Tuesday,

June 29, 2004

Part V

Department of the 

Treasury

31 CFR Part 50

Terrorism Risk Insurance Program; 

Claims Procedures; Final Rule

39296 Federal Register / Vol. 69, No. 124 / Tuesday, June 29, 2004 / Rules and Regulations 

DEPARTMENT OF THE TREASURY

31 CFR Part 50 

RIN 1505–AB07 

Terrorism Risk Insurance Program; 

Claims Procedures

AGENCY: Departmental Offices, Treasury.

ACTION: Final rule.

SUMMARY: The Department of the 

Treasury (Treasury) is issuing this final 

rule as part of its implementation of title 

I of the Terrorism Risk Insurance Act of 

2002 (Act). The Act established a 

temporary Terrorism Insurance Program 

(Program) under which the Federal 

Government will share the risk of 

insured loss from certified acts of 

terrorism with commercial property and 

casualty insurers until the Program ends 

on December 31, 2005. This rule was 

published in proposed form on 

December 1, 2003, for public comment. 

The final rule contains certain 

definitions, requirements, and 

procedures for insurers filing claims 

with Treasury for payment of the 

Federal share of compensation for 

insured losses under the Program. In 

particular, the final rule addresses 

requirements for Federal payment, 

initial notice of insured loss, loss 

certifications, the timing and process for 

payment, associated recordkeeping 

requirements, and Treasury’s audit and 

investigation authority.

DATES: This final rule is effective July 

29, 2004.

FOR FURTHER INFORMATION CONTACT:

Howard Leikin, Senior Insurance 

Advisor, 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 Program will end 

on December 31, 2005. Thereafter, the 

Act 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. 

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 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 duplicate payments for 

insured losses that have been covered 

under other Federal programs. 

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 commercial 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 

decision 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 the policyholders of the 

premium charged for insured losses 

covered by the Program and of the 

Federal share of compensation for 

insured losses under the Program. In 

addition, the Act requires that insurers 

make certain certifications to Treasury 

and process and submit claims for the 

insured loss in accordance with 

appropriate business practices and any 

reasonable procedures Treasury may 

prescribe. 

The Act also contains specific 

provisions designed to manage litigation 

arising out of or resulting from a 

certified act of terrorism. Among other 

provisions, section 107 creates, upon 

certification of an act of terrorism by the 

Secretary, an exclusive Federal cause of 

action and remedy for property damage, 

personal injury, or death arising out of 

or relating to an act of terrorism; 

preempts certain State causes of action; 

provides for consolidation of all civil 

actions in Federal court for any claim 

(including any claim for loss of 

property, personal injury, or death) 

relating to or arising out of an act of 

terrorism; and provides that amounts 

awarded in actions for property damage, 

personal injury, or death that are 

attributable to punitive damages are not 

to be counted as ‘‘insured losses’’ and 

not paid under the Program. The Act 

also provides the United States with the 

right of subrogation with respect to any 

payment or claim paid by the United 

States under the Program. 

In implementing the Program, 

Treasury is 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 all 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 

Federal Register / Vol. 69, No. 124 / Tuesday, June 29, 2004 / Rules and Regulations 39297

1Treasury’s fourth interim guidance, published at 

68 FR 15039 on March 27, 2003, provided insurers 

a procedure by which they could seek to rebut a 

presumption of control established in Treasury’s 

interim final regulations. The Interim Guidance has 

subsequently been superseded by a provision in the 

final rule for subpart A of part 50, title 31 published 

at 68 FR 41250 (July 11, 2003).

goal that insurers develop their own 

capacity, resources, and mechanisms for 

terrorism insurance coverage when the 

Program expires. 

B. Previously Issued Interim Guidance 

and Regulations 

To assist insurers, policyholders, and 

other interested parties in complying 

with immediately applicable 

requirements of the Act prior to the 

issuance of regulations, Treasury 

promptly issued interim guidance. The 

interim guidance addressed certain 

immediately applicable provisions that 

required clarification and was to be 

relied upon by insurers until 

superseded by regulations or a 

subsequent notice.

Treasury’s first notice of Interim 

Guidance was published in the Federal 

Register at 67 FR 76206 on December 

11, 2002, and addressed, among other 

matters, statutory disclosure obligations 

of insurers as conditions for Federal 

payment under the Program; the 

requirement that an insurer ‘‘make 

available’’ terrorism insurance; and how 

insurers were to calculate the ‘‘direct 

earned premium’’ received from 

commercial lines of property and 

casualty insurance as well as their 

‘‘insurer deductibles’’ for purposes of 

the Program. The second notice of 

interim guidance was published at 67 

FR 78864 on December 26, 2002, and 

provided guidance concerning which 

insurance companies were ‘‘insurers’’

for purposes of the Program, including 

their ‘‘affiliates.’’ It also addressed the 

scope of insured losses covered by the 

Program and calculation of insurer 

deductibles. Treasury’s third notice of 

interim guidance was published at 68 

FR 4544 on January 29, 2003. It clarified 

certain disclosure and certification 

requirements, and addressed issues 

concerning non-U.S. insurers, and the 

scope of the term ‘‘insured loss’’ under 

the Act.1 These interim guidance 

notices have now been superceded by a 

series of interim final and final 

regulations issued by Treasury.

On February 28, 2003 (68 FR 9804) 

Treasury published an interim final rule 

that laid the groundwork for Program 

implementation, including the scope of 

the Program and key definitions. This 

interim final rule was finalized and 

published in the Federal Register at 68 

FR 41250 (July 11, 2003) (as amended at 

68 FR 48280 (Aug. 13, 2003)) and 

created subpart A of part 50 in title 31 

of the Code of Federal Regulations. 

Treasury’s second interim final 

regulation created subparts B and C of 

part 50 and addressed disclosures that 

insurers must make to policyholders as 

a condition for Federal payment under 

the Act, and requirements that insurers 

make available, in their commercial 

property and casualty insurance 

policies, terrorism risk coverage for 

insured losses under the Program. It was 

published in the Federal Register at 68 

FR 19301 (Apr. 18, 2003). After review 

of comments, this interim final rule was 

finalized and published at 68 FR 59720 

(Oct. 17, 2003). 

Treasury has also issued a regulation 

applying the Act to State residual 

market insurance entities and State 

workers’ compensation funds. In this 

regard, Treasury created a subpart D to 

part 50 of title 31, which was first 

proposed and published in the Federal 

Register at 68 FR 19309 (Apr. 18, 2003). 

After review of comments Treasury 

finalized and published this rule at 68 

FR 59715 (Oct. 17, 2003). 

C. The Proposed Rule (Claims 

Procedures) 

The proposed rule on which this final 

rule is based was published in the 

Federal Register at 68 FR 67100 on 

December 1, 2003. In subpart F to part 

50 of title 31, Treasury’s proposed rule 

contained requirements and procedures 

for insurers that file claims for payment 

of the Federal share of compensation for 

insured losses resulting from a certified 

act of terrorism under the Act. In 

particular, the proposed rule revised the 

regulatory definition of ‘‘insured loss,’’

provided for an initial notice of insured 

loss and loss certifications, set forth 

general requirements for Federal 

payment under the Program and 

addressed the timing and process of 

such payment. Subpart G addressed 

information to be retained related to the 

handling and settlement of claims to 

enable Treasury to perform financial 

and claim audits. 

II. Summary of Comments and Final 

Rule 

In the event that it had been necessary 

to activate the Program’s claims 

procedures prior to the issuance of this 

final rule, Treasury was prepared to do 

so on an expedited basis. Such action, 

however, was not necessary and 

Treasury is now issuing this final rule 

after careful consideration of all 

comments received on the proposed 

rule and after consultation with the 

NAIC. While this final rule largely 

reflects the proposed rule, Treasury has 

made several revisions and a number of 

clarifications based on the comments 

received. 

Treasury received comments on the 

proposed rule from four national 

insurance industry trade associations, 

collectively, as well as individually, a 

national risk retention trade association, 

a national lender trade association, a 

national surety trade association, a 

national agent and broker association, a 

captive insurers association, three 

insurance companies, a group of 

London-based insurers, a consulting 

actuarial firm, a vendor of insurance 

services, and a legal firm representing 

captive insurers. As described in detail 

below, commenters generally agreed 

with the proposed rule. However, 

Treasury received many requests to add 

a process for advance payments and for 

clarification of specific payment 

requirements and processes. In 

response, Treasury has revised the 

proposed rule to allow advance 

payments under certain conditions. In 

addition, Treasury has clarified 

provisions in the proposed rule that 

pertain to loss certifications 

requirements, payments to affiliated 

groups, prohibitions on duplicative 

compensation from other Federal 

programs, and the adjustment and 

suspension or denial of payments. 

Several commenters also requested that 

Treasury add specific references in the 

claims rule for State residual market 

insurance entities and Treasury has 

done so in the final rule. The comments 

received and Treasury’s revisions to the 

proposed rule are summarized below.

A. Definition of Insured Loss (Section 

50.5) 

The final rule amends the previously 

issued definition of ‘‘insured loss’’ at 

§ 50.5(e) to clarify that certain loss 

adjustment expenses allocable to a 

specific underlying loss are part of an 

insurer’s insured losses and will be 

included in the Federal share of 

compensation under the Program. This 

clarification follows customary practices 

of the insurance industry with regard to 

reinsured losses. The definition has also 

been amended by the final rule to clarify 

that an insurer’s payments in excess of 

policy limits or payments due to an 

insurer’s extra-contractual obligations 

will not be considered as an insurer’s 

insured loss. In addition, because 

section 107(a)(5) of the Act explicitly 

states that punitive damages are not to 

be considered as insured losses, the 

definition has been further amended to 

exclude compensation to an insurer for 

any payments attributable to punitive 

damages. 

39298 Federal Register / Vol. 69, No. 124 / Tuesday, June 29, 2004 / Rules and Regulations 

1. Allocated Loss Adjustment Expense 

In § 50.5(e)(3) of the proposed rule, 

Treasury proposed to revise the 

definition of the term ‘‘insured loss’’ to 

include certain loss adjustment 

expenses incurred by an insurer in 

connection with insured losses, 

specifically those expenses ‘‘that are 

allocated and identified by claim file in 

insurer records, including expenses 

incurred in the investigation, 

adjustment and defense of claims, but 

excluding staff adjuster salaries and any 

allocations of other internal insurer 

expenses.’’ In the preamble to the 

proposed rule, Treasury noted that this 

was consistent with customary 

insurance industry business practices. 

