Friday,

February 28, 2003

Part V

Department of the 

Treasury

31 CFR Part 50

Departmental Offices; Terrorism Risk 

Insurance Program; Interim Final Rule 

and Proposed Rule

9804 Federal Register / Vol. 68, No. 40 / Friday, February 28, 2003 / Rules and Regulations 

DEPARTMENT OF THE TREASURY

31 CFR Part 50 

RIN 1505–AA96 

Departmental Offices; Terrorism Risk 

Insurance Program

AGENCY: Departmental Offices, Treasury.

ACTION: Interim final rule with request 

for comments. 

SUMMARY: The Department of the 

Treasury (Treasury) is issuing this 

interim final rule as part of its 

implementation of Title I of the 

Terrorism Risk Insurance Act of 2002 

(Act). That Act established a temporary 

Terrorism Risk 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 

sunsets on December 31, 2005. This 

interim final rule sets forth the purpose 

and scope of the Program and key 

definitions that Treasury will use in 

implementing the Program. In general, 

this interim final rule incorporates 

interim guidance previously issued by 

Treasury concerning these definitions. 

However, the preamble indicates those 

areas in which Treasury has modified 

the interim guidance. This interim final 

rule is the first of a series of regulations 

Treasury will issue to implement the 

Program.

DATES: This interim rule is effective 

February 28, 2003. Written comments 

on this interim final rule may be 

submitted to the Treasury Department 

on or before March 31, 2003.

ADDRESSES: Submit comments (if hard 

copy, preferably an original and two 

copies) to Office of Financial 

Institutions Policy, Attention: Terrorism 

Risk Insurance Program Public 

Comment Record, Room 3160 Annex, 

Department of the Treasury, 1500 

Pennsylvania Ave., NW., Washington, 

DC 20220. Because paper mail in the 

Washington, DC area may be subject to 

delay, it is recommended that comments 

be submitted by electronic mail to: 

triacomments@do.treas.gov. Please 

include your name, affiliation, address, 

e-mail address and telephone number in 

your comment. All comments should be 

captioned with ‘‘February 28, 2003 

TRIA Comments.’’ Comments will be 

available for public inspection by 

appointment only at the Reading Room 

of the Treasury Library. To make 

appointments, call (202) 622–0990 (not 

a toll-free number).

FOR FURTHER INFORMATION CONTACT:

Mario Ugoletti, Deputy Director, Office 

of Financial Institutions Policy (202) 

622–2730 or Martha Ellett, AttorneyAdvisor, Office of the Assistant General 

Counsel (Banking & Finance), (202) 

622–0480 (not toll-free numbers).

SUPPLEMENTARY INFORMATION: 

I. Background 

A. Terrorism Risk Insurance Act of 2002 

On November 26, 2002, President 

Bush signed into law the Terrorism Risk 

Insurance Act of 2002 (Public Law 107–

297, 116 Stat. 2322). The Act was 

effective immediately. 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 as defined in 

the Act and 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 

sunset on December 31, 2005. 

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. 

The amount of Federal payment for an 

insured loss resulting from an act of 

terrorism is to be determined based 

upon the insurance company 

deductibles and excess loss sharing with 

the Federal Government, as specified by 

the Act. Thus, the Program provides a 

Federal reinsurance backstop for a 

temporary period of time. The Act also 

provides Treasury with authority to 

recoup Federal payments made under 

the Program through policyholder 

surcharges, up to a maximum annual 

limit. 

Each entity that meets the definition 

of ‘‘insurer’’(well over 2,000 firms) must 

participate in the Program. From the 

date of enactment of the Act through the 

last day of Program Year 2 (December 

31, 2004), insurers under the Program 

must ‘‘make available’’ terrorism risk 

insurance in their commercial property 

and casualty insurance policies and the 

coverage must not differ materially from 

the terms, amounts and other coverage 

limitations applicable to commercial 

property and casualty losses arising 

from events other than acts of terrorism. 

The Act permits Treasury to extend the 

‘‘make available’’ requirement into 

Program Year 3, based on an analysis of 

factors referenced in the study required 

by section 108(d)(1) of the Act, and not 

later than September 1, 2004. 

