the right to 

require insurers to submit for preapproval any settlement of a Federal 

cause of action that comes to its 

attention, on a case-by-case basis, even 

if the settlement amount attributable to 

liability for property damage, personal 

injury, or death is below the applicable 

threshold. Accordingly, Treasury is 

modifying section 50.82 of the final rule 

to add a new paragraph (b) which states 

that Treasury may request that an 

insurer submit for review and advance 

approval proposed settlements of 

Federal causes of action for property 

damage, personal injury, or death, 

where the settlement amounts are below 

the monetary thresholds identified in 

section 50.82(a)(1) and (2). 

Several commenters asked for 

clarification covering different, but 

related aspects concerning what is 

included in calculating the thresholds. 

In response, Treasury provides the 

following additional clarifications: 

• Any portion of the proposed 

settlement amount that is attributable to 

an insured loss or losses is aggregated 

per third-party claimant, regardless of 

the number of causes of action or 

insured losses being settled (section 

50.82(a)(1) and (2) are being revised to 

reflect the ‘‘per third-party claimant’’

qualification); 

• The thresholds include self-insured 

retentions (no change to the rule is 

necessary); 

• Defense costs are not included in 

the thresholds. They are reviewed as 

loss adjustment expenses under sections 

50.50(a) and 50.5(e)(4) of the 

regulations; and 

• The pre-approval process does 

apply to Federal causes of action settled 

before the insurer has exceeded its 

insurer deductible under the Act. See

section 102(7); 103(e)(1)(A). This is 

because under the claims procedures 

rule, insured losses are submitted on an 

aggregate basis without identification as 

to which insured losses are assigned to 

meeting the insurer deductible. See

section 50.51(a) of Subpart F. 

One commenter, representing a 

market of London-based insurers and 

reinsurers commented that it read the 

proposed settlement pre-approval 

requirements as being limited to 

settlements of filed legal actions. As 

Treasury stated in the preamble to its 

proposed rule (69 FR at 25344–45), the 

Federal Register / Vol. 69, No. 144 / Wednesday, July 28, 2004 / Rules and Regulations 44937

settlement pre-approval requirements, 

which are now being finalized, apply to 

Federal causes of action regardless of 

whether a lawsuit has actually been 

filed or an arbitration commenced with 

respect to the claim. This is because, as 

we explained in the preamble to the 

proposed rule, ‘‘a ‘cause of action’ is a 

group of operative facts giving rise to 

one or more bases for one person to sue 

and obtain a remedy in court from 

another person.’’

Commenters generally favored the 

proposed rule’s limitation on the preapproval requirements to causes of 

action brought by third-party claimants 

against insureds. As stated in the 

preamble to the proposed rule, the prior 

approval requirement extends only to 

settlements for insured losses arising 

from third-party claims against an 

insured for property damage, personal 

injury or death against a commercial 

insured. Coverage disputes involving 

contract rights are not included in the 

scope of the causes of actions requiring 

advanced settlement approval by 

Treasury. Such disputes involve causes 

of action that are based on contract law, 

not on property damage, personal 

injury, or death, and are not subject to 

prior approval by Treasury. Several 

commenters suggested that Treasury 

include this important distinction in the 

rule itself. After consideration of these 

comments, Treasury has clarified in 

section 50.82(a) of the final rule that the 

advance approval requirements apply to 

any proposed agreement to settle or 

compromise any Federal cause of action 

for property damage, personal injury, or 

death, asserted by a third-party or 

parties against an insured.

4. Factors To Be Reviewed by Treasury 

In determining whether to approve a 

proposed settlement, section 50.82(b) of 

the proposed rule (now being redesignated in the final rule as 

subparagraph (c)) identified the factors 

(in addition to those listed in section 

50.50 of Subpart F) that Treasury would 

consider. These factors included the 

nature of the insured loss, the facts and 

circumstances surrounding the loss, 

and, as applicable, other related factors, 

as well as any other information 

requested by Treasury. The real estate 

industry association stated that the 

proposed rule ‘‘provides commendable 

detail in requiring specific information 

to be communicated in submissions of 

proposed settlement for pre-approval by 

Treasury.’’

The ad hoc industry working group 

suggested that if the proposed rule is 

adopted, Treasury should limit the preapproval of proposed settlements to a 

review that only would consider 

whether punitive damages were 

included in the settlement. 

Alternatively, the working group 

comment suggested eliminating section 

50.83 and modifying section 50.82 to 

require insurers to provide Treasury 

‘‘notice’’ that the settlement is not an ex 

gratia payment (i.e., a payment not 

required under the terms of the 

insurance policy); does not include 

settlement of a claim for punitive 

damages; and is not the result of fraud, 

collusion, bad faith, or dishonesty. In 

addition, the working group comment 

suggested the insurer notify Treasury 

that the insurer has complied with 

applicable State laws governing claims 

practices; determined that liability of 

the insured is clear; and has agreed to 

settlement based on merits and terms 

and conditions of the policy, without 

regard to the submission as part of its 

claim for the Federal share of 

compensation. These factors are 

generally covered through application of 

the claims procedures rule. See section 

50.50(a). Accordingly, Treasury has 

decided to not revise the rule as 

suggested. 