Three comments addressed the 

proposed rule’s treatment of these 

allocated loss adjustment expenses 

(commonly known in the insurance 

industry as ALAE) within the definition 

of insured loss. An insurance industry 

trade association commended Treasury 

noting that, ‘‘this is consistent with 

industry practices and certainly 

appropriate.’’ However, an individual 

insurance company commented that 

this description of ALAE would not 

provide equal indemnification to 

insurers employing staff adjusters 

versus those using outside, or 

independent, adjustors. Another insurer 

expressed concern that certain expenses 

would be excluded under § 50.5(e)(3) of 

the proposed rule. Expenses cited were, 

‘‘traveling to investigate the site of a 

loss, attend an examination, or perform 

some other function related to a specific 

claim’’ if incurred by insurer staff 

adjusters. 

Treasury has considered the 

comments presented and believes that 

the proposed rule generally reflected its 

intention to follow the Act’s objectives 

of a system of shared public and private 

compensation for insured losses, 

including the unpredictable adjustment 

expenses directly associated with such 

losses. In particular, Treasury believes 

that the treatment of staff salaries in the 

proposed rule remains consistent with 

the Congressional findings and purposes 

of the Act and treats insurers 

participating in the Program 

comparably. Expenses such as staff 

salaries and other internal insurer 

expenses that are known and incurred 

regardless of the occurrence of any 

certified act of terrorism are not suitable 

to be shared with the general taxpayers 

and thus are not included in the 

definition of insured loss. 

The specific approach taken toward 

staff adjuster and other expenses in 

§ 50.5(e)(3) of the proposed rule is 

consistent with accepted practices in 

the reinsurance industry and with the 

broader objectives for the Act. However, 

for added clarity, Treasury has modified 

§ 50.5(e)(3) in the final rule to 

specifically exclude ‘‘staff salaries, 

overhead, and other insurer expenses 

that would have been incurred 

notwithstanding the insured loss’’ from 

the definition of insured loss. Consistent 

with this approach, reasonable, 

allocated expenses for travel to 

investigate the site of a loss, attend an 

examination, or perform some other 

function related to the investigation, 

adjustment and defense of a specific 

claim, even if incurred by insurer staff 

adjusters, are included in the definition 

of insured loss.

2. Extra-Contractual Obligations 

The proposed rule also revised the 

definition of ‘‘insured loss’’ to clarify 

that the Federal Government would not 

share in an insurer’s payment of extracontractual damages. Extra-contractual 

obligations describe an insurer’s 

liability to pay damages to its insured or 

a third party due to the insurer’s breach 

of the insurance policy and/or negligent 

or bad-faith claims-handling conduct, 

including liability for punitive, 

exemplary, or special damages awarded 

or paid as a result of such conduct. 

Several insurance industry trade 

groups commented that Treasury’s 

proposed rule should be revised to 

allow for the federal payment of extracontractual obligations paid by an 

insurer. Extra-contractual obligations 

paid by an insurer are the result of an 

insurer’s conduct and are not part of 

‘‘insured loss’’ or directly associated 

with adjusting the loss as is the case 

with ALAE. Accordingly, such losses 

are not to be paid under the Program. 

The final rule adopts § 50.5(4) of the 

rule as proposed, with some minor 

modifications to the language. 

In commenting on extra-contractual 

obligations, one trade group stated that 

in the light of unique situations 

following an act of terrorism, insurers 

‘‘may go beyond the contract language 

to indemnify an insured.’’ Such 

payments by an insurer would not be an 

‘‘insured loss’’ because the paid loss is 

not covered by the terms and conditions 

of the insurance policy. Treasury 

considered the comment and has 

determined to adopt § 50.50(a)(6) of the 

proposed rule without change in the 

final rule. 

3. Excess Policy Limits Payments 

The definition of ‘‘insured loss’’ in the 

proposed rule did not include losses in 

excess of policy limits (known 

commonly in the insurance industry as 

XPL). XPL losses occur when the 

liability of the insured to a third party 

is in excess of that policy limit but 

otherwise within the scope of the 

insurance coverage. Under certain 

circumstances, an insurer will pay XPL 

losses to or on behalf of its insured (e.g., 

when an insurer fails to accept a 

settlement offer within policy limits and 

a jury later finds the policyholder liable 

in an amount in excess of policy limits). 

In the preamble to the proposed rule, 

Treasury specifically invited comments 

on whether Treasury should include 

XPL losses within the definition of 

‘‘insured loss.’’

One commenter who addressed the 

issue of XPL losses pointed out that 

excess of loss reinsurance treaties 

usually include clauses providing 

reinsurance coverage for XPL claims. 

Treasury recognizes that such clauses 

are sometimes negotiated into 

reinsurance treaties. However, Treasury 

had determined not to include such 

losses in the definition of ‘‘insured loss’’

because such excess losses are not part 

of ‘‘insured loss’’ or directly associated 

with adjusting the loss. Given the lack 

of additional reasons to include XPL, 

the final rule adopts Treasury’s 

proposed language, with a technical 

correction at § 50.5(e)(4)(iii). 

4. Losses by State Residual Market 

Mechanisms 

Three comments were received from 

insurance trade associations, submitted 

individually and collectively, 

concerning the proposed rule not 

specifically addressing losses by State 

residual market insurance entities and 

State workers’ compensation funds 

(hereafter referenced as State residual 

market mechanisms). The commenters 

offered language to explicitly include, in 

the definition of insured losses, those 

losses allocated on a proportionate share 

basis from a State residual market 

mechanism to a participating insurer. 

Treasury has determined that it is not 

necessary to amend the definition of 

insured loss for this purpose, but has 

addressed this issue through 

clarifications to §§ 50.50 and 50.53 

regarding the treatment of residual 

market losses. These changes are 

discussed below. 

B. Federal Share of Compensation 

(Section 50.50) 

The final rule provides that the 

Federal share of compensation under 

the Program is 90 percent of that portion 

of the insurer’s insured losses that 

exceed its insurer deductible during a 

Program Year, subject to specified 

adjustments and the annual industry 

aggregate limit of $100 billion as 

provided in the Act. This section also 

Federal Register / Vol. 69, No. 124 / Tuesday, June 29, 2004 / Rules and Regulations 39299

addresses requirements for federal 

payment and situations under which 

Treasury may deny or suspend 

payment. 

1. General Clarifications

In § 50.50(a), Treasury has revised the 

proposed rule to clarify that the Federal 

share of compensation will be paid once 

a Certification of Loss required by 

§ 50.53 of the final rule is deemed 

sufficient. Section 50.50(a)(1) was 

changed slightly to make clear that the 

insurer, including all affiliates of the 

insurer, must meet the requirements of 

§ 50.5(f). Also, § 50.50(a)(4) has been 

revised to clarify that Treasury will pay 

so long as the underlying insured loss—

as well as the insurer’s claim for Federal 

payment—is not fraudulent, collusive, 

made in bad faith, or dishonest. In 

addition, under § 50.50(4) of the final 

rule, neither the underlying claim for 

insured loss nor the insurer’s claim will 

be paid if Treasury determines that the 

claim is designed to circumvent the 

purposes of the Act and regulations. 

This is intended to discourage those 

who may attempt to ‘‘game’’ the 

Program. 

Section 50.50(a) of the proposed rule 

provided that payment of the Federal 

share of compensation would occur 

upon Treasury making a determination 

as to the factors listed therein. This 

section of the proposed rule provided 

that Treasury may make a payment 

without this determination, subject to a 

‘‘reservation of rights.’’ As that term is 

commonly understood in the insurance 

industry, payment subject to a 

‘‘reservation of rights’’ facilitates prompt 

payment because the payment is not 

construed as a waiver by the payee of 

any preconditions to payment. Although 

Treasury has eliminated the 

‘‘reservation of rights’’ language in the 

final rule, Federal payment is still 

subject to Treasury’s statutory authority 

as administrator of the Program to 

examine, or re-examine the factors listed 

in § 50.50(a) as part of a claims review 

or audit. This is now reflected in 

§ 50.50(b) of the final rule. Treasury has 

statutory authority to subsequently 

adjust, or require repayment of any 

federal payment under the Act. 

2. State Residual Market Mechanisms 

As previously noted in the discussion 

of § 50.5, Treasury received comments 

with regard to the distribution of losses 

to participating insurers from State 

residual market mechanisms described 

in section 103(d)(2)(B) of the Act. A 

comment jointly provided by four 

insurance industry trade associations 

suggested that the proposed rule be 

revised to recognize losses paid by 

participating insurers as their share of 

residual market losses. Treasury concurs 

with the need to clarify the treatment of 

losses paid as a share of residual market 

losses. Section 50.50(a)(2) has been 

revised to make clear that the insurer’s 

insured losses include ‘‘the allocated 

dollar value of the insurer’s 

proportionate share of losses from a 

State residual market entity or State 

workers’ compensation fund.’’

3. Advance Payments 

Section 50.50(a) of the proposed rule 

provided that the amount of payment of 

the Federal share of compensation 

would be based, in part, upon a 

Treasury determination that, the 

‘‘insurer has made payment of an 

underlying insured loss to a person who 

had suffered the insured loss, or to a 

person acting on behalf of such person 

* * *.’’ This proposed an approach 

whereby Treasury would pay the 

Federal share of compensation strictly 

as a reimbursement for amounts actually 

paid by insurers for underlying insured 

losses, whether fully or partially settled. 

This approach was also followed in 

§ 50.53 of the proposed rule (Loss 

Certifications), which required, in part, 

a certification that the insurer had paid 

all underlying claims comprising the 

insured losses submitted for payment, 

as listed in the bordereau provided 

pursuant to § 50.53(b)(1). 

Treasury received six comments on 

the timing of Federal payments. With 

some variation, the common theme was 

the issue of whether an insurer would 

receive the Federal share of 

compensation before or after the 

insurer’s payment of underlying insured 

losses. The commenters, one insurer, 

three trade associations and one law 

firm on behalf of a trade association, 

contended that adherence to the pure 

reimbursement approach is not required 

by the Act. It was asserted that insurers 

may need to receive the Federal share of 

compensation for an insured loss in 

advance of their actual payment because 

of liquidity problems, particularly in the 

financial environment following a 

certified act of terrorism. The 

commenters explained that reinsurance 

industry practice permits advance or 

simultaneous payments subject to 

certain controls. 

Treasury carefully considered these 

comments and determined that there 

may be some circumstances in which it 

would be appropriate for Treasury to 

advance payment for the Federal share 

of compensation for insured losses. 

Section 104(b)(2) of the Act authorizes 

the issuance of rules or procedures 

specifying the manner in which 

payments of the Federal share of 

compensation may be made based on 

estimates of insured losses. In the final 

rule, Treasury has revised § 50.50 of the 

proposed rule to permit insurers to 

include on their bordereau requests for 

payment of the Federal share of 

compensation for both (1) claim 

payments already made, and (2) claim 

payments about to be made. This 

applies to partial as well as final 

settlements of underlying claims that 

comprise an insurer’s insured losses. 