An insurer’s deductible increases 

each year of the Program, thereby 

reducing the Federal government’s 

involvement prior to sunset of the 

Program. An insurer’s deductible is 

based on ‘‘direct earned premiums’’ 

over a statutory Transition Period and 

the three Program Years. Once an 

insurer has met its deductible, the 

Federal payments cover 90 percent of 

insured losses above the deductible, 

subject to an aggregate annual cap of 

$100 billion. The Act prohibits 

duplicative payments for insured losses 

that have been covered under any other 

Federal program. 

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 must 

submit a claim and certain certifications 

to Treasury. Treasury will be 

prescribing claims procedures at a later 

date. 

The Act also contains specific 

provisions designed to manage litigation 

arising from or relating to a certified act 

of terrorism. Section 107 creates an 

exclusive Federal cause of action, 

provides for claims consolidation in 

Federal court and contains a prohibition 

on Federal payments for punitive 

damages under the Program. This 

section 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. 

B. Previously Issued Interim Guidance

To assist insurers, policyholders and 

other interested parties in complying 

with immediately applicable and time 

sensitive requirements of the Act prior 

to the issuance of these and future 

regulations, Treasury issued interim 

guidance in three separate notices. 

Treasury publicly released these interim 

guidance notices on its Program Web 

site, http://www.treasury.gov/trip, and 

published each notice in the Federal 

Register. 

Treasury released the first notice of 

Interim Guidance on December 3, 2002, 

within a week of the Act’s enactment 

(Interim Guidance I). Interim Guidance 

I was published at 67 FR 76206 on 

December 11, 2002 and addressed 

several issues pertaining to immediately 

applicable provisions of the Act, 

including statutory disclosure 

obligations of insurers as conditions for 

Federal payment under the Program and 

the requirement that an insurer ‘‘make 

Federal Register / Vol. 68, No. 40 / Friday, February 28, 2003 / Rules and Regulations 9805

available’’ terrorism risk insurance. The 

disclosure guidance in Interim 

Guidance I references certain model 

forms of the National Association of 

Insurance Commissioners (NAIC) and 

provides safe harbor for those insurers 

that make use of such forms prior to the 

issuance of regulations, but Interim 

Guidance I stated that these forms are 

not the exclusive means by which 

insurers could comply with the 

disclosure conditions prior to the 

issuance of regulations. Interim 

Guidance I also provided guidance 

concerning the ‘‘direct earned 

premium’’ on lines of property and 

casualty insurance to enable insurers to 

calculate their ‘‘insurer deductible’’ and 

enable insurers to price and disclose 

their premiums for terrorism risk 

insurance to policyholders within 

statutory time periods. 

On December 18, 2002, Treasury 

issued a second notice of interim 

guidance. This interim guidance was 

published at 67 FR 78864 on December 

26, 2002 (Interim Guidance II). Interim 

Guidance II further addressed the 

statutory categories of ‘‘insurers’’ that 

are required to participate in the 

Program, including their ‘‘affiliates’’; 

provided clarification on the scope of 

‘‘insured loss’’ covered by the Program 

and provided additional guidance to 

enable eligible surplus line carriers 

listed on the Quarterly Listing of Alien 

Insurers of the NAIC or federally 

approved insurers to calculate their 

insurer deductible for purposes of the 

Program. 

On January 22, 2003, Treasury issued 

a third notice of interim guidance, 

published at 68 FR 4544 on January 29, 

2003 (Interim Guidance III). Interim 

Guidance III further clarified certain 

disclosure and certification questions, 

issues for non-U.S. insurers, and the 

scope of the term ‘‘insured loss’’ under 

the Act. 

In issuing each notice of Interim 

Guidance, Treasury stated that the 

Interim Guidance may be relied upon by 

insurers until superseded by regulations 

or a subsequent notice. Treasury 

provided safe harbors for actions by 

those insurers taken in accordance with, 

and in reliance on, the interim guidance 

for the time period prior to the issuance 

of regulations. Treasury now is issuing 

an interim final rule with request for 

comment. The interim final rule 

addresses certain general Program 

provisions and Program definitions. 

Treasury is also issuing a companion 

proposed rule with request for 

comment. 

II. Analysis of the Interim Final Rule 

The interim final rule establishes a 

new Part 50 in Title 31 of the Code of 

Federal Regulations, 31 CFR Part 50. 

Part 50 eventually will include other 

regulations deemed necessary by 

Treasury to implement the Program. 

Subpart A of new Part 50 contains 

certain general provisions and 

definitions of Program terms. 