The real estate industry association 

wanted the factors expanded to include 

all information considered by the 

insurer’s claims adjuster; that 

settlements also are reviewed for 

‘‘excessiveness’’; and that Treasury 

should receive detailed statement 

explaining how any proposed 

settlement ensures that punitive 

damages are not included. Treasury 

believes the listed factors are sufficient. 

In addition, section 50.82(c)(5) allows 

Treasury to consider any other criteria 

that Treasury may consider appropriate, 

depending on the facts and 

circumstances surrounding the 

settlement. The commenter’s 

suggestions are the type of additional 

information that could be requested 

(pursuant to 50.83(d)(12) of the final 

rule) and evaluated in certain 

circumstances, but certainly not all, and 

therefore, Treasury declines to add them 

by specific reference at this time. 

Other comments were directed 

specifically to some of the factors, 

described below. 

a. Ensuring That the Settlement Is an 

Insured Loss Covered Under the 

Insurance Policy (Section 50.82(c)(1)) 

Among the factors the proposed rule 

listed as relevant to Treasury’s 

consideration of proposed settlements, 

section 50.82(c)(1) stated that Treasury 

would consider whether the proposed 

settlement compensates for a loss that is 

an insured loss under the terms and 

conditions of the underlying 

commercial property and casualty 

insurance policy. The ad hoc industry 

working group pointed out that this is 

already part of the claims review 

process under the claims procedures 

rule in Subpart F and doing a coverage 

analysis at the pre-approval stage may 

cause delay in insurers paying claims. 

In consideration of this comment, 

Treasury is revising the final rule to 

state that Treasury will review whether 

the ‘‘proposed settlement compensates 

for a third-party’s loss, the liability for 

which is an insured loss under the 

terms and conditions of the underlying 

commercial property and casualty 

insurance policy, as certified by the 

insurer pursuant to § 50.83(d)(2).’’ As a 

result, Treasury is changing section 

50.83(d)(2) of the final rule to require 

the insurer to provide to Treasury as 

part of the approval submission process 

a certification by the insurer that the 

settlement is for a third-party’s loss, the 

liability of which is an insured loss 

under the terms and conditions of the 

underlying commercial property and 

casualty insurance policy. The revisions 

clarify that the loss is that of a thirdparty, the liability for which is an 

insured loss, as suggested by an insurer 

who commented that the rule, left 

unchanged, could be misread to capture 

first-party settlements.

b. Ensuring That Settlement Amounts 

Shared With the Program Do Not 

Include Payment of Punitive Damages 

(Section 50.82(c)(2)) 

Section 107(a)(5) provides that any 

amounts awarded in actions under 

section 107(a)(1) of the Act (exclusive 

Federal cause of action for property 

damage, personal injury, or death 

arising out of or resulting from an act of 

terrorism) that are attributable to 

punitive damages shall not count as 

insured losses under the Act. Because 

section 107(a)(5) of the Act does not 

consider punitive damages ‘‘insured 

losses’’ under the Act, the Federal 

Government will not compensate an 

insurer for such damages. See also 

sections 50.5(e)(4)(i) of Subpart A 

(definition of ‘‘insured loss’’) and 

50.50(a) of Subpart I. 

Consistent with the claims procedures 

rule, this proposed rule stated that a 

factor Treasury would consider in 

approving a proposed settlement is 

whether the settlement excludes 

punitive damages, regardless of how the 

parties to the settlement agreement 

characterize the payment. An insurer 

shall be required to identify any portion 

of a proposed settlement amount that is 

attributable to punitive damages, or that 

is intended to compromise a claim or 

demand for punitive damages in a cause 

of action for which punitive damages 

44938 Federal Register / Vol. 69, No. 144 / Wednesday, July 28, 2004 / Rules and Regulations 

could be awarded. And Treasury will 

review proposed settlements to 

determine whether all or part of the 

settlement amount is intended to 

compromise an actual or threatened 

claim for punitive or exemplary 

damages, even if the settlement does not 

indicate that the payment includes 

punitive or exemplary damages. 

The real estate industry association 

stated that, ‘‘[o]ne of the best elements 

of the NPRM [Notice of Proposed 

Rulemaking] is its detailed discussion of 

steps that will be taken to ensure that 

settlements do not include indemnity 

for punitive damages claims.’’ The ad 

hoc industry working group suggested 

that the proposed rule be modified to 

require the review of amounts 

‘‘attributable to an award of punitive or 

exemplary damages,’’ presumably 

following the literal language of section 

107(a)(5) of the Act. The working group 

stated that while claims for punitive 

damages are made routinely, actual 

awards are rare. Without the 

modification, the working group 

comment suggested, Treasury’s review 

would be highly subjective, involve 

substantial legal and factual analysis, 

and create inordinate delay, yet would 

promise little value. After review of 

these comments, Treasury is finalizing 

the rule as proposed in order to ensure 

that punitive damages are not awarded 

through settlements. 