Under the final rule, insurers are 

required to certify that any advances for 

underlying insured losses that have 

been requested will be paid within five 

business days of receipt of funds from 

Treasury. In addition, any interest 

earned on such funds will be remitted 

to the Treasury. Treasury believes that 

this provides an appropriate balance 

between meeting the cash flow needs of 

participating insurers and the proper 

stewardship over public funds. 

To permit advanced payments, 

§ 50.50(a)(3) of the proposed rule has 

been revised in the final rule to 

recognize that an insurer ‘‘has paid or is 

prepared to pay an underlying insured 

loss.’’ Section 50.53(b)(2)(i) also has 

been revised to provide that underlying 

losses on the insurer’s bordereau 

‘‘either: Have been paid by the insurer; 

or will be paid by the insurer upon 

receipt of an advance payment of the 

Federal share of compensation as soon 

as possible, consistent with the insurer’s 

normal business practices, but not 

longer than five business days after 

receipt of the Federal share of 

compensation.’’ Also, a new subsection 

(d) has been added to § 50.54 Payment 

of the Federal Share of Compensation, 

that requires insurers seeking advanced 

payments to establish segregated 

interest-bearing accounts for the receipt 

of such payments and for the 

disbursement of those payments to 

insureds and claimants.

4. Full Payment for All Insured Losses 

One comment was received from a 

trade association that understood the 

proposed rule as requiring insurers to 

make payment in full of all insured 

losses before becoming eligible for the 

Federal share of compensation. This is 

a misreading of the proposed rule and 

no change to the rule is required. 

5. Denial or Suspension of Payment 

Section 50.62 of the proposed rule 

provided generally that an insurer may 

be ineligible to receive payment of the 

Federal share of compensation for 

insured losses upon a determination by 

Treasury that the insurer intentionally 

concealed or misrepresented any 

material fact or circumstance, engaged 

39300 Federal Register / Vol. 69, No. 124 / Tuesday, June 29, 2004 / Rules and Regulations 

in fraudulent conduct, or made false 

statements relating to participation 

under the Act. 

A national insurance trade association 

commented on § 50.62. This commenter 

noted that section 103(b) of the Act sets 

forth the grounds under which an 

insurer may be ineligible to receive 

Federal payments and that section 

104(e) of the Act provides Treasury with 

civil money penalty authority. If any of 

the conditions for payment of the 

Federal share in section 103(b) have not 

been met with respect to a particular 

insured loss, the commenter suggested 

that the appropriate response of 

Treasury would be to deny payment for 

that insured loss. Similarly, the 

commenter suggested that if there is 

wrongdoing, such as fraud or 

misrepresentation, Treasury could 

assess civil money penalties under 

section 104(e) of the Act. The 

commenter concluded that these 

provisions ‘‘cover the landscape of 

potential offenses’’ and thus viewed the 

provisions of § 50.62 to be overbroad. 

The commenter recommended that 

§ 50.62 be deleted or revised. 

Treasury concurs that sections 103(b) 

and 104(e) provide Treasury with broad 

authority to deny or suspend payment 

and/or to assess civil money penalties in 

connection with insurer requests for 

payment of the Federal share of 

compensation under the Act. Treasury 

has determined to delete § 50.62 as the 

commenter requested and to address 

certain issues through revisions to 

§ 50.50. 

Treasury believes there may be 

circumstances where failure to meet one 

of the requirements for payment of the 

Federal share of compensation with 

respect to one insured loss may be an 

indication of a broader pattern or 

practice of malfeasance or wrongdoing 

on the part of the insurer with regard to 

its other claims for insured losses. To 

address this, Treasury has added a new 

subsection (c) to § 50.50 that provides, 

in Treasury’s discretion, for suspension 

of payment for other insured losses of 

an insurer if the insurer fails to meet 

one of the requirements in § 50.50(a). In 

such cases, Treasury may decide to 

conduct additional review and 

investigation of the insurer’s Loss 

Certification submissions before paying 

the Federal share of compensation. 

C. Adjustments to the Federal Share of 

Compensation (Section 50.51)

The final rule specifies several 

adjustments in calculating the Federal 

share of compensation. First, the rule 

reduces aggregate insured losses by 

amounts recovered by insurers for 

salvage and subrogation. Second, the 

rule provides that, should the amount of 

an insurer’s Federal share of 

compensation from the Program and the 

amount of recoveries from other sources 

exceed the aggregate amount of its 

insured losses in a Program Year, then 

any excess recovery must be returned to 

Treasury. Excluded from this 

requirement are recoveries from a 

reinsurer pursuant to an agreement 

whereby an insurer’s obligation to repay 

its reinsurer takes priority over its 

obligation to repay Treasury. Third, the 

rule in § 50.51 follows the Act’s 

requirement that the Federal share of 

compensation for insured losses be 

reduced by any duplicate amount of 

compensation otherwise provided by 

the Federal government for those 

insured losses. 

1. Salvage and Subrogation 

Treasury received three comments on 

the salvage and subrogation provisions 

of 50.51(a). One commenter, an insurer, 

noted that the preamble to the proposed 

rule expressed Treasury’s expectation 

that, ‘‘as normal good business practice, 

insurers will pursue salvage and 

subrogation.’’ The commenter was 

concerned that this language and the 

proposed rule did not explicitly address 

the flexibility of the insurer to use its 

own business discretion to pursue, 

abandon or forego salvage and/or 

subrogation efforts. Treasury believes 

that normal business practice requires 

the use of discretion in determining 

salvage and/or subrogation efforts. 

Treasury does not believe a change to 

the proposed rule is required and 

expects insurers to use the appropriate 

discretion in pursuing salvage and/or 

subrogation opportunities. 

This same commenter requested 

clarification regarding the cost of 

pursuing salvage and/or subrogation. 

The rule states that the insurer’s 

aggregate insured losses used to 

calculate the Federal share of 

compensation shall be reduced by any 

salvage or subrogation recoveries. 

Treasury agrees that insurers should be 

able to recover the costs of pursuing 

salvage and subrogation actions. It is 

expected that these expenses will be 

included by insurers in Allocated Loss 

Adjustment Expenses. Because such 

reasonable expenses are included in the 

definition of insured loss, Treasury sees 

no need to further change the rule to 

resolve this issue. Additional guidance 

on the treatment and netting of expenses 

will be included in the definitions for 

the fields reported on the bordereau 

form submitted with the Certifications 

of Loss. 

A trade association commented that 

some insurers do not currently capture 

salvage and subrogation recoveries 

independent of one another and sought 

relaxed reporting requirements. 

Treasury prefers to receive this 

information separately, but in the 

interest of minimizing changes to 

insurers’ existing processes Treasury 

will accept reports with salvage and 

subrogation recoveries combined or 

separate. This accommodation will be 

accomplished in the bordereau format 

and instructions which are soon to be 

published (along with other forms) for 

public comment. 

2. No Excess Recoveries

Section 50.51(b)(1) of the proposed 

rule provided that in any Program Year 

the sum of the Federal share of 

compensation paid to an insurer and the 

insurer’s recoveries for insured losses 

from other sources shall not be greater 

than the insurer’s aggregate losses for 

acts of terrorism in that Program Year. 

This is consistent with section 103(g)(2) 

of the Act. 

One commenter suggested that ceding 

commissions received by an insurer in 

reinsuring its deductible and retentions 

under the Act could be considered part 

of an insurer’s recovery. Ceding 

commissions are compensation from a 

reinsurer to a ceding insurer for the 

costs of writing underlying policies and 

are paid regardless of whether claims 

are ever submitted. It is Treasury’s view 

that ceding commissions are not 

recoveries from other sources for 

insured losses and, therefore, the 

Federal share of compensation shall not 

be reduced by such commissions. No 

change has been made to the proposed 

rule in this regard. 

Section 50.51(b)(1) of the proposed 

rule also provided that amounts 

recovered for insured losses in excess of 

an insurer’s aggregate amount of insured 

losses in a Program Year be repaid to 

Treasury within 45 days after the end of 

the month when such amounts are 

received by the insurer. A trade 

association commented that it may take 

a long time after actual receipt of 

recoveries before an insurer is able to 

determine whether a recovery is excess. 

The commenter suggested that 

repayment be required 45 days after the 

insurer becomes aware that the recovery 

is excess. 

Treasury recognizes that the 

determination of a recovery being excess 

may occur some time after the actual 

receipt of that recovery. However, 

Treasury believes that the commenter’s 

alternative, based on when the insurer 

becomes ‘‘aware’’ of any excess 

recovery, is too vague to establish a 

definitive schedule for the repayment of 

funds. The final rule has been clarified 

Federal Register / Vol. 69, No. 124 / Tuesday, June 29, 2004 / Rules and Regulations 39301

in § 50.51(b)(1) so that amounts 

recovered for insured losses in excess of 

an insurer’s aggregate amount of insured 

losses in a Program Year are to be repaid 

to Treasury based on when total 

recoveries of the insurer, from all 

sources, become excess. 

3. Compensation From Other Federal 

Programs 

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.’’ To implement this statutory 

provision, § 50.51(b)(2) of the proposed 

rule stated, ‘‘The Federal share of 

compensation due an insurer for 

insured losses shall be reduced by any 

amounts received by the insurer or an 

insured or a third party suffering the 

underlying loss from any other Federal 

programs as compensation for those 

insured losses, including, but not 

limited to, insurance, assistance, grants 

or disaster relief from the Federal 

Government.’’ Nine comments 

addressed § 50.51(b)(2). After 

consideration of the comments and 

upon further analysis, Treasury has 

made several revisions in the final rule 

and is providing additional explanation 

in this preamble for greater guidance. 

As a preliminary matter, Treasury has 

made a few technical corrections to the 

final rule. The proposed rule explained 

that any reduction would be based on 

the amount of compensation received by 

the insurer or an insured or a third party 

suffering the underlying loss. This 

provision in the final rule no longer 

makes reference to amounts received or 

compensation provided to insurers. This 

is because amounts received by insurers 

are covered in § 50.51(b)(1), which 

addresses recoveries by insurers from all 

other sources, including compensation 

received by the Federal Government. 