Some of the definitions are taken 

virtually verbatim from the Act because 

they do not need further clarification 

and are included in the interim final 

regulations primarily for ease of 

reference. In addition, the interim final 

rule generally incorporates the interim 

guidance provided previously by 

Treasury as it pertains to Program terms, 

for example, the terms ‘‘insurer,’’

‘‘affiliate’’, ‘‘property and casualty 

insurance’’ and ‘‘direct earned 

premium.’’ In several areas, the interim 

final regulation makes clarifying 

modifications to, or supplements, the 

interim guidance. For example, the 

interim final rule clarifies and 

emphasizes that the Program covers 

only commercial lines of property and 

casualty insurance, subject to the 

inclusions and exclusions of certain 

lines of insurance as set forth in the 

definition of property and casualty 

insurance in section 102(12) of the Act. 

The Program does not cover personal 

lines of property and casualty 

insurance, even if the latter are reported 

by an insurer on the NAIC’s Exhibit of 

Premiums and Losses (commonly 

known as Statutory Page 14). 

In implementing the Program, 

Treasury has been guided by several 

goals. First, we strive to implement the 

Act in a transparent and effective 

manner that, for example, treats 

comparably those insurers required to 

participate in the Program and that 

provides necessary information to 

policyholders in a useful and efficient 

manner. Second, Treasury seeks to rely 

as much as possible on the State 

insurance regulatory structure. In that 

regard, Treasury is closely coordinating 

with the NAIC in implementing 

definitions and other aspects of the 

Program. Third, to the extent possible 

within statutory constraints, Treasury 

seeks to allow insurers to participate in 

the Program in a manner consistent with 

their normal course of business. Finally, 

given the temporary and transitional 

nature of the Program, Treasury is 

guided by the Act’s goal for insurers to 

develop their own capacity, resources 

and mechanisms for terrorism risk 

insurance coverage when the Program 

expires. 

Key Program definitions contained in 

the interim final regulation are analyzed 

below. 

A. What is an ‘‘Act of Terrorism’’ Under 

the Program? 

The Program definition of ‘‘act of 

terrorism’’ in the interim final rule is the 

same definition that is contained in 

section 102(1) of the Act. Section 

106(a)(2) of the Act provides that the 

Act’s definition is the exclusive 

definition of the term ‘‘act of terrorism’’

for purposes of compensation for 

insured losses under the Act. The Act’s 

definition requires a certification by the 

Treasury Secretary, in concurrence with 

the Secretary of State and the Attorney 

General of the United States, that an act 

is an act of terrorism within the 

statutory parameters. These parameters 

include an act that is violent or 

dangerous to human life, property or 

infrastructure; that has resulted in 

damage within the United States, or 

outside the United States in the case of 

certain air carriers or vessels or if on the 

premises of a U.S. mission; and that has 

been committed by individual(s) on 

behalf of any foreign person or foreign 

interest, as part of an effort to coerce the 

U.S. civilian population or to influence 

the policy or affect the conduct of the 

U.S. government by coercion. 

Thus, for example, acts of domestic 

civil disturbance would not be covered 

by the Act’s definition of ‘‘act of 

terrorism’’ or therefore, by the Program. 

As in the Act, the interim final rule 

provides that the Secretary’s 

determination or certification with 

regard to an act is final and is not 

subject to judicial review. An act of 

terrorism must meet a $5,000,000 de 

minimis aggregate loss requirement 

before it may be certified. The Act also 

provides that an act is not certifiable if 

committed as part of a course of war 

declared by Congress, except with 

respect to workers compensation 

coverage.

B. What Entities Must Participate in the 

Program (‘‘Affiliate’’, ‘‘Control’’, 

‘‘Insurer’’)? 

1. Mandatory Participation of Insurers 

The general provisions of the interim 

final rule incorporate the Act’s 

requirement in section 103(a)(3) that 

each entity meeting the definition of 

‘‘insurer’’ under the Act must 

participate in the Program. 