Several commenters requested that 

Treasury explain how it would 

determine what portion of a proposed 

settlement might be attributable to a 

claim for punitive damages when the 

settlement does not indicate that the 

payment includes such damages. No 

methods of review were suggested by 

these comments. The real estate 

industry association, however, 

suggested that Treasury could require 

and receive a detailed statement from 

the insurer (under section 50.83) 

explaining how any proposed 

settlement ensures that punitive 

damages are not included. Treasury 

considered the comments and decided 

that a requirement for the insurer to 

identify any portion of a proposed 

settlement amount that is attributable to 

punitive damages (or that is intended to 

compromise a claim or demand for 

punitive damages) is sufficient. 

c. Ensuring That Settlement Amounts 

Shared With the Program Have 

Accounted For Compensation Received 

by Third-Parties From Other Federal 

Programs (Section 50.82(c)(3)) 

Section 50.82(b)(3) of the proposed 

rule (now re-designated as paragraph 

(c)(3) in the final rule) stated that a 

factor Treasury would consider in 

approving a proposed settlement is 

whether the settlement amount offset 

amounts received from the United 

States pursuant to any other Federal 

program. Section 103(e)(1)(B) of the Act 

states, ‘‘The Federal share of 

compensation for insured losses under 

the Program shall be reduced by the 

amount of compensation provided by 

the Federal Government to any person 

under any other Federal program for 

those insured losses. See also section 

50.51(b) of Subpart I. The ad hoc

industry working group objected to 

Treasury’s consideration of this as part 

of the settlement approval process 

because, as explained by the working 

group, an insurer generally does not 

have the ability under the terms and 

conditions of a property and casualty 

insurance policy to reduce the value of 

a claim by such collateral source 

amounts. Treasury is adopting this 

requirement in the final rule because it 

is required under the Act to adjust the 

Federal share of compensation by these 

amounts, Treasury is in effect asking, as 

a practical versus contractual matter, 

whether the insurer has already taken 

collateral source payments into 

consideration in arriving at the 

settlement amount (i.e., would the 

settlement have been higher but for the 

compensation from the other Federal 

Program?). Section 50.82(c)(3) of the 

final rule is finalized as proposed, 

without change. 

d. Review of Impact of Professional Fees 

and Expenses on Settlement Amount 

(50.82(c)(4)) 

Another factor Treasury proposed to 

take into account in reviewing proposed 

settlements was the amount of 

attorneys’ fees and other legal expenses 

paid out of the settlement proceeds. The 

proposed rule was based on Treasury’s 

concern about inflated, unsupported 

insured losses. In order to address this 

concern, Treasury proposed to evaluate 

whether attorneys’ fees and expenses in 

connection with the settlement were 

unreasonable or inappropriate, in whole 

or in part, and whether they caused the 

insured losses under the underlying 

commercial property and casualty 

insurance policy to be overstated. 

Another commenter asked if review of 

attorneys’ fees included review of 

defense attorneys’ fees and expenses? 

Such costs would not be reviewed at the 

pre-approval stage but would be 

reviewed as part of the insurer’s claim 

for loss adjustment expenses. See 

sections 50.50(a) and 50.5(e)(3). 

In the preamble to our proposed rule, 

we described how Treasury would 

examine the appropriateness of 

attorneys’ fees and expenses, generally 

by considering such factors as those 

weighed by Federal courts regarding the 

reasonableness of attorneys’ fees and 

expenses. The real estate industry 

association praised this approach.

Many of the comments addressed this 

section of the proposed rule. The ad hoc 

industry working group contended that 

the review of attorneys’ fees contained 

in the proposed rule was unnecessary 

because bar association ethics rules 

(prohibiting unreasonable fees) and 

procedural review by courts 

(presumably over settlements of filed 

legal actions) are a sufficient check on 

legal fees that may inflate the settlement 

amounts paid by insurers. 

In light of some of the comments and 

upon further consideration, Treasury 

has decided to revise section 50.82(c)(4) 

of the final rule to more clearly focus on 

the issue of whether insured losses have 

been inflated. Under the final rule, 

Treasury will consider whether the 

settlement amount has been inflated by 

such things as unjustified professional 

fees and expenses of attorneys, experts, 

and other professionals. The intent is to 

focus on whether such fees or other 

expenses have caused the settlement 

amount to exceed the value of the 

insured loss as compared to similar 

losses. In order to apply this revision to 

the pre-approval submission and in 

response to a request for clarification by 

a commenter, Treasury is also making a 

related revision to section 50.83(d)(7) to 

clarify that insurers are to submit to 

Treasury the net amount to be received 

by the third-party after the payment of 

professional fees and expenses. Section 

50.83(d)(7) is revised to now require 

that insurers inform Treasury of ‘‘[t]he 

amount to be paid that will compensate 

for any items such as fees and expenses 

of attorneys, experts, and other 

professionals for their services and 

expenses related to the insured loss 

and/or settlement and the net amount to 

be received by the third-party after such 

payment.’’

Some commenters explained that 

insurers might not always be able to 

obtain this information. Treasury 

understands the possible difficulty in 

obtaining information but believes the 

insurer is in the best position to obtain 

this information and it is hoped that a 

third-party would provide such 

information to the insurer knowing that 

it is a requirement upon which 

Treasury’s approval, and in turn the 

insurer’s eventual agreement to finalize 

the settlement, may depend. Insurers 

should recognize that the factors listed 

in section 50.82(c) will be viewed as a 

whole, with different emphasis on 

different factors depending on the 

particulars of the cause of action. If an 

Federal Register / Vol. 69, No. 144 / Wednesday, July 28, 2004 / Rules and Regulations 44939

insurer cannot obtain the information 

required by section 50.82(c)(4), it should 

simply indicate that fact to Treasury, as 

well as what attempts it made to 

discover the information. An insurer 

could also provide its best estimate 

based on its prior business experience of 

what professionals charge under the 

circumstances of the particular claim. 