Second, the language of 50.51(b) is 

being revised from ‘‘any amounts 

received by’’ to ‘‘compensation 

provided by other Federal programs to’’

an insured or a third party to parallel 

the statutory language found in section 

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

a. Types of Compensation Used To 

Reduce the Federal Share. In its 

proposed rule, Treasury described the 

type of compensation provided by other 

Federal programs in reducing the 

Federal share of compensation to 

insurers as ‘‘insurance, assistance, 

grants, or disaster relief.’’ In its final 

rule, Treasury is providing clearer 

guidance on what constitutes 

compensation provided by other Federal 

programs for insured losses. Section 

50.51(b)(2)(i) of the Final Rule provides 

that compensation provided by other 

Federal programs for insured losses 

means compensation that is provided by 

Federal programs established for the 

purpose of compensating persons for 

losses in the event of emergencies, 

disasters, acts of terrorism, or similar 

events. Compensation provided by other 

Federal programs that could be 

considered duplicate compensation 

include, but are not limited to, 

compensation provided under Federal 

programs such as: 

• Federal Emergency Management 

Agency (FEMA) disaster relief and 

emergency assistance; 

• Department of Housing and Urban 

Development block grant assistance; and 

• Federal programs specially 

established to compensate victims for 

losses resulting from the certified act of 

terrorism (similar to the September 11th 

Victim Compensation Fund of 2001 

(Pub. L. 107–42, 115 Stat. 237, § 401 et 

seq.)). 

However, it is Treasury’s view that 

Congress did not intend to reduce the 

Federal share of compensation due to 

receipt of Social Security disability 

payments and other similar benefits. 

Accordingly, § 50.51(b)(2)(i) of the final 

rule provides that compensation 

provided by Federal programs for 

insured losses excludes benefit or 

entitlement payments such as those 

made under the Social Security Act, 

those made under laws administered by 

the Secretary of Veteran Affairs, railroad 

retirement benefit payments, and other 

types of similar benefit payments. These 

types of Federal entitlement or benefit 

payments to individuals are the result of 

services performed and are paid 

irrespective of whether the loss occurs 

as a result of an act of terrorism. Under 

the final rule they are not treated as 

duplicate compensation for insured 

losses arising from an act of terrorism 

and shall not be used by Treasury to 

reduce the Federal share of 

compensation due an insurer.

b. Statutory Requirement That the 

Federal Share Be Reduced. Several 

commenters criticized the Act’s 

requirement that the Federal share of 

compensation be reduced by 

compensation provided by the Federal 

Government under other Federal 

programs for insured losses. Several 

commenters acknowledged that it is a 

legitimate goal that no one should 

receive a double recovery for a loss. In 

developing this rule, Treasury 

understands that its reduction of the 

Federal share of compensation does not, 

in turn, reduce the amount insurers are 

obligated to pay under the terms and 

conditions of their insurance policies. 

This was pointed out by several 

commenters. Nevertheless, Treasury 

must follow the Act. 

Based upon a review of how several 

other Federal programs would likely 

treat proceeds from ‘‘property and 

casualty insurance,’’ under the Act or 

otherwise, Treasury expects that 

duplicative compensation situations 

will be rare. This is because the most 

likely Federal programs identified by 

Treasury as potential sources of 

duplicate payments already guard 

against duplicate compensation. 

For example, HUD and FEMA 

programs offset their payments by 

insurance proceeds received or expected 

to be received by their applicants. These 

programs also have procedures to 

recoup their payments from recipients 

of assistance to the extent those 

recipients later receive insurance 

proceeds. Further, it is expected that 

Congress will include mechanisms to 

prevent double Federal recovery in 

programs designed to help victims of 

future acts of terrorism, much in the 

same way the September 11th 

Compensation Fund of 2001 treats 

collateral source payments. Moreover, 

any payments from other Federal 

insurance programs should be offset by 

operation of the ‘‘other insurance’’

clauses in insurers’ standard policy 

forms for commercial property and 

casualty insurance. Finally, insurers 

themselves can discount settlement 

offers to reflect payments received from 

other Federal programs and in that way 

avoid the problem of compensation 

being duplicative. For claims that do not 

settle and proceed to award, some states 

allow or require reductions based on 

collateral source payments. 

One commenter acknowledged that 

the proposed rule generally follows 

section 103 of the Act, but nevertheless 

concluded that section presents a 

‘‘serious contractual problem’’ for 

insurers because insurance contracts do 

not allow for any reduction of amounts 

paid to insureds, other than for 

payments made under other insurance 

policies. Also, the commenter explained 

that because insurers’ cannot forecast 

the amount by which their payment will 

be reduced, insurers cannot factor the 

reduction into the price of their 

premiums. The commenter suggested 

that § 50.53(b)(1) of the proposed rule be 

revised by deleting the words ‘‘or 

insured or third party suffering the 

underlying loss’’ or if that is not 

possible, that the Federal Government 

require that the insured reduce the 

amount of its claim presented to the 

insurer. 

39302 Federal Register / Vol. 69, No. 124 / Tuesday, June 29, 2004 / Rules and Regulations 

Treasury has considered the comment 

but has determined not to accept either 

suggestion. The language in section 103 

requires that Treasury reduce its 

payment to insurers by the amount of 

compensation provided ‘‘to any person’’

for those insured losses. Insureds or 

third party claimants who suffer the 

underlying insured loss are included in 

the definition of ‘‘person[s],’’ in section 

102 of the Act. However, nothing in the 

Act or Treasury’s regulations would 

prevent an insurer from pursuing 

changes to its policies (including 

obtaining any necessary State regulatory 

approval) in order to address this 

reduction and allow for possible offset. 

Another commenter asserted that the 

proposed rule ‘‘is neither logical nor 

equitable, and does not serve the 

underlying purpose of 103(e)(1)(B).’’

According to the commenter, it was not 

the intent of Congress to transfer the risk 

of double recovery to insurers. The 

commenter does not believe there 

should be any reduction of the insurer’s 

Federal payment but that insurers are 

willing to assist Treasury in identifying 

those persons that have received double 

Federal recovery for insured losses. 

Treasury does not share the 

commenter’s view. The statutory 

language requires Treasury to reduce the 

Federal share of compensation by the 

amount of compensation provided by 

the Federal Government to any person 

under any other Federal program for 

insured losses. 

This same commenter also suggested 

that the subrogation provisions of the 

Act are available to prevent double 

recoveries. Section 107(c) of the Act 

provides that the United States shall 

have the right of subrogation with 

respect to any payment or claims paid 

by the United States under title I of the 

Act. Upon payment to an insurer, the 

United States becomes subrogated to the 

rights of the insurer (to the extent of the 

payment). Yet, as many of the 

commenters pointed out, the terms and 

conditions of standard commercial 

property and casualty policies do not 

provide the insurer with any right of 

offset or recoupment of amounts paid by 

other Federal programs. Therefore, 

section 107(c) may not be effective in 

guarding against double Federal 

payment. Furthermore, even if the 

exercise of the United States’

subrogation rights could avoid the 

Federal Government paying twice for 

the same loss, the commenter’s 

approach shifts the responsibility to 

pursue subrogation to the United States. 

Under § 50.50(a)(6), insurers are to 

process claims in a manner consistent 

with appropriate business practices, 

which include pursuing subrogation 

recoveries when appropriate. The 

responsibility to pursue recoveries 

though subrogation lies with the insurer 

in the first instance. The United States 

retains the ability to pursue such 

recoveries in the event the insurer does 

not.

c. Other Federal Compensation 

Already Offset in the Underlying Claim 

for Insured Loss. A trade association 

commented that the Federal share of 

compensation should not be reduced if 

in fact the payments by the other 

Federal program are already offset in the 

insurance claim to the insurer. If the 

insurance claim is already reduced, 

there is no duplicate compensation. The 

commenter is concerned that the 

proposed rule could be read to require 

the reduction of the payment to the 

insurer even though the insured or third 

party did not claim, and the insurer did 

not pay, for that part of the insured loss. 

To address this, the association 

recommended that Treasury clarify the 

proposed rule to make clear that there 

will be no reduction in Federal 

payments if the losses compensated for 

by the other Federal program are not 

also paid by the insurer. Based on the 

commenter’s suggestion, language has 

been added to the final rule that clarifies 

the Federal share of compensation shall 

be reduced only ‘‘to the extent such 

other compensation duplicates the 

insurance indemnification for those 

insured losses.’’ When the insurer’s 

payment has not been offset, the Federal 

share shall only be reduced by the 

amount, if any, that the aggregate of the 

insurer’s payment and the 

compensation from the other Federal 

program exceed the total loss. This is 

because the other compensation is not 

duplicating the payment for insured 

losses until there is an excess recovery. 

The commenter also questioned what 

would happen in the situation where 

other Federal programs require their 

claimants to pursue other recoveries 

(such as insurance proceeds) and then 

to repay the other program. Would the 

insurer be credited for any repayment to 

the other Federal program? In such a 

situation, the Federal share of 

compensation would be reduced 

pending the claimant’s repayment to the 

other Federal program. Once the 

claimant repays the other Federal 

program, presumably out of the 

insurance proceeds, the Program will 

pay the insurer the amount of the 

reduction. This will occur after the 

other Federal program notifies Treasury 

that the recipient of the insurance 

proceeds has repaid the other Federal 

program. 

d. Insurer Due Diligence. Section 

50.51(b)(2) of the proposed rule stated, 

‘‘Each insurer shall inquire of each of its 

claimants whether or not duplicate 

payments for insured losses have been 

paid from other Federal sources. Such 

amounts shall be reported with each 

underlying claim on the bordereau 

specified in § 50.53(b)(1) and the total 

amount subtracted from the aggregate 

amount claimed as the Federal share of 

compensation for insured losses.’’

Generally, all of the commenters viewed 

this information collection requirement 

as reasonable. Three commenters 

addressed the information insurers 

would need to obtain from claimants 

and suggested various approaches and 

forms to be used by insurers to collect 

information about duplicate 

compensation from other Federal 

sources. Treasury will be issuing a 

notice and publishing forms for public 

comment at a later date. 

Another commenter pointed out that 

the proposed rule did not address the 

situation where an insurer pays a claim 

before the person receives compensation 

from another Federal program. This may 

occur when the person has not yet 

applied for such compensation from the 

other program despite being eligible or 

the person later becomes entitled to 

compensation (e.g., a program set up at 

a later date). Having considered this 

comment, Treasury has modified the 

rule to require insurers to inquire of 

their policyholders, insureds, and 

claimants not only whether the person 

receiving the insurance proceeds has 

received compensation from another 

Federal program but also whether it 

expects to receive, or is entitled to 

receive compensation from another 

Federal program for the insured loss, 

and if so, the source and amount of the 

compensation received or expected. An 

insurer will be expected to collect this 

information at the time of claims 

settlement. Consistent with the 

insurance industry’s business practice, 

Treasury will not require the insurer to 

re-open its closed claim file simply to 

collect this information, which can be 

obtained from the other Federal 

programs. 

Although § 50.51(b)(2)(ii) of the final 

rule requires insurers to inquire about 

duplicate compensation—expected, as 

well as received—the Federal share of 

compensation will be reduced only by 

those amounts actually provided by the 

other Federal program. If a person 

informs an insurer that it has not yet 

received but expects to, or is entitled to 

receive compensation for another 

Federal program for the insured losses, 

Treasury will notify the other Program. 