2. ‘‘Insurer’’

The interim final rule incorporates the 

statutory definition of ‘‘insurer’’ and 

generally incorporates the guidance set 

forth in Interim Guidance II concerning 

9806 Federal Register / Vol. 68, No. 40 / Friday, February 28, 2003 / Rules and Regulations 

the categories of insurer and the 

definition of affiliate. To participate in 

the Program, an entity, including an 

affiliate of an insurer, must itself meet 

all of the requirements of section 

102(6)(A), (B) and, as the Treasury may 

prescribe, (C). This means that to be an 

insurer, an entity must (1) fall within 

one of the categories in section 

102(6)(A) described below, and (2) must 

receive direct earned premiums as 

required by section 102(6)(B) and (3) 

must meet any additional criteria 

established by Treasury pursuant to 

section 102(6)(C). 

a. Must Fall Within a Category of 

Insurers in Section 102(6)(A) 

First, an insurer must fall within at 

least one of the following several 

categories set forth in section 102(6)(A): 

(i) Licensed or admitted to engage in 

the business of providing primary or 

excess insurance in any State (‘‘State’’

includes the District of Columbia and 

territories of the United States); 

(ii) Not so licensed or admitted, but is 

an eligible surplus line carrier listed on 

the Quarterly Listing of Alien Insurers 

of the National Association of Insurance 

Commissioners; 

(iii) Approved for the purpose of 

offering property and casualty insurance 

by a Federal agency in connection with 

maritime, energy or aviation activity; or 

(iv) A State residual market insurance 

entity or State workers’ compensation 

fund. 

Consistent with Interim Guidance II, 

the interim final rule provides that an 

entity that falls within two categories 

will be considered by Treasury to fall 

within the first category it meets under 

section 102(6)(A)(i)–(v). Therefore, if an 

entity is a federally approved insurer 

under section 102(6)(A)(iii) and is 

licensed or admitted in any State, it will 

be treated under the Program as a State 

licensed or admitted insurer under 

section 102(6)(A)(i). 

In each of the categories of insurer in 

section 102(6)(A)(i)–(iv), the insurer has 

a pre-existing State or NAIC regulatory 

framework, or has a relationship with a 

Federal or State program. In developing 

this interim final rule, Treasury 

considers such a nexus between an 

insurer and a Federal or State program 

or regulatory authority to be extremely 

important to the effective and efficient 

administration of the Program. A preexisting nexus between an insurer and 

a regulatory structure, for example, 

assists Treasury in ensuring the 

financial integrity of participating 

entities, in obtaining necessary data to 

implement and evaluate the Program 

and in carrying out Treasury’s surcharge 

and recoupment, audit and enforcement 

responsibilities under the Act. 

Treasury’s emphasis on such a nexus is 

also in accord with the temporary 

nature of the Program and other aspects 

of the Program’s statutory structure. 

‘‘State Licensed or Admitted’’

Insurers under clause (i) of section 

102(6)(A) include all entities that are 

licensed or admitted by a State’s 

insurance regulatory authority. This 

group of insurers includes captive 

insurers, risk retention groups, and farm 

and county mutuals, if such entities are 

State licensed or admitted. The Program 

treats all State licensed or approved 

insurers consistently in accord with the 

plain language of section 102(6)(A)(i). 

This treatment also furthers other 

statutory objectives such as ensuring 

that policyholders have widespread 

access to the terrorism risk insurance 

benefits of Program, and spreading 

potential costs of the Program associated 

with any federal loss-sharing payments. 

(For example, see the cost spreading 

provisions in connection with 

recoupment as required by section 

103(e)(7) and in connection with 

surcharges as required by section 

103(e)(8) to be applied to all commercial 

property and casualty policyholders). 

Other Categories of Insurers 

The NAIC has established criteria for 

approval of eligible surplus line carriers 

for listing on the NAIC’s Quarterly 

Listing of Alien Insurers. Federally 

approved insurers under section 

102(6)(A)(iii) are addressed in detail 

below. Treasury intends to issue 

additional regulations to apply the 

provisions of the Act to insurers in 

clause (iv) of State residual market 

insurance entities and State workers’

compensation funds pursuant to section 

103(d). 