Having provided such guidance, 

Treasury has decided to not change the 

rule. 

5. Settlement Without Treasury’s 

Approval 

Under section 50.82(d) of the rule, if 

an insurer settles a cause of action after 

Treasury has rejected the proposed 

settlement, or if an insurer settles a 

cause of action without seeking 

Treasury’s approval in advance, as 

required by section 50.82(a), the insurer 

will not be entitled to the Federal share 

of the amount paid as part of its claim 

for federal payment unless the insurer 

can demonstrate, to the satisfaction of 

the Treasury, extenuating 

circumstances. Also, the insurer shall 

not be entitled to include the paid 

settlement amount as an insured loss in 

its aggregate insured losses (whether or 

not those aggregate insured losses 

exceed the insurer deductible) for 

purposes of calculating the Federal 

share of compensation due to the 

insurer under the Program. 

In its proposed rule, Treasury 

requested comments on how frequently 

claims are received by commercial 

property and casualty insurers under 

commercial liability policies where the 

insured settles directly with a claimant 

and then notifies the insurer after the 

settlement has been consummated. No 

one commented on the frequency of 

such situations or the size of claims 

usually involved. The ad hoc industry 

working group cited situations under 

the law of three states that may allow an 

insured to settle causes of action 

without the knowledge or consent of 

their insurer. The working group 

comment suggested one possible 

approach to address these situations is 

to specifically state in the rule that 

settlements without insurer consent are 

‘‘extenuating circumstances’’ that will 

not preclude Federal compensation of 

the insurer’s payment of the settlement 

or indemnification of the insured. 

Although there may be situations 

where this does occur, perhaps under 

relevant State law, Treasury prefers to 

evaluate each situation when it occurs, 

based on the particular circumstances as 

presented by the insurer. Accordingly, 

Treasury is not changing the rule and 

adopts section 50.82(d), as proposed, as 

final. 

F. Procedures for Requesting Approval 

of Settlements (Section 50.83) 

Section 50.83 of the proposed rule set 

out a procedure for an insurer to submit 

proposed settlements for advance 

approval by Treasury. Generally, within 

30 days after Treasury’s receipt of a 

complete notice of the proposed 

settlement and an insurer’s request that 

the proposed settlement be approved, 

Treasury may issue a written response 

and either approve or disapprove the 

proposed settlement, in whole or in 

part. If Treasury does not issue a written 

response within 30 days after its receipt 

of a complete notice (or within the time 

as extended in writing by Treasury), the 

request for advance approval of the 

settlement will be deemed approved 

under section 50.83(c). (The settlement 

will still be subject to review under the 

claims procedures rule.) 

The majority of the comments either 

supported or did not object to the 

within 30-day pre-approval review 

process. The ad hoc industry working 

group suggested that 30 days is too long. 

Treasury emphasizes that the rule 

anticipates a decision by Treasury 

within 30 days, and through the 

‘‘deemer’’ provision, no later than 30 

days. While it is true, as a comment 

noted, that the ‘‘deemer’’ provision 

allows Treasury to extend the 30-day 

period, Treasury expects such instances 

to not be common. Treasury is aware of 

its responsibility to manage the Program 

effectively and efficiently and will 

employ its best efforts to administer the 

pre-approval process in an expedient 

manner. For reasons stated previously 

in the proposed rule preamble, Treasury 

is not changing the 30-day time period 

in the rule. See 69 FR 25341, 25346.

Several commenters pointed out that 

the process does not envision any type 

of expedited review of settlements 

where the agreements in principal may 

be reached shortly before a Federal 

cause of action is about to be tried. The 

commenters suggest Treasury consider 

approaches to accommodate such 

situations. Treasury has made no change 

to the proposed rule. Treasury expects 

that attorneys representing the insureds 

will advise the Federal district court 

about Treasury’s approval role. 

Section 50.83 of the proposed rule 

also outlined minimum information 

Treasury thought might be relevant and 

useful in considering whether to 

approve a proposed settlement. One 

comment was supportive of the 

proposed rule. Others, primarily 

representing or themselves insurers, 

believed the rule requested too much 

information which would be 

burdensome on insurers and cause 

substantial delay. Comments were 

received on the various items, some of 

which have resulted in some 

modifications, which are now 

discussed. 

In careful consideration of the 

insurer’s comments, Treasury has 

changed the section 50.83(d) of the final 

rule in the following ways in order to 

ensure that Treasury is preliminarily 

only seeking the minimum information 

required by Treasury: 

• As explained earlier in the 

discussion of section 50.82(c)(1) 

(ensuring that the settlement is of an 

insured loss under the terms and 

conditions of the insurance policy), the 

final rule now adds a revised 

requirement at paragraph (d)(2) to 50.83, 

requiring a certification by the insurer 

that the settlement is for a third-party’s 

loss, the liability for which is an insured 

loss under the terms and conditions of 

the underlying commercial property and 

casualty insurance policy. This revision 

is being made because Treasury needs 

less information since it will no longer 

be performing a complete review of the 

insurer’s coverage analysis as part of the 

pre-approval process, as originally 

proposed; 

