September 21, 2004 

Dear Mr. D: 

This letter responds to your request for an interpretation concerning the 

application of the Terrorism Risk Insurance Act of 2002 (“TRIA”)1

 and Treasury’s 

regulations implementing TRIA2

 to the use of a captive insurer that would insure the 

parent’s deductible under a separate workers’ compensation insurance policy, issued by a 

separate insurer, but only to the extent the deductible applies to losses from certified acts 

of terrorism.3

Your client currently purchases workers’ compensation insurance from a large 

commercial insurer. Under the policy, your client retains a large deductible. As we 

understand your letter, your client wishes to restructure its workers’ compensation policy 

to make all insured losses under the workers’ compensation policy that are caused by a 

certified act of terrorism to be within the policy’s deductible. As you state in your letter, 

this structure would make your client responsible for all terrorism losses under the 

workers’ compensation policy.4

 Your client would then obtain a stand-alone matching 

deductible policy from a domestic, wholly-owned, licensed or admitted captive insurance 

company which we understand will cover the terrorism losses within the other policy’s 

deductible. You request confirmation from Treasury that the captive insurer would have 

benefit of the TRIA backstop protection if such a workers’ compensation program were 

established. 

A State licensed or admitted captive that receives direct earned premium5

 has the 

benefit of TRIA backstop protection for insured losses covered under workers’ 

compensation policies, which is a commercial line of property and casualty insurance 

included in the Terrorism Risk Insurance Program.6

 Nevertheless, Treasury has concerns 

about the strategic use of captives as a means of avoiding the requirements of the Act and 

its implementing regulations. For example, we have cautioned entities about forming 

captive insurers for the sole purpose of issuing stand-alone, single-risk terrorism 

insurance if they are doing so in order to avoid the Act’s deductible requirements.7

 

 

1

 P.L. 107-297, 116 Stat. 2322, 15 U.S.C. §6701, note. 

2 See 31 C.F.R., Part 50. 

3

 For purposes of this response, we assume that such an arrangement is permitted under state law though 

you have told us that state regulatory approval has not yet been sought. 

4

 All terrorism losses, though covered by the workers’ compensation policy, would not be payable because 

the losses would be considered to be within the policy’s deductible regardless of the aggregate amount of 

the losses. 

5

 31 C.F.R. §50.5(f). 

6 Id. at §50.5(l). 

7 See Letter regarding TRIA-Only Captives (March 2, 2004), http://www.treas.gov/offices/domesticfinance/financial-institution/terrorism-insurance/. 
2

 

As stated in our regulations that govern the payment of claims, Treasury will not 

pay the Federal share of compensation, in whole or in part, should it determine that the 

insurer’s claim for Federal payment has been designed to circumvent the purposes of the 

Act or regulations.8

 Here, your client, its insurer, and your client’s wholly-owned captive 

appear to be acting in concert to design an atypical insurance program with its purpose 

being to transfer part of the terrorism risk to Treasury (through the captive with a lower 

TRIA deductible) that for all other perils your client is otherwise willing to retain or 

transfer to its current insurer with a higher TRIA deductible. This arrangement raises 

serious questions as to whether it has been designed to circumvent the purposes of the 

Act or regulations. For this reason, we strongly caution you and advise you against 

taking the proposed action if it is being undertaken to avoid TRIA’s deductible 

requirements. 

Thank you for your inquiry. For additional information or if you have other 

questions that need to be addressed, please write or call the Program office at 202-622-

6770. 

* * * 

This response addresses the application of the Act and regulations to the specific 

situation set forth in your request, as you have represented the facts to Treasury. If there 

is a change in any of the facts or assumptions presented, and such facts or assumptions 

are material to a conclusion presented in this response, then the requestor may not rely on 

that conclusion generally or as support for any proposed or subsequent activity. This 

response is provided by the Terrorism Risk Insurance Program as a means of stating its 

current interpretation of the Act and regulations. The Program may revise or revoke this 

interpretation upon its own initiative or upon the enactment of amendments to the Act or 

regulations. 

TERRORISM RISK INSURANCE PROGRAM 

______________________________ 

Jeffrey S. Bragg 

Executive Director 

8

 31 C.F.R. §50.50(a)(4).