As described above, all State licensed 

or admitted captive insurers are insurers 

within the Program under section 

102(6)(A)(i). Treasury may, in 

consultation with the NAIC or the 

appropriate State regulatory authority, 

apply the provisions of the Act to ‘‘other 

classes or types of captive insurers and 

other self insurance arrangements’’

pursuant to section 103(f) of the Act, but 

only if such an application is 

determined before the occurrence of an 

act of terrorism and all of the provisions 

of the Act are applied comparably to 

such entities. Treasury has engaged in 

consultations, but has not yet made a 

decision regarding the participation in 

the Program of captives and other self 

insurance arrangements that do not fall 

into other categories in clauses (i)–(iv). 

b. Must Receive Direct Earned 

Premiums As Required by Section 

102(6)(B) 

The second criteria an entity must 

meet to be an insurer for purposes of the 

Program is prescribed by section 

102(6)(B). In addition to falling within 

a category in section 102(6)(A), to be an 

‘‘insurer’’ under the Act, an entity must 

receive ‘‘direct earned premiums’’ (as 

defined) on any type of commercial 

property and casualty insurance (as 

defined). The key aspect of this 

requirement in the statutory definition 

of insurer is the Act’s specification of a 

direct measure of premium income as 

opposed, for example, to a net measure 

of premium income which accounts for 

reinsurance. Although the legislative 

history and design of the Act envision 

reinsurance arrangements as an 

important component of capacity within 

the insurance market, the Act excludes 

reinsurance from the Program. (Section 

103(g) of the Act provides that the Act 

does not limit or prevent ‘‘insurers’’

from obtaining reinsurance coverage for 

‘‘insurer deductibles’’ or ‘‘insured 

losses’’ retained by insurers.) Therefore, 

consistent with the Act and Treasury’s 

Interim Guidance II, the interim final 

rule provides that, if an entity does not 

receive direct earned premiums as 

required by section 102(6)(B), and 

subject to statutory exceptions, then the 

entity is not an ‘‘insurer’’ under the Act. 

In that regard, Section 102(6)(B) excepts 

State residual market insurance entities 

from the direct earned premium 

requirement.

c. Must Meet Additional Criteria 

Prescribed by Treasury Under Section 

102(6)(C). 

In addition to the requirements of 

section 102(6)(A) and (B) described 

above, section 102(6)(C) of the Act 

requires that an insurer also meet ‘‘any 

other criteria that the Secretary of the 

Treasury may reasonably prescribe.’’

The interim final rule does not prescribe 

additional criteria under section 106(C). 

Published elsewhere in this separate 

part of the Federal Register is a notice 

of proposed rulemaking in which 

Treasury solicits public comment on 

whether the Secretary should prescribe 

other criteria for certain insurers 

pursuant to the authority provided by 

section 102(6)(C) and, if so, what criteria 

Treasury should prescribe. In this 

regard, in the notice of proposed 

rulemaking Treasury solicits comment 

on appropriate criteria to prevent 

participation in the Program by newly 

formed insurance companies deemed by 

Treasury to be established for the 

purpose of evading the insurer 

deductible requirements of the Act and 

the Program. As stated in the notice of 

proposed rulemaking, Treasury’s 

objectives are to encourage new sources 

of capital in the market for terrorism 

Federal Register / Vol. 68, No. 40 / Friday, February 28, 2003 / Rules and Regulations 9807

risk insurance, and at the same time, 

ensure the integrity of the Program and 

provide comparable treatment of 

Program participants. Accordingly, the 

intent of any additional criteria, if 

proposed, is not to discourage Program 

participation by newly formed 

commercial property and casualty 

insurance companies in their normal 

course of business, but to administer the 

Program effectively and fairly, including 

preventing evasion of insurer deductible 

requirements by special purpose entities 

formed to provide terrorism risk only 

coverage. 

Also in the notice of proposed 

rulemaking published elsewhere in this 

separate part of the Federal Register, 

Treasury solicits comment on 

appropriate additional criteria, 

including financial standards, that 

should be proposed for federally 

approved insurers under Treasury’s 

authority in section 102(6)(C). One 

reason for imposing additional criteria 

on federally approved insurers is 

because there are no uniform 

requirements or standards for federal 

approval under various federal 

programs. Although some federal 

programs impose minimum financial 

standards, others do not. Therefore, 

Treasury is considering whether 

additional criteria for federally 

approved insurers should be proposed 

to promote the financial integrity of the 

Program and to otherwise effectively 

administer the Program. In addition, in 

the notice of proposed rulemaking 

published elsewhere in this separate 

part of the Federal Register, Treasury 

solicits comment on criteria that 

Treasury should propose and prescribe 

under section 102(6)(C) to ensure that 

payments under the Program do not 

benefit entities with connections to 

terrorist organizations. 

d. ‘‘Federally Approved’’ Insurer. 