Another commenter, a ‘‘federally 

approved’’ insurer, commented that it 

would not have to inquire about 

Federal Register / Vol. 69, No. 124 / Tuesday, June 29, 2004 / Rules and Regulations 39303

duplicate Federal compensation because 

awards under the Longshore and Harbor 

Workers’ Compensation Act 

(‘‘LHWCA’’) (33 U.S.C. 901, et seq.) 

already take such payments into 

account. In such a situation, however, 

the final rule will still require the 

insurer to inquire about possible 

duplicate compensation since there may 

be sources of Federal payments for 

LHWCA claimants that are not taken 

into account under that Act. 

e. False Information Submitted to the 

Insurer. Another commenter asserted 

that insurers have no way of ensuring 

that its policyholders, insureds, or 

claimants will reveal information 

concerning duplicative payments. The 

comment suggested that Treasury add 

penalties or warn persons attempting to 

collect twice. The final rule only 

requires that insurers inquire 

concerning duplicate compensation and 

report the response received. If Treasury 

learns that a person who has received an 

insurance payment shared by the 

Program has also received compensation 

for those insured losses from another 

Federal program, the insurer’s Federal 

share of compensation shall be reduced. 

4. Claims Handling

A commenter referenced § 50.51(b)(2) 

as well as § 50.51(a) and asserted that 

the regulations should ‘‘make it clear 

that the Treasury does not wish to 

exercise any authority over claims 

handling.’’ The commenter’s 

observation is incorrect. Treasury is 

responsible for the financial integrity of 

the Program. Section 50.50, which 

provides the basis for Treasury to 

determine the amount of the Federal 

share of compensation to insurers, is 

designed to allow Treasury to review 

the insurer’s handling of underlying 

claims for insured losses. For example, 

§ 50.50(a)(6) provides that Treasury will 

examine whether the insurer took all 

steps reasonably necessary to properly 

and carefully investigate the underlying 

insured loss and otherwise processed 

the underlying loss using appropriate 

insurance business practices. Section 

50.50(a)(7) indicates that Treasury will 

review whether the insured losses 

submitted for payment are within the 

scope of coverage issued by the insurer. 

In order for it to properly carry out its 

financial responsibilities, Treasury will, 

as needed, audit insurer requests for 

compensation, including the handling 

of underlying claims, as provided in 

subpart G of the rule. 

D. Initial Notice of Insured Loss (Section 

50.52) 

The final rule includes an early 

notification requirement when an 

insurer obtains information indicating 

its insured losses will exceed 50 percent 

of its insurer deductible as defined by 

the Act. At that time, the insurer is 

required to submit, on a form prescribed 

by Treasury, estimates of aggregate 

losses for the Program Year, its insurer 

deductible and the Federal share of 

aggregate losses, as well as the name of 

the person designated to make required 

certifications and receive Federal 

payments. Such information will assist 

in estimating funding levels for certified 

acts of terrorism and otherwise facilitate 

operations of the Program. Because the 

insurer deductible applies collectively 

to all insurers in an affiliated group, the 

notice must include the designation of 

a single insurance entity to coordinate 

the submission of required reports and 

documentation (including the Initial 

Notice of Insured Loss), make required 

certifications and receive Federal 

payments on behalf of the affiliated 

group. 

No comments were received specific 

to this section of the proposed 

regulation. However, as a result of 

changes made to § 50.54 in response to 

comments regarding the designated 

single payee in an affiliated group, this 

section has also been revised. The Initial 

Notice of Insured Loss is to include a 

‘‘designated insurer’’ as a single point of 

contact in an affiliated group for 

‘‘receiving, disbursing, and distributing’’

payments of the Federal share. This 

issue is more fully addressed in the 

discussion of § 50.54 below. 

E. Loss Certifications (Section 50.53) 

The final rule specifies the type of 

loss information that an insurer is 

required to submit in documenting 

insured losses eligible for payment of 

the Federal share of compensation. An 

Initial Certification of Loss, on a form 

prescribed by Treasury, is required 

when insured losses first exceed the 

insurer’s deductible. If the insurer 

sustains ongoing, additional insured 

losses, periodic Supplementary 

Certifications of Loss, on a form 

prescribed by Treasury, must be 

submitted. These Certifications of Loss 

will be used by Treasury to assess 

payment eligibility for the Federal share 

of compensation and compliance with 

the Act’s prerequisites for payment. The 

rule also addresses various written 

certifications the Act requires as a 

condition for payment of the Federal 

share. Specific statements certifying 

actions by the insurer as required by the 

Act, and by Treasury in administering 

and implementing the Act, are to be 

included as part of each Certification of 

Loss. 

One revision to the proposed rule has 

been made to this section solely to add 

clarity. The definition of a bordereau, 

formerly § 50.53(e), has now been 

included in § 50.53(b)(1). 

1. Timing of Submission of Initial 

Certification of Loss 

In § 50.53(b) of the proposed rule, 

Treasury proposed that an insurer ‘‘use 

its best efforts to file the Initial 

Certification of Loss with Treasury 

within 45 days following the last 

calendar day of the month when an 

insurer’s aggregate insured losses 

exceed its insurer deductible.’’ One 

insurer trade organization commented 

that an insurer may not be able to file 

the initial certification of loss within 

that time period and that a time 

requirement is not really necessary. 

Alternatively, it suggested that Treasury 

modify the rule to allow insurers to 

request an extension of time to submit 

the Initial Certification of Loss.

The proposed rule provided for 

insurers to use their ‘‘best efforts’’ to 

submit the Initial Certification of Loss 

within 45 days. The proposed rule did 

not establish a fixed deadline that 

would serve as the basis to deny a claim 

for federal payment. Thus, a special 

request for an extension of time is not 

necessary so long as the insurer has 

used its best efforts to meet the 

requirement. Treasury believes this is 

reasonable. The objective of the rule is 

to encourage timely reporting of losses 

so that Treasury remains as current as 

possible with its potential liabilities. 

Generally, it will be in the insurer’s 

interest to report losses as soon as 

possible. Accordingly, Treasury has 

made no change to the proposed rule. 

The trade group also recommended 

that the loss certification process should 

specifically recognize special 

circumstances associated with large 

deductible policies. The commenter 

noted that with large deductible 

policies, particularly in workers 

compensation, insurers will typically 

first pay the entire claim to the insured 

worker and then recover the deductible 

from the insured employer. Treasury 

agrees that this comment regarding large 

deductible policies merits attention and 

will address the concern in the 

development of the actual loss 

certification reporting forms. 

2. Certification Language 

Two insurance trade associations and 

an insurer commented on the 

certification required in proposed rule 

§ 50.53(b)(2)(iv) dealing with the clear 

and conspicuous disclosures that 

insurers are required to provide to 

policyholders. The commenters noted 

39304 Federal Register / Vol. 69, No. 124 / Tuesday, June 29, 2004 / Rules and Regulations 

that the certification requirement 

appeared to impose a more stringent 

standard than was promulgated in 

previously issued regulations, in that 

insurers are required to certify they have 

‘‘complied with the disclosure 

requirements * * * for each underlying 

loss.’’ They suggested the use of less 

demanding certification language that 

would allow insurers to rely on 

‘‘systems and normal business practices 

that demonstrate a practice of 

compliance’’ with the mandatory 

disclosure requirement as referenced in 

§ 50.12(e). 

Treasury does not believe that the 

compliance language of § 50.53(b)(2)(iv) 

is inconsistent or more stringent than 

the ‘‘normal business practices’’

approach in § 50.12(e). The compliance 

language of § 50.53(b)(2)(iv) means that 

for each underlying loss an insurer 

would be able to demonstrate it made an 

individual disclosure because it had a 

reliable system in its normal business 

practice that generated disclosures. For 

this reason, Treasury has decided to not 

change the certification language of 

§ 50.53(b)(2)(iv). 

One insurance trade association 

suggested deletion of the requirement in 

§ 50.53(b)(2)(v) of the proposed rule to 

certify compliance with the Act’s 

mandatory availability requirements 

because, in the commenter’s view, there 

is no specific statutory requirement for 

the certification as a condition for 

payment. The mandatory availability or 

‘‘make available’’ provisions in section 

103(c) of the Act require that, for 

Program Years 1 and 2, and if so 

determined by Treasury for Program 

Year 3, all insurers 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. Under its authority in section 

104(a)(2) of the Act to effectively 

administer and implement the Program, 

Treasury believes it is appropriate to 

include the certification requirement in 

§ 50.53(b)(2)(iv). The ‘‘make available’’

requirement is, as the commenter also 

acknowledged, an ‘‘important predicate 

to the proper functioning of [the Act].’’

For this reason, Treasury has made no 

change in making the rule final. 

3. State Residual Market Mechanisms 

As described earlier, Treasury revised 

§ 50.50(a)(2) of the proposed rule to 

clarify that the proportionate share of 

insured losses from State residual 

market insurance entities or State 

workers’ compensation funds described 

in § 50.35 (those that share profit and 

losses) are treated as the insured losses 

of the individual insurer participants of 

those State residual market 

mechanisms. Joint comments from the 

four insurer trade associations also 

raised issues regarding the certification 

of loss requirements for these entities in 

§ 50.53(b)(2) of the proposed rule. The 

joint comments observed that the flow 

of information pertaining to insured 

losses of State residual market 

mechanisms was different than that of 

individual insurers. For example, 

commenters noted that knowledge about 

processing claims in accordance with 

‘‘appropriate business practices’’ as 

required by section 103(b)(3) of the Act 

lies with State residual market 

mechanism servicing carriers and 

administrators, not the participating 

insurers who are assessed a 

proportionate share of insured losses of 

the State residual market mechanism. 

Consequently, the joint trade association 

comment recommended special 

treatment for the loss certification 

requirements of § 50.53(b)(2) for State 

residual market insurance entities and 

State workers’ compensation funds.

After considering the joint comments, 

as well as its own concerns with the 

mechanisms of information flow and 

content in connection with reconciling 

and auditing insured loss information of 

State residual market mechanisms, 

Treasury has added a new § 50.53(e) to 

the final rule to deal with loss 

certifications of State residual market 

mechanisms. Essentially, Treasury has 

sought to accommodate the special 

circumstances of State residual market 

mechanisms by separating the entity 

receiving payment (insurers 

participating in a residual market 

mechanism) from the entity with 

responsibility for providing 

certifications under section 103(b) of the 

Act (the residual market mechanism 

based on its own servicing or that of a 

servicing carrier). 