• Paragraph (d)(4) of section 50.83 of 

the final rule now requires a statement 

from the insurer or its attorney in 

support of the settlement rather than a 

more onerous one recommending the 

settlement and requiring the basis for 

the recommendation; 

• As explained earlier in the 

discussion of section 50.82(c)(4) and the 

proposed review of attorneys’ fees and 

expenses, paragraph (d)(7) of section 

50.83 of the final rule is revised to call 

for the amount to be paid out of the 

settlement proceeds that in turn will 

compensate professionals for their 

services and expenses related to the 

insured loss and/or settlement and the 

net amount to be received by the thirdparty claimant. In addition to 

conforming to the changes made to 

50.82(c)(4), this paragraph now 

combines (and clarifies) section 

50.82(d)(6) and (7) of the proposed rule; 

• Relevant agreements called for in 

the proposed rule are now, under 

section 50.83(d)(10) of the final rule, 

only required to be submitted if 

requested by Treasury; and 

• Paragraph (d)(12) of section 50.83 is 

clarified to assure insurers that Treasury 

will request and require only such other 

information that is related to the insured 

loss and that it deems necessary to 

evaluate the proposed settlement. 

Treasury has decided not to adopt 

several of the other suggestions by the 

commenters, such as: Treasury receive 

the same information submitted to a 

44940 Federal Register / Vol. 69, No. 144 / Wednesday, July 28, 2004 / Rules and Regulations 

claims officer who approves the 

settlement on behalf of the insurer; a 

statement of risks and disadvantages of 

settlement with an assessment of the 

strengths and weaknesses of the claim; 

and a disclosure whether coverage is 

disputed and other coverage issues. It 

was also suggested that the submissions 

for approval be verified under oath. For 

the reasons stated earlier, Treasury 

declines to adopt the suggestions except 

that, for the reasons stated earlier, it will 

require certification of the insurer’s 

coverage determination under section 

50.83(a)(2) of the final rule. 

Finally, the ad hoc industry working 

group commented that the proposed 

rule did not include provisions to 

protect confidential or privileged 

information submitted to Treasury 

under section 50.83. Any issues relating 

to the protection or disclosure of 

confidential or privileged information 

are adequately addressed through the 

procedures and exceptions (e.g., 

exception (b)(4) and (5)) applicable 

under the Freedom of Information Act, 

5 U.S.C. 552, and Treasury’s FOIA 

regulations at 31 CFR part 1, subpart A. 

Insurers wishing to protect such 

information should follow those 

procedures, including labeling the 

information pursuant to those 

regulations. 

G. Right of Subrogation (Section 50.84) 

Section 107(c) provides that the 

United States shall have the right of 

subrogation with respect to any 

payment or claim paid by the United 

States under the Act. In section 50.85 of 

the proposed rule, Treasury proposed a 

requirement that insurers take steps to 

preserve the Federal Government’s 

rights of subrogation under section 

107(c).

The ad hoc industry working group 

claimed that the requirement to preserve 

the subrogation rights of the United 

States conflicts with claims procedures 

rule that allows insurers to use business 

judgment in deciding whether to pursue 

subrogation opportunities. See Section 

50.51(a). Treasury believes there is no 

conflict. Under the claims procedures 

rule, when an insurer pursues 

subrogation opportunities, the outcome 

inures to the benefit of the United States 

through an adjustment to the Federal 

share of compensation. As we stated at 

60 FR 39296, 39300 (June 29, 2004), if 

an insurer decides to forego subrogation, 

the United States itself can pursue those 

opportunities. This does not conflict 

with section 50.84 of the final rule, 

which is designed to ensure that 

insurers do not waive subrogation rights 

and to prevent the very situation the 

working group identified when it stated, 

‘‘waiver of subrogation rights often takes 

place in settlement.’’ Treasury is not 

changing the rule on the basis of this 

comment. Given the language in section 

107, insurers are prohibited from 

negotiating away the Federal 

Government’s subrogation rights. 

The group of London-based insurers 

and reinsurers pointed out that the 

proposed rule required insurers to ‘‘take 

all steps necessary to preserve the 

subrogation rights of the United States.’’

The commenter explains that it is not 

clear what affirmative steps insurers 

must take to preserve these rights. The 

commenter suggested revising the rule 

to instead require that insurers avoid 

taking action that would prejudice the 

Federal Government’s right of 

subrogation. Treasury is accepting this 

commenter’s suggestion and is changing 

the language of section 50.84 

accordingly. 

H. Management of Pre-Certification 

Litigation and Related Issues 

Several commenters pointed out that 

the proposed rule does not address 

causes of action settled and/or paid after 

the occurrence of an event not yet, but 

later certified by the Secretary pursuant 

to section 102 of the Act as an ‘‘act of 

terrorism.’’ The comments raised issues 

that may warrant further study and 

consideration and Treasury has decided 

not to address this issue at this time. 

I. Time Between Occurrence and 

Certification of an Event as an Act of 

Terrorism 

The ad hoc industry working group 

raised the issue of the time it may take 

for the Secretary to certify an event as 

an act of terrorism pursuant to section 

102 of the Act. As previously explained 

in the preamble to other regulations, 

Treasury believes it unwise and 

inappropriate to establish a set time 

frame within which the Secretary would 

be required to make a certification that 

an ‘‘act of terrorism’’ had occurred. See 

68 FR 41250, 41252 (July 11, 2003). The 

ad hoc industry working group 

comment requested that Treasury 

promulgate a rule allowing for: (1) A 

‘‘conditional’’ determination if the facts 

strongly lead to a conclusion of foreign 

or domestic involvement; or (2) a 

regulatory provision acknowledging the 

possibility of a delayed certification and 

urging state regulatory consideration of 

that possibility; or (3) qualified 

immunity where there is a delay in the 

certification process. Treasury declines 

to adopt these suggestions. 