If an entity does not fall within 

section 102(6)(A)(i) or (ii), but is 

approved or accepted by a Federal 

agency to offer property and casualty 

insurance in connection with maritime, 

energy or aviation activities; receives 

direct earned premiums for any type of 

commercial property and casualty 

insurance as required by 102(6)(B), and, 

if prescribed, meets any criteria 

established by Treasury under 102(6)(C), 

then, such an entity is considered by 

Treasury to be a federally approved 

‘‘insurer’’ under section 102(6)(A)(iii). 

As reflected in Interim Guidance II, 

this interim final rule provides that the 

scope of insurance coverage (insured 

losses) under the Program for federally 

approved insurers under section 

102(6)(A)(iii) is only to the extent of 

federal approval of the commercial 

property and casualty insurance 

coverage approved by the Federal 

Agency in connection with maritime, 

energy or aviation activity. Insured 

losses under other insurance coverage 

that may be offered by a federally 

approved insurer under section 

102(6)(A)(iii) is not covered by the 

Program. This treatment of federally 

approved insurers is in accord with the 

statutory language of the Act in section 

102(6)(A)(iii) (‘‘approved for the 

purpose of offering property and 

casualty insurance by a Federal agency 

in connection with maritime, energy or 

aviation activity’’). This treatment is 

also in accord with Treasury’s 

consideration of a pre-existing nexus 

(for example, the nexus of Statelicensing or NAIC approval for listing 

on the Quarterly Listing of Alien 

Insurers) as very important to the 

effective and efficient administration of 

the Program. This nexus is considered 

by Treasury to be an important aid in 

ensuring financial integrity of 

participants in the Program, in obtaining 

data, and in connection with 

recoupment, audit and enforcement 

responsibilities, among others. In 

addition, this treatment is consistent 

with the temporary nature and other 

statutory structure of the Program. 

Treasury recognizes that it is possible to 

interpret section 102(6)(A)(iii) more 

broadly, but for reasons stated above has 

determined that the narrower reading is 

not only in accord with the statutory 

language but serves other important 

purposes in the administration of the 

Program. 

Examples of federally approved 

insurers under section 102(6)(A)(iii) are 

those insurers that do not fall within 

section 102(6)(A)(i) or (ii), and are 

approved or accepted by a Federal 

agency under the following federal 

programs and statutes: 

• Approval of Underwriters for 

Marine Hull Insurance (Maritime 

Administration, U.S. Department of 

Transportation). 

• Aircraft Accident Liability 

Insurance (U.S. Department of 

Transportation). 

• Oil Spill Financial Responsibility 

for Offshore Facilities (Minerals 

Management Service, U.S. Department 

of the Interior). 

• Oil Spill Financial Responsibility 

for Vessels (United States Coast Guard, 

U.S. Department of Transportation). 

• Longshoremen’s and Harbor 

Workers’ Compensation Act 

(Employment Standards 

Administration, U.S. Department of 

Labor). 

• Price Anderson Act (Nuclear 

Regulatory Commission, U.S. 

Department of Energy). 

The above list of Federal insurance 

programs contains an addition to the list 

contained in Interim Guidance II 

through the express inclusion of 

insurers approved or accepted under the 

Price Anderson Act. This list is 

provided as a starting reference point 

and is not exclusive. Any entity that is 

approved or accepted by a U.S. agency 

to offer commercial property and 

casualty insurance in connection with 

maritime, energy or aviation activities 

by a program that is not listed above is 

particularly encouraged to advise the 

designated Treasury contacts provided 

by this rule with the name of the 

program and the name of the Federal 

agency that approved or accepted them. 

Treasury is not prescribing additional 

criteria under section 102(6)(C) in the 

interim final rule for federally approved 

insurers, but solicits comments 

elsewhere in this separate part of the 

Federal Register on whether and what 

additional criteria should be prescribed 

for federally approved insurer. 

3. ‘‘Affiliates’’

The definition of ‘‘insurer’’ in section 

102(6) includes ‘‘any affiliate thereof.’’