In order to receive payment of the 

Federal share of compensation for 

residual market losses, an insurer 

participating in a State residual market 

mechanism will submit to Treasury, as 

an underlying loss on its bordereau, the 

amount of losses allocated to it by the 

State residual market mechanism. The 

State residual market mechanism will 

provide to its participating insurers the 

detailed underlying loss information 

that supports the total amount of 

insured losses from which the 

proportionate share of insured losses 

was calculated for each participating 

insurer. The State residual market 

mechanism will also provide to its 

participating insurers and to Treasury 

the certifications required by 

§§ 50.53(b)(2) and 50.53(c)(2). To 

facilitate any needed review or audit 

pursuant to §§ 50.60 and 50.61, State 

residual market mechanisms and their 

individual participating insurers are 

both required to maintain insured loss 

information they received or provided, 

as well as any supporting 

documentation for certifications. 

F. Payment of Federal Share of 

Compensation (Section 50.54) 

The final rule establishes the process 

for making payment as provided by the 

Act. It also addresses the making of 

payments before the total amount of 

insured losses are known, providing for 

later adjustment based on any 

overpayment or underpayment. The rule 

specifies the types of insurer accounts 

required for Treasury to electronically 

transfer funds in making payments of 

the Federal share of compensation and, 

in the case of advance payments of the 

Federal share, establishes that interest 

earned on those funds must be remitted 

to Treasury. Because the Act requires 

insurance entities within an affiliated 

group to be treated as a single entity in 

determining the insurer deductible, the 

rule requires that all payments be made 

to a single insurance entity within an 

affiliated group. This entity is to be 

identified by the affiliated group and 

designated on the Initial Notice of 

Insured Loss. Applicable payment 

process procedures are to be posted at 

www.treasury.gov/trip or otherwise 

made publicly available. 

1. Prompt Payment 

Section 50.54(a) of the proposed rule 

provided that Treasury would 

‘‘promptly’’ pay to an insurer the 

Federal share of compensation due the 

insurer for its insured losses and that 

any overpayments by Treasury of the 

Federal share will be offset from future 

payments to the insurer or returned to 

Treasury within 45 days. Three 

comments were received on the issue of 

prompt payment. One commenter was 

pleased with the rule as written. Two 

commenters asked that prompt payment 

be better defined. One of these 

commenters suggested that Treasury set 

a goal of processing and paying claims 

within 45 days of receipt of an Initial 

Certification of Loss or any 

Supplemental Certification if the losses 

being claimed are not in dispute. After 

considering these comments, Treasury 

does not believe a regulatory time limit 

for payment is necessary. Treasury 

intends to pay the Federal share of 

compensation due insurers as promptly 

as possible and believes this 

commitment in the provision of public 

Federal Register / Vol. 69, No. 124 / Tuesday, June 29, 2004 / Rules and Regulations 39305

funds is sufficient. In seeking contractor 

support for the management of Program 

claims, Treasury has made this 

intention clear. Treasury has also 

clarified this section to specify that the 

payment process incorporates the use of 

electronic funds transfer through the 

Automated Clearinghouse (ACH) 

network. This provides a mechanism for 

the prompt disbursement of funds from 

Treasury to an insurer. 

2. Advance Payments 

As stated in the discussion of § 50.50, 

Treasury has revised this section in 

order to permit advance payments of the 

Federal share. Section 50.54 of the final 

rule describes the types of accounts 

required to be established by insurers to 

receive the Federal share of 

compensation. Treasury’s control over 

the payment process is facilitated by 

having only one account per insurer 

into which payments will be made. If an 

insurer is only seeking reimbursement 

for insured losses it has already paid, 

then the only requirement for the 

account is the capability to receive 

electronic funds transfers over the ACH 

network. If an insurer seeks advance 

payments of the Federal share, or a 

combination of advance payments and 

reimbursement, then the account must 

be segregated from other insurer 

accounts. A ‘‘segregated account’’ is 

defined in section 50.54(d) of the final 

rule as an interest bearing, separate 

account at an institution eligible to 

receive payments through the ACH 

network and limited to the purposes of 

(i) receiving payments of the Federal 

share of compensation (ii) disbursing 

payments to insureds and claimants and 

(iii) transferring payments to the insurer 

or affiliated insurers for insured losses 

reported on the bordereau as already 

paid.

Payments to insureds and claimants 

that are made using funds advanced by 

Treasury are to be made directly from 

the segregated account. All interest 

earned on these advanced funds is to 

accrue through such time that payments 

from the account clear and is to be 

entirely remitted to Treasury. If it is 

determined that an insurer has not 

properly disbursed advances of the 

Federal share or otherwise not complied 

with these regulatory claims procedures, 

then Treasury may deny or withhold 

making advance payments of the 

Federal share of compensation. 

3. Affiliated Group 

Because the Act requires insurance 

entities within an affiliated group to be 

treated as a single entity in determining 

the insurer deductible, the proposed 

rule required that all payments be made 

to a single insurance entity within an 

affiliated group. The proposed rule 

required this entity to be identified by 

the affiliated group and designated on 

the Initial Notice of Insured Loss. The 

proposed rule further required insurers 

within an affiliated group to assign their 

rights to receive payments of their 

Federal share of compensation to this 

designated single insurance entity, 

while requiring the single insurance 

entity to distribute such payments ‘‘as 

appropriate’’ among affiliated insurers 

in the group. 

Four commenters addressed issues 

involving Treasury’s payment of the 

Federal share of compensation to a 

single insurance entity on behalf of an 

affiliated group of insurers. One 

commenter expressed the view that it 

preferred that Federal payments go to 

the individual insurer making the 

underlying claim payment. In the 

alternative, the commenter 

recommended that, in order to prevent 

a designated insurer from withholding 

distribution to affiliates, at a minimum, 

the rule be revised to require the single 

insurance entity to distribute payments 

of the Federal share of compensation to 

affiliated insurers in the group or to 

hold those funds in trust for distribution 

to affiliated insurers in the group. This 

suggestion was echoed by a second 

commenter. 

Another commenter criticized the 

assignment requirement in § 50.54(c) of 

the proposed rule. Because of the 

potential shift in statutory rights or 

corporate asset values resulting from 

this ‘‘compulsory assignment of rights,’’

the commenter suggested a better 

approach would be to require each 

entity within an affiliated group to 

appoint a common agent within the 

group for submission of claims while 

retaining legal title in its own name to 

all proceeds. The commenter further 

suggested that the common agent be 

required to act in a fiduciary capacity on 

behalf of other affiliates.

A fourth commenter noted that the 

execution of assignment agreements will 

trigger holding company filing 

requirements pursuant to state 

insurance laws. The commenter 

observed that such filing requirements 

have been brought to the attention of the 

NAIC and expressed interest in working 

with both NAIC and Treasury ‘‘to craft 

an appropriate solution that will be 

convenient for all parties.’’ As a result 

of this comment, Treasury consulted 

with the NAIC and devised a more 

flexible approach to the single payee/

affiliated group provision than what was 

proposed. 

In the final rule, Treasury has deleted 

the requirement that affiliated insurers 

assign their rights to be paid under the 

Program to the single insurance entity in 

their affiliated group. Treasury has 

concluded that the proposed 

requirement of an assignment of rights 

may be an overly restrictive approach 

and that different mechanisms may be 

used among affiliate groups to assure 

proper distribution of the Federal share 

of compensation. 

In addition, in § 50.54 of the final rule 

Treasury has clarified that the 

designated insurer receiving payments 

of the Federal share of compensation on 

behalf of an affiliated group must 

distribute payments in a manner that 

assures that other insurers in the group 

are compensated for their insured losses 

taking into account a reasonable and fair 

allocation of the group’s insurer 

deductible. Because the insurer 

deductible for a group is an aggregate 

calculation based on the collective 

property and casualty insurance 

premium of all insurers in the group, 

Treasury recognizes there may be 

complexities and difficulties in 

determining individual insurer 

deductibles within the group. Treasury 

has thus provided guidance in requiring 

that the group deductible be allocated in 

a ‘‘reasonable and fair’’ manner among 

affiliated insurers. If necessary, Treasury 

will review the deductible allocation of 

an affiliated group, looking to the 

totality of the circumstances in 

determining what is ‘‘reasonable’’ and 

‘‘fair.’’ The final rule also clarifies that 

Treasury’s obligation to pay the Federal 

share of compensation to affiliated 

insurers in a group is discharged upon 

its payment to the designated insurer, to 

the extent of the payment for insured 

losses of the group as reported on the 

group’s bordereau. This provision does 

not prevent Treasury from subsequently 

adjusting payments, for example, as a 

result of an audit. 

G. Audit Authority and Recordkeeping 

(Sections 50.60 and 50.61) 

Sections 50.60 and 50.61 of the final 

rule require insurers to retain all records 

and files pertaining to the processing, 

handling, and settlement of insured 

losses, including electronic documents 

and data, and allow Treasury access in 

order to conduct subsequent financial, 

claims, and performance reviews and 

audits. Treasury and/or its appointed 

designee(s) will need access to pertinent 

books, files, agreements and records that 

support the insurer’s Certifications of 

Loss previously submitted. 

Three comments were received 

regarding the proposed §§ 50.60 Audit 

authority and 50.61 Recordkeeping. One 

commenter recommended that § 50.60 

explicitly require the retention of 

39306 Federal Register / Vol. 69, No. 124 / Tuesday, June 29, 2004 / Rules and Regulations 

reinsurance and other relevant 

agreements and that they be available 

during audit. Treasury believes that the 

proposed language already required 

such information to be maintained and 

accessible. Thus, no change to the 

proposed rule was required. A second 

commenter requested that access to the 

records be provided ‘‘upon reasonable 

notice’’ to the insurer by Treasury. 

Treasury has added this language to the 

final rule. This commenter also 

recommended that the audit authority of 

§ 50.60 be expressly limited to the 

records required to be kept under 

§ 50.61. Treasury disagrees and declines 

to limit the records it may need to 

access during investigation, audit and 

examination. 

A third commenter was concerned 

with the type and form of claims records 

to be maintained. The commenter 

observed that § 50.61 of the proposed 

rule only required that ‘‘records’’ of 

material matters pertinent to insured 

losses be retained, not actual claim files 

containing activities relative to the 

handling and adjustment of claims. The 

commenter further suggested that any 

records required to be retained beyond 

actual claim files be permitted to be 

stored in a limited form such as 

electronic data storage Treasury is 

concerned with the availability of 

information needed for investigation, 

confirmation, audit and examination for 

the time periods specified in § 50.61, 

not the medium in which information is 

retained. Information that is material 

needs to be retained in whatever form 

that can provide reasonable access by 

Treasury. Treasury believes that 

insurers’ normal claims and other 

record keeping methods, technology, 

and systems can be used to meet this 

requirement and the proposed rule does 

not need to be changed. 

H. Other Issues

1. Future Issues 

As Treasury explained in the 

preamble to the proposed rule, its 

strategy has been to give priority to 

regulations needed in the event of an act 

of terrorism. In addition to comments on 

the proposed claims rule, Treasury 

received several comments regarding 

aspects of insured losses resulting from 

certified acts of terrorism that were not 

included in the proposed rule. 