III. Procedural Requirements 

Executive Order 12866, ‘‘Regulatory 

Planning and Review’’

This rule is a significant regulatory 

action for purposes of Executive Order 

12866, ‘‘Regulatory Planning and 

Review,’’ and has been reviewed by the 

Office of Management and Budget 

(OMB). 

Regulatory Flexibility Act 

Pursuant to the Regulatory Flexibility 

Act, 5 U.S.C. 601 et seq., it is hereby 

certified that this rule will not have a 

significant economic impact on a 

substantial number of small entities. 

Accordingly, a regulatory flexibility 

analysis is not required. The rule 

establishes requirements for advance 

approval of settlements when claims are 

to be submitted for insured losses. There 

is no impact on small insurers unless an 

act of terrorism occurs and federal 

compensation is sought by small 

insurers entitled to reimbursement for 

their insured losses. If an act of 

terrorism occurs and Federal payment is 

sought through a claim, the rule’s 

impact on small insurers is likely to be 

minimal because most of the 

information that would have to be 

submitted in connection with Treasury 

approval of settlements largely 

duplicates information already 

contained in an insurer claim file or an 

attorney case file. Moreover, the $2 

million and $10 million thresholds for 

the submission of settlements to 

Treasury for approval is likely further to 

minimize burdens on small insurers. 

Paperwork Reduction Act 

The collection of information 

contained in this rule has been 

approved by the OMB in accordance 

with the requirements of the Paperwork 

Reduction Act, 44 U.S.C. 3507(d) and 

assigned OMB Control Number 1505–

0196. An agency may not conduct or 

sponsor, and a person is not required to 

respond to, a collection of information 

unless it displays a valid control 

number assigned by OMB. 

The collection of information is the 

notice of proposed settlement in section 

50.83 that insurers must submit to 

implement the settlement approval 

process prescribed by section 50.82. The 

information will be used by Treasury to 

evaluate the reasonableness of proposed 

settlements in order to approve them in 

advance. The submission of specified 

information in connection with a 

proposed settlement is mandatory for 

any insurer that seeks payment of a 

Federal share of compensation.

The burden associated with this 

collection of information is estimated to 

Federal Register / Vol. 69, No. 144 / Wednesday, July 28, 2004 / Rules and Regulations 44941

be 4 hours with respect to each claim. 

Comments on the accuracy of this 

estimate and suggestions on how to 

reduce this burden should be sent to the 

Terrorism Risk Insurance Program, 

Room 2100, 1425 New York Avenue, 

NW., Washington, DC 20220 and to the 

Desk Officer for the Department of the 

Treasury, Office of Information and 

Regulatory Affairs, Office of 

Management and Budget, Washington, 

DC 20503.

List of Subjects in 31 CFR Part 50 

Terrorism risk insurance.

Authority and Issuance

■ For the reasons set forth above, 31 CFR 

part 50 is amended as follows:

PART 50—TERRORISM RISK 

INSURANCE PROGRAM

■ 1. The authority citation for part 50 

continues to read as follows:

Authority: 5 U.S.C. 301; 31 U.S.C. 321; 

Title I, Pub. L. 107–297, 116 Stat. 2322 (15 

U.S.C. 6701 note).

■ 2. Subpart I of part 50 is added to read 

as follows:

Sec. 

50.80 Federal cause of action and remedy. 

50.81 State causes of action preempted. 

50.82 Advance approval of settlements. 

50.83 Procedure for requesting approval of 

proposed settlements. 

50.84 Subrogation.

Subpart I—Federal Cause of Action; 

Approval of Settlements

§ 50.80 Federal cause of action and 

remedy. 

(a) General. If the Secretary certifies 

an act as an act of terrorism pursuant to 

section 102 of the Act, there shall exist 

a Federal cause of action for property 

damage, personal injury, or death 

arising out of or resulting from such act 

of terrorism, pursuant to section 107 of 

the Act, which shall be the exclusive 

cause of action and remedy for claims 

for property damage, personal injury, or 

death arising out of or relating to such 

act of terrorism, except as provided in 

paragraph (c) of this section. 

(b) Effective period. The exclusive 

Federal cause of action and remedy 

described in paragraph (a) of this 

section shall exist only for causes of 

action for property damage, personal 

injury, or death that arise out of or result 

from acts of terrorism that occur or 

occurred during the effective period of 

the Program. 

(c) Rights not affected. Nothing in 

section 107 of the Act or this Subpart 

shall in any way: 

(1) Limit the liability of any 

government, organization, or person 

who knowingly participates in, 

conspires to commit, aids and abets, or 

commits any act of terrorism; 

(2) Affect any party’s contractual right 

to arbitrate a dispute; or 

(3) Affect any provision of the Air 

Transportation Safety and System 

Stabilization Act (Pub. L. 107–42; 49 

U.S.C. 40101 note).

§ 50.81 State causes of action preempted. 

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 that are otherwise 

available under State law are 

preempted, except that, pursuant to 

section 107(b) of the Act, nothing in this 

section shall limit in any way the 

liability of any government, 

organization, or person who knowingly 

participates in, conspires to commit, 

aids and abets, or commits the act of 

terrorism certified by the Secretary.

§ 50.82 Advance approval of settlements. 

(a) Mandatory submission of 

settlements for advance approval. An 

insurer shall submit to Treasury for 

advance approval any proposed 

agreement to settle or compromise any 

Federal cause of action for property 

damage, personal injury, or death, 

asserted by a third-party or parties 

against an insured, involving an insured 

loss, all or part of the payment of which 

the insurer intends to submit as part of 

its claim for Federal payment under the 

Program, when: 

(1) Any portion of the proposed 

settlement amount that is attributable to 

an insured loss or losses involving 

personal injury or death in the aggregate 

is $2 million or more per third-party 

claimant, regardless of the number of 

causes of action or insured losses being 

settled; or 

(2) Any portion of the proposed 

settlement amount that is attributable to 

an insured loss or losses involving 

property damage (including loss of use) 

in the aggregate is $10 million or more 

per third-party claimant, regardless of 

the number of causes of action or 

insured losses being settled. 

(b) Discretionary review of other 

settlements. Notwithstanding paragraph 

(a), Treasury may require that an insurer 

submit for review and advance approval 

any proposed agreement to settle or 

compromise any Federal cause of action 

for property damage, personal injury, or 

death, asserted by a third-party or 

parties against an insured, involving an 

insured loss, all or part of the payment 

of which the insurer intends to submit 

as part of its claim for Federal payment 

under the Program where the settlement 

amounts are below the applicable 

monetary thresholds identified in 

paragraphs (a)(1) and (2) of this section. 

(c) Factors. In determining whether to 

approve a proposed settlement, 

Treasury will consider the nature of the 

loss, the facts and circumstances 

surrounding the loss, and other factors 

such as whether: 

(1) The proposed settlement 

compensates for a third-party’s loss, the 

liability for which is an insured loss 

under the terms and conditions of the 

underlying commercial property and 

casualty insurance policy, as certified 

by the insurer pursuant to § 50.83(d)(2);

(2) Any amount of the proposed 

settlement is attributable to punitive or 

exemplary damages intended to punish 

or deter (whether or not specifically so 

described as such damages); 

(3) The settlement amount offsets 

amounts received from the United 

States pursuant to any other Federal 

program; 

(4) The settlement amount does not 

include any items such as fees and 

expenses of attorneys, experts, and other 

professionals that have caused the 

insured losses under the underlying 

commercial property and casualty 

insurance policy to be overstated; and 

(5) Any other criteria that Treasury 

may consider appropriate, depending on 

the facts and circumstances surrounding 

the settlement, including the 

information contained in § 50.83. 

(d) Settlement without seeking 

advance approval or despite 

disapproval. If an insurer settles a cause 

of action or agrees to the settlement of 

a cause of action without submitting the 

proposed settlement for Treasury’s 

advance approval in accordance with 

paragraph (a) or (b) of this section, and 

in accordance with § 50.83 or despite 

Treasury’s disapproval of the proposed 

settlement, the insurer will not be 

entitled to include the paid settlement 

amount (or portion of the settlement 

amount, to the extent partially 

disapproved) in its aggregate insured 

losses for purposes of calculating the 

Federal share of compensation of its 

insured losses, unless the insurer can 

demonstrate, to the satisfaction of 

Treasury, extenuating circumstances.

§ 50.83 Procedure for requesting approval 

of proposed settlements. 

(a) Submission of notice. Insurers 

must request advance approval of a 

proposed settlement by submitting a 

notice of the proposed settlement and 

other required information in writing to 

the Terrorism Risk Insurance Program 

Office or its designated representative. 

The address where notices are to be 

submitted will be available at http://

www.treasury.gov/trip following any 

44942 Federal Register / Vol. 69, No. 144 / Wednesday, July 28, 2004 / Rules and Regulations 

certification of an act of terrorism 

pursuant to section 102(1) of the Act. 

(b) Complete notice. Treasury will 

review requests for advance approval 

and determine whether additional 

information is needed to complete the 

notice. 

(c) Treasury response or deemed 

approval. Within 30 days after 

Treasury’s receipt of a complete notice, 

or as extended in writing by Treasury, 

Treasury may issue a written response 

and indicate its partial or full approval 

or rejection of the proposed settlement. 

If Treasury does not issue a response 

within 30 days after Treasury’s receipt 

of a complete notice, unless extended in 

writing by Treasury, the request for 

advance approval is deemed approved 

by Treasury. Any settlement is still 

subject to review under the claim 

procedures pursuant to § 50.50. 