Comments were received concerning 

insurer insolvency, dispute resolution, 

commutation of losses, and the impact 

of losses exceeding the annual aggregate 

cap of $100 billion specified by the Act. 

These are the types of secondary issues 

that Treasury intends to address as 

necessary through guidance or 

supplementary rulemaking. Treasury 

will consider all the comments that 

have already been submitted in its 

development of pertinent future 

regulations. 

2. Confidential or Privileged 

Information 

A trade association commented that 

the proposed rule did not protect 

confidential or privileged information 

submitted to Treasury as part of the 

TRIA claim process. Any issues relating 

to the disclosure of confidential or 

privileged information will be 

addressed through the procedures and 

exceptions applicable under the 

Freedom of Information Act, 5 U.S.C. 

552. 

3. Longshore and Harbor Workers’

Compensation Act Assessments 

A comment, received from an insurer, 

dealt specifically with the insurer’s 

situation regarding assessments under 

the Longshore and Harbor Workers’

Compensation Act. This comment was 

not pertinent to the proposed rule and 

therefore has not been addressed. 

Insurers can request interpretations 

from Treasury pursuant to 31 CFR 50.9. 

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. Treasury is 

required to pay the Federal share of 

compensation to insurers for insured 

losses in accordance with the Act. A 

condition of Federal payment is that the 

insurer must submit to Treasury, in 

accordance with procedures established 

by Treasury, a claim for payment and 

certain certifications. The rule seeks to 

emulate loss reporting practices in the 

reinsurance industry, which insurers 

already follow in order to get payment 

for reinsurance, thus minimizing the 

impact on all insurers. The Act itself 

requires all insurers receiving direct 

earned premium for any type of 

property and casualty insurance, as 

defined in the Act, to participate in the 

Program. This includes all insurers 

regardless of size or sophistication. The 

Act also defines property and casualty 

insurance to mean commercial lines 

insurance without any reference to the 

size or scope of the insurer or the 

insured. Accordingly, any economic 

impact associated with the rule flows 

from the Act and not the rule. A 

regulatory flexibility analysis is thus not 

required. 

Paperwork Reduction Act. The 

collection of information (recordkeeping 

requirement) 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 1505–0197. The forms to be 

prescribed by Treasury will be the 

subject of a separate submission to OMB 

on which the public will be provided an 

opportunity to comment. 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 

recordkeeping requirement in § 50.61. 

The information will be used by 

Treasury (or its designees) to audit or 

examine claims for Federal payments 

submitted by insurers. The 

recordkeeping requirement is 

mandatory for any insurer that seeks 

payment of a Federal share of 

compensation.

The estimated number of record 

keepers is 100 insurers sustaining 

insured losses. The estimated average 

annual burden per recordkeeper is 8.33 

hours. The estimated total annual 

recordkeeping burden is 833 hours. 

Comments regarding the accuracy of 

this burden estimate should be directed 

to the Terrorism Risk Insurance 

Program, Suite 2100, Department of the 

Treasury, 1425 New York Ave., NW., 

Washington, DC 20220 and to the Office 

of Management and Budget, Attn: Desk 

Officer for the Department of the 

Treasury, Office of Information and 

Regulatory Affairs, New Executive 

Office Building, Room 3208, 

Washington, DC 20503.

List of Subjects in 31 CFR Part 50 

Terrorism risk insurance.

■ For the reasons stated 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. Revise § 50.5(e) to read as follows:

§ 50.5 Definitions.

* * * * *

Federal Register / Vol. 69, No. 124 / Tuesday, June 29, 2004 / Rules and Regulations 39307

(e) Insured loss. (1) The term insured 

loss means 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 the loss: 

(i) Occurs within the United States;

(ii) Occurs to an air carrier (as defined 

in 49 U.S.C. 40102), 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 

(iii) Occurs at the premises of any 

United States mission. 

(2)(i) A loss that occurs to an air 

carrier (as defined in 49 U.S.C. 40102), 

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, is not an insured loss under 

section 102(5)(B) of the Act unless it is 

incurred by the air carrier or vessel 

outside the United States. 

(ii) An insured loss to an air carrier or 

vessel outside the United States under 

section 102(5)(B) of the Act does not 

include losses covered by third party 

insurance contracts that are separate 

from the insurance coverage provided to 

the air carrier or vessel. 

(3) The term insured loss includes 

reasonable loss adjustment expenses, 

incurred by an insurer in connection 

with insured losses, that are allocated 

and identified by claim file in insurer 

records, including expenses incurred in 

the investigation, adjustment and 

defense of claims, but excluding staff 

salaries, overhead, and other insurer 

expenses that would have been incurred 

notwithstanding the insured loss. 

(4) The term insured loss does not 

include: 

(i) Punitive or exemplary damages 

awarded or paid in connection with the 

Federal cause of action specified in 

section 107(a)(1) of the Act. The term 

‘‘punitive or exemplary damages’’

means damages that are not 

compensatory but are an award of 

money made to a claimant solely to 

punish or deter; or 

(ii) Extra contractual damages 

awarded against, or paid by, an insurer; 

or 

(iii) Payments by an insurer in excess 

of policy limits.

* * * * *

■ 3. New Subparts F and G of Part 50 are 

added as follows:

Subpart F—Claims Procedures 

Sec. 

50.50 Federal share of compensation. 

50.51 Adjustments to the Federal share of 

compensation. 

50.52 Initial Notice of Insured Loss. 

50.53 Loss certifications. 

50.54 Payment of Federal share of 

compensation.

Subpart F—Claims Procedures

§ 50.50 Federal share of compensation. 

(a) General. The Treasury will pay the 

Federal share of compensation for 

insured losses as provided in section 

103 of the Act once a Certification of 

Loss required by § 50.53 is deemed 

sufficient. Subject to paragraph (b) of 

this section, Treasury shall pay the 

appropriate amount of the Federal share 

of compensation upon a determination 

that: 

(1) The insurer is an entity, including 

an affiliate thereof, that meets the 

requirements of § 50.5(f);

(2) The insurer’s insured losses as 

defined in § 50.5(e), including the 

allocated dollar value of the insurer’s 

proportionate share of insured losses 

from a State residual market insurance 

entity or State workers’ compensation 

fund as described in § 50.35, have 

exceeded its insurer deductible as 

defined in § 50.5(g); 

(3) The insurer has paid or is prepared 

to pay an underlying insured loss, based 

on a filed claim for the insured loss; 

(4) Neither the insurer’s claim for 

Federal payment nor any underlying 

claim for an insured loss is fraudulent, 

collusive, made in bad faith, dishonest 

or otherwise designed to circumvent the 

purposes of the Act and regulations; 

(5) The insurer had provided a clear 

and conspicuous disclosure as required 

by §§ 50.10 through 50.19; 

(6) The insurer took all steps 

reasonably necessary to properly and 

carefully investigate the underlying 

insured loss and otherwise processed 

the underlying insured loss using 

appropriate insurance business 

practices; 

(7) The insured losses submitted for 

payment are within the scope of 

coverage issued by the insurer under the 

terms and conditions of the policies for 

commercial property and casualty 

insurance as defined in § 50.5(l); and 

(8) The procedures specified in this 

Subpart have been followed and all 

conditions to payment have been met. 

(b) Adjustments. Treasury may 

subsequently adjust, including requiring 

repayment of, any payment made under 

paragraph (a) of this section in 

accordance with its authority under the 

Act. 

(c) Suspension of payment for other 

insured losses. Upon a determination by 

Treasury that an insurer has failed to 

meet any of the requirements for 

payment specified in paragraph (a) of 

this section for a particular insured loss, 

Treasury may suspend payment of the 

Federal share of compensation for all 

other insured losses of the insurer 

pending investigation and audit of the 

insurer’s insured losses. 

(d) Amount payable. The Federal 

share of compensation under the 

Program shall be 90 percent of that 

portion of the insurer’s aggregate 

insured losses that exceed its insurer 

deductible during a Program Year, 

subject to any adjustments in § 50.51 

and the cap of $100 billion as provided 

in section 103(e)(2) of the Act.

§ 50.51 Adjustments to the Federal share 

of compensation. 

(a) Aggregate amount of insured 

losses. The aggregate amount of insured 

losses of an insurer in a Program Year 

used to calculate the Federal share of 

compensation shall be reduced by any 

amounts recovered by the insurer as 

salvage or subrogation for its insured 

losses in the Program Year. 

(b) Amount of Federal share of 

compensation. The Federal share of 

compensation shall be adjusted as 

follows: 

(1) No excess recoveries. For any 

Program Year, the sum of the Federal 

share of compensation paid by Treasury 

to an insurer and the insurer’s 

recoveries for insured losses from other 

sources shall not be greater than the 

insurer’s aggregate amount of insured 

losses for acts of terrorism in that 

Program Year. Amounts recovered for 

insured losses in excess of an insurer’s 

aggregate amount of insured losses in a 

Program Year shall be repaid to 

Treasury within 45 days after the end of 

the month in which total recoveries of 

the insurer, from all sources, become 

excess. For purposes of this paragraph, 

amounts recovered from a reinsurer 

pursuant to an agreement whereby the 

reinsurer’s right to any excess recovery 

has priority over the rights of Treasury 

shall not be considered a recovery 

subject to repayment to Treasury. 

(2) Reduction of amount payable. The 

Federal share of compensation for 

insured losses under the Program shall 

be reduced by the amount of other 

compensation provided by other Federal 

programs to an insured or a third party 

to the extent such other compensation 

duplicates the insurance 

indemnification for those insured 

losses.

(i) Other Federal program 

compensation. For purposes of this 

section, compensation provided by 

other Federal programs for insured 

losses means compensation that is 

39308 Federal Register / Vol. 69, No. 124 / Tuesday, June 29, 2004 / Rules and Regulations 

provided by Federal programs 

established for the purpose of 

compensating persons for losses in the 

event of emergencies, disasters, acts of 

terrorism, or similar events. 

Compensation provided by Federal 

programs for insured losses excludes 

benefit or entitlement payments, such as 

those made under the Social Security 

Act, under laws administered by the 

Secretary of Veteran Affairs, railroad 

retirement benefit payments, and other 

similar types of benefit payments. 

(ii) Insurer due diligence. Each insurer 

shall inquire of each of its 

policyholders, insureds, and claimants 

whether the person receiving insurance 

proceeds for an insured loss has 

received, expects to receive, or is 

entitled to receive compensation from 

another Federal program for the insured 

loss, and if so, the source and the 

amount of the compensation received or 

expected. The response, source, and 

such amounts shall be reported with 

each underlying claim on the bordereau 

specified in § 50.53(b)(1).