(d) Notice format. A notice of a 

proposed settlement should be entitled, 

‘‘Notice of Proposed Settlement—

Request for Approval,’’ and should 

provide the full name and address of the 

submitting insurer and the name, title, 

address, and telephone number of the 

designated contact person. An insurer 

must provide all relevant information, 

including the following, as applicable: 

(1) A brief description of the insured’s 

underlying claim, the insured’s loss, the 

amount of the claim, the operative 

policy terms, defenses to coverage, and 

all damages sustained; 

(2) A certification by the insurer that 

the settlement is for a third-party’s loss 

the liability for which is an insured loss 

under the terms and conditions of the 

underlying commercial property and 

casualty insurance policy; 

(3) An itemized statement of all 

damages by category (i.e., actual, 

economic and non-economic loss, 

punitive damages, etc.); 

(4) A statement from the insurer or its 

attorney in support of the settlement.; 

(5) The total dollar amount of the 

proposed settlement; 

(6) Indication as to whether the 

settlement was negotiated by counsel; 

(7) The amount to be paid that will 

compensate for any items such as fees 

and expenses of attorneys, experts, and 

other professionals for their services and 

expenses related to the insured loss 

and/or settlement and the net amount to 

be received by the third-party after such 

payment; 

(8) The amount received from the 

United States pursuant to any other 

Federal program for compensation of 

insured losses related to an act of 

terrorism; 

(9) The proposed terms of the written 

settlement agreement, including release 

language and subrogation terms; 

(10) If requested by Treasury, other 

relevant agreements, including: 

(i) Admissions of liability or 

insurance coverage; 

(ii) Determinations of the number of 

occurrences under a commercial 

property and casualty insurance policy;

(iii) The allocation of paid amounts or 

amounts to be paid to certain policies, 

or to specific policy, coverage and/or 

aggregate limits; and 

(iv) Any other agreement that may 

affect the payment or amount of the 

Federal share of compensation to be 

paid to the insurer; 

(11) A statement indicating whether 

the proposed settlement has been 

approved by the Federal court or is 

subject to such approval and whether 

such approval is expected or likely; and 

(12) Such other information that is 

related to the insured loss as may be 

requested by Treasury that it deems 

necessary to evaluate the proposed 

settlement.

§ 50.84 Subrogation. 

An insurer shall not waive its rights 

of subrogation under its property and 

casualty insurance policy and preserve 

the subrogation right of the United 

States as provided by section 107(c) of 

the Act by not taking any action that 

would prejudice the United States’ right 

of subrogation.

Dated: July 23, 2004. 

Wayne A. Abernathy, 

Assistant Secretary of the Treasury.

[FR Doc. 04–17235 Filed 7–26–04; 9:22 am] 

BILLING CODE 4810–42–P

DEPARTMENT OF DEFENSE

Office of the Secretary 

32 CFR Part 199 

RIN 0720–AA78 

TRICARE; Individual Case 

Management Program; Program for 

Persons With Disabilities; Extended 

Benefits for Disabled Family Members 

of Active Duty Service Members; 

Custodial Care

AGENCY: Office of the Secretary, DoD.

ACTION: Final rule.

SUMMARY: The Department is publishing 

this final rule to implement 

requirements enacted by Congress in 

section 701(g) of the National Defense 

Authorization Act for Fiscal Year 2002 

(NDAA–02), which terminates the 

Individual Case Management Program. 

The Department withdraws its proposed 

rule published at 66 FR 39699 on 

August 1, 2001, regarding the Individual 

Case Management Program. This rule 

also implements section 701(b) of the 

NDAA–02 which provides additional 

benefits for certain eligible active duty 

dependents by amending the TRICARE 

regulations governing the Program for 

Persons with Disabilities. The Program 

for Persons with Disabilities is now 

called the Extended Care Health Option. 

Other administrative amendments are 

included to clarify specific policies that 

relate to the Extended Care Health 

Option, custodial care, and to update 

related definitions.

DATES: Termination of the Individual 

Case Management Program (§ 199.4(i)) 

became effective December 28, 2001. 

The remainder of this rule is effective 

July 1, 2004.

ADDRESSES: TRICARE Management 

Activity, Medical Benefits and 

Reimbursement Systems, 16401 East 

Centretech Parkway, Aurora, CO 80011.

FOR FURTHER INFORMATION CONTACT:

Michael Kottyan, Medical Benefits and 

Reimbursement Systems, TRICARE 

Management Activity, telephone (303) 

676–3520. Questions regarding payment 

of specific claims should be addressed 

to the appropriate TRICARE contractor.

SUPPLEMENTARY INFORMATION: 

I. Background 

The Individual Case Management 

Program (ICMP). Under the provisions 

of section 704(3) of the NDAA–93 [Pub. 

L. 102–484], 10 U.S.C. 1079(a)(17) was 

enacted which allowed the DoD to 

establish the ICMP, also known as the 

Individual Case Management Program 

for Persons with Extraordinary 

Conditions (ICMP–PEC). This allowed a 

reasonable deviation from the restrictive 

statutory coverage of health services for 

patients who had exceptionally serious, 

long-range, costly and incapacitating 

conditions. The ICMP was officially 

implemented in March 1999 as a waiver 

program that provided coverage for care 

and services that were normally 

restricted from coverage under the Basic 

Program. Specifically, when a 

beneficiary was determined to meet the 

TRICARE definition of custodial care, 

coverage under the Basic Program was 

limited to one hour of skilled nursing 

care per day, twelve physician visits per 

year related to the custodial condition, 

durable medical equipment and 

prescription medications. The 

Department recognized that the 

exclusion of coverage when a family 

member is deemed to be a custodial care 

patient is both a financial and emotional 

burden. Consequently, the Department 

used the ICMP/ICMP–PEC authority to 

cover medically necessary care and to