§ 50.52 Initial Notice of Insured Loss. 

Each insurer shall submit to Treasury 

an Initial Notice of Insured Loss, on a 

form prescribed by Treasury, whenever 

the insurer’s aggregate insured losses 

(including reserves for ‘‘incurred but not 

reported’’ losses) within a Program Year 

exceed an amount equal to 50 percent 

of the insurer’s deductible as specified 

in § 50.5(g). Insurers are advised the 

form for the Initial Notice of Insured 

Loss will include an initial estimate of 

aggregate losses for the Program Year, 

the amount of the insurer deductible 

and an estimate of the Federal share of 

compensation for the insurer’s aggregate 

insured losses. In the case of an 

affiliated group of insurers, the form for 

the Initial Notice of Insured Loss will 

include the name and address of a 

single designated insurer within the 

affiliated group that will serve as the 

single point of contact for the purpose 

of providing loss and compliance 

certifications as required in § 50.53 and 

for receiving, disbursing, and 

distributing payments of the Federal 

share of compensation in accordance 

with § 50.54. An insurer, at its option, 

may elect to include with its Initial 

Notice of Insured Loss the certification 

of direct earned premium required by 

§ 50.53(b)(3).

§ 50.53 Loss certifications. 

(a) General. When an insurer has paid 

aggregate insured losses that exceed its 

insurer deductible, the insurer may 

make claim upon Treasury for the 

payment of the Federal share of 

compensation for its insured losses. The 

insurer shall file an Initial Certification 

of Loss, on a form prescribed by 

Treasury, and thereafter such 

Supplementary Certifications of Loss, 

on a form prescribed by Treasury, as 

may be necessary to receive payment for 

the Federal share of compensation for 

its insured losses. 

(b) Initial Certification of Loss. An 

insurer shall use its best efforts to file 

with the Program the Initial 

Certification of Loss within 45 days 

following the last calendar day of the 

month when an insurer has paid 

aggregate insured losses that exceed its 

insurer deductible. The Initial 

Certification of Loss will include the 

following:

(1) A bordereau, on a form prescribed 

by Treasury, that includes basic 

information about each underlying 

insured loss. For purposes of this 

section, a ‘‘bordereau’’ is a report of 

basic information about an insurer’s 

underlying claims that, in the aggregate, 

constitute the insured losses of the 

insurer. The bordereau will include, but 

may not be limited to: 

(i) A listing of each underlying 

insured loss by catastrophe code and 

line of business; 

(ii) The total amount of reinsurance 

recovered from other sources; 

(iii) A calculation of the aggregate 

insured losses sustained by the insurer 

above its insurer deductible for the 

Program Year; and 

(iv) The amount the insurer claims as 

the Federal share of compensation for 

its aggregate insured losses. 

(2) A certification that the insurer is 

in compliance with the provisions of 

section 103(b) of the Act and this part, 

including certifications that: 

(i) The underlying insured losses 

listed on the bordereau filed pursuant to 

§ 50.53(b)(1) either: Have been paid by 

the insurer; or will be paid by the 

insurer upon receipt of an advance 

payment of the Federal share of 

compensation as soon as possible, 

consistent with the insurer’s normal 

business practices, but not longer than 

five business days after receipt of the 

Federal share of compensation; 

(ii) The underlying claims for insured 

losses were filed by persons who 

suffered an insured loss, or by persons 

acting on behalf of such persons; 

(iii) The underlying claims for insured 

losses were processed in accordance 

with appropriate business practices and 

the procedures specified in this subpart; 

(iv) The insurer has complied with 

the disclosure requirements of §§ 50.10 

through 50.19 for each underlying 

insured loss that is included in the 

amount of the insurer’s aggregate 

insured losses; and 

(v) The insurer has complied with the 

mandatory availability requirements of 

§§ 50.20 through 50.24. 

(3) A certification of the amount of the 

insurer’s ‘‘direct earned premium’’ as 

defined in § 50.5(d), together with the 

calculation of its ‘‘insurer deductible’’

as defined in § 50.5(g) (provided this 

certification was not submitted 

previously with the Initial Notice of 

Insured Loss specified in § 50.52). 

(4) A certification that the insurer will 

disburse payment of the Federal share of 

compensation in accordance with this 

subpart.

(c) Supplementary Certification of 

Loss. If the total amount of the Federal 

share of compensation due an insurer 

for insured losses under the Act has not 

been determined at the time an Initial 

Certification of Loss has been filed, the 

insurer shall file monthly, or on a 

schedule otherwise determined by 

Treasury, Supplementary Certifications 

of Loss updating the amount of the 

Federal share of compensation owed for 

the insurer’s insured losses. 

Supplementary Certifications of Loss 

will include the following: 

(1) A bordereau described in 

§ 50.53(b)(1); and 

(2) A certification as described in 

§ 50.53(b)(2). 

(d) Supplementary information. In 

addition to the information required in 

paragraphs (b) and (c) of this section, 

Treasury may require such additional 

supporting documentation as required 

to ascertain the Federal share of 

compensation for the insured losses of 

any insurer. 

(e) State Residual Market Insurance 

Entities and State Workers’

Compensation Funds. A State residual 

market insurance entity or State 

workers’ compensation fund described 

in § 50.35 shall provide the 

Certifications of Loss described in 

§§ 50.53(b) and 50.53(c) for all its 

insured losses to each participating 

insurer at the time it provides the 

allocated dollar value of the 

participating insurer’s proportionate 

share of insured losses. In addition, at 

such time the State residual market 

insurance entity or State workers’

compensation fund shall provide the 

certification described in § 50.53(b)(2) to 

Treasury. Participating insurers shall 

treat the allocated dollar value of their 

proportionate share of insured losses 

from a State residual market insurance 

entity or State workers’ compensation 

fund as an insured loss for the purpose 

of their own reporting to Treasury in 

seeking the Federal share of 

compensation.

Federal Register / Vol. 69, No. 124 / Tuesday, June 29, 2004 / Rules and Regulations 39309

§ 50.54 Payment of Federal share of 

compensation. 

(a) Timing. Treasury will promptly 

pay to an insurer the Federal share of 

compensation due the insurer for its 

insured losses. Payment shall be made 

in such installments and on such 

conditions as determined by the 

Treasury to be appropriate. Any 

overpayments by Treasury of the 

Federal share of compensation will be 

offset from future payments to the 

insurer or returned to Treasury within 

45 days. 

(b) Payment process. Payment of the 

Federal share of compensation for 

insured losses will be made to the 

insurer designated on the Initial Notice 

of Loss required by § 50.52. An insurer 

that requests payment of the Federal 

share of compensation for insured losses 

must receive payment through 

electronic funds transfer. The insurer 

must establish either an account for 

reimbursement as described in 

paragraph (c) of this section (if the 

insurer only seeks reimbursement) or a 

segregated account as described in 

paragraph (d) of this section (if the 

insurer seeks advance payments or a 

combination of advance payments and 

reimbursement). Applicable procedures 

will be posted at www.treasury.gov/trip

or otherwise will be made publicly 

available. 

(c) Account for reimbursement. An 

insurer shall designate an account for 

the receipt of reimbursement of the 

Federal share of compensation at an 

institution eligible to receive payments 

through the Automated Clearing House 

(ACH) network. 

(d) Segregated account for advance 

payments. An insurer that seeks 

advance payments of the Federal share 

of compensation as certified according 

to § 50.53(b)(2)(i)(B) shall establish an 

interest-bearing segregated account into 

which Treasury will make advance 

payments as well as reimbursements to 

the insurer. 

(1) Definition of segregated account.

For purposes of this section, a 

segregated account is an interest-bearing 

separate account established by an 

insurer at a financial institution eligible 

to receive payments through the ACH 

network. Such an account is limited to 

the purposes of: 

(i) Receiving payments of the Federal 

share of compensation; 

(ii) Disbursing payments to insureds 

and claimants; and 

(iii) Transferring payments to the 

insurer or affiliated insurers for insured 

losses reported on the bordereau as 

already paid. 

(2) Remittance of interest. All interest 

earned on advance payments in the 

segregated account must be remitted at 

least quarterly to Treasury’s Office of 

Financial Management or as otherwise 

prescribed in applicable procedures. 

(e) Denial or withholding of advance 

payment. Treasury may deny or 

withhold advance payments of the 

Federal share of compensation to an 

insurer if Treasury determines that the 

insurer has not properly disbursed 

previous advances of the Federal share 

of compensation or otherwise has not 

complied with the requirements for 

advance payment as provided in this 

subpart.

(f) Affiliated group. In the case of an 

affiliated group of insurers, Treasury 

will make payment of the Federal share 

of compensation for the insured losses 

of the affiliated group to the insurer 

designated in the Initial Notice of 

Insured Loss to receive payment on 

behalf of the affiliated group. The 

designated insurer receiving payment 

from Treasury must distribute payment 

to affiliated insurers in a manner that 

ensures that each insurer in the 

affiliated group is compensated for its 

share of insured losses, taking into 

account a reasonable and fair allocation 

of the group deductible among affiliated 

insurers. Upon payment of the Federal 

share of compensation to the designated 

insurer, Treasury’s payment obligation 

to the insurers in the affiliated group 

with respect to any insured losses 

covered on the applicable bordereau is 

discharged to the extent of the payment.

Subpart G—Audit and Investigative 

Procedures

§ 50.60 Audit authority. 

The Secretary of the Treasury, or an 

authorized representative, shall have, 

upon reasonable notice, access to all 

books, documents, papers and records 

of an insurer that are pertinent to 

amounts paid to the insurer as the 

Federal share of compensation for 

insured losses for the purpose of 

investigation, confirmation, audit and 

examination.

§ 50.61 Recordkeeping. 

Each insurer that seeks payment of a 

Federal share of compensation under 

subpart F of this part shall retain such 

records as are necessary to fully disclose 

all material matters pertinent to insured 

losses and the Federal share of 

compensation sought under the 

Program, including, but not limited to, 

records regarding premiums and 

insured losses for all commercial 

property and casualty insurance issued 

by the insurer and information relating 

to any adjustment in the amount of the 

Federal share of compensation payable. 

Insurers shall maintain detailed records 

for not less than 5 years from the 

termination dates of all reinsurance 

agreements involving commercial 

property and casualty insurance subject 

to the Act. Records relating to premiums 

shall be retained and available for 

review for not less than 3 years 

following the conclusion of the policy 

year. Records relating to underlying 

claims shall be retained for not less than 

5 years following the final adjustment of 

the claim.

Dated: June 21, 2004. 

Wayne A. Abernathy, 

Assistant Secretary of the Treasury.

[FR Doc. 04–14588 Filed 6–28–04; 8:45 am] 

BILLING CODE 4811–15–P