Section 102(2) of the Act defines 

‘‘affiliate’’ to mean ‘‘with respect to any 

insurer, any entity that controls, is 

controlled by or is under common 

control with the insurer’’ (emphasis 

supplied). Any affiliate that does not 

meet the definition of insurer, for 

example, it does not fall into any of the 

categories in section 102(6)(A) or does 

not receive direct earned premiums for 

commercial property and casualty 

insurance as required by section 

102(6)(B), is not an ‘‘insurer’’ for 

purposes of the Program. Consistent 

with Interim Guidance II, and the 

definition of ‘‘control’’ discussed below, 

Treasury will treat the parent company, 

and all affiliates that meet the 

requirements of ‘‘insurer’’ in section 

102(6)(A), (B) and (C), collectively as 

one ‘‘insurer’’ for purposes of 

calculating the direct earned premiums 

on which the insurer deductible is 

based under the Program. This 

consolidated treatment is also in accord 

with the Conference Report to 

accompany the Act, which states, in the 

explanation of section 102 of the Act, 

that ‘‘the terms ‘affiliate’ and ‘control’

are meant to ensure that affiliated 

insurers are treated as a consolidated 

entity for calculating direct earned 

premiums.’’ H.R. Conf. Rep. No. 107–

779 (2002). 

For example, if an insurance company 

is licensed or admitted to engage in the 

9808 Federal Register / Vol. 68, No. 40 / Friday, February 28, 2003 / Rules and Regulations 

business of providing primary or excess 

insurance in a State and receives direct 

earned premiums as required in section 

102(6)(B), and three out of four of its 

affiliate insurance companies also are 

State licensed and meet the 

requirements of section 102(6)(B) and 

(C), then the parent company and the 

three affiliates that meet the definition 

of ‘‘insurer’’ are, collectively, one 

insurer for purposes of calculating and 

consolidating direct earned premiums 

and calculating insurer deductibles 

under the Program. The affiliate that 

does not fall within one of the categories 

in section 102(6)(A) or fails to meet all 

the requirements to be an ‘‘insurer’’

under section 102(6) is not included in 

the Program.

As discussed previously in Interim 

Guidance II, if an entity is ‘‘under 

common control with the insurer,’’ and 

that entity meets the requirements to be 

an ‘‘insurer’’ in section 102(6)(A)–(C), 

Treasury will consider that entity 

collectively with the other insurer (its 

affiliate) as one ‘‘insurer’’ for the 

Program purposes of consolidating 

direct earned premiums and calculating 

the insurer deductible. For example, 

assume that two insurance companies 

are licensed to engage in the business of 

providing primary or excess insurance 

in any State (either in one State or in 

separate States) and both receive direct 

earned premiums as required by section 

102(6)(B). Each company, would meet 

the definition of ‘‘insurer.’’ Assume 

additionally that the common parent of 

the two companies does not fall into any 

of the categories in section 102(6)(A). 

Treasury will consider the two affiliated 

companies to be, collectively, one 

insurer for purposes of calculating and 

consolidating direct earned premiums 

and their insurer deductible under the 

Program, but their parent company is 

not an insurer and not included in the 

Program. 

4. ‘‘Control’’

Related to the definition of insurer 

and affiliate is the definition of 

‘‘control’’ in section 102(3)(A)–(C) of the 

Act. The definition and determination 

of ‘‘control’’ for purposes of the Program 

is used by Treasury to calculate the 

insurer deductible on a consolidated 

basis for an insurer ‘‘including any 

affiliate thereof’’(see discussion of 

affiliate above). Under the Act, an entity 

is in control of another entity if the 

statutory definition is met under section 

102(3)(A) or (B), or if Treasury makes a 

determination under (C) that the entity 

directly or indirectly exercises a 

controlling influence over the 

management or policies of the other 

entity. Each category of control for 

purposes of the Program is described 

below with examples. 

a. ‘‘Owns, Controls or has the Power 

to Vote’’ 25 Percent of Voting Securities. 

Section 102(3)(A) provides that an 

entity has ‘‘control’’ over another if the 

entity directly or indirectly or acting 

through 1 or more other persons owns, 

controls or has power to vote, 25 

percent or more of any class of voting 

securities of the other entity. For 

example, if Insurer X owns, or has the 

power to vote, 25 percent or more of any 

class of voting securities of Insurer Y, 

then Insurer X is in control of Insurer Y 

under section 102(3)(A). This control 

relationship means, among other things, 

that Treasury will consolidate the direct 

earned premiums of these two insurers 

under Insurer X for purposes of 

calculating the insurer deductible and 

evaluating a claim for federal payment. 

Published elsewhere in this separate 

part of the Federal Register is a notice 

of proposed rulemaking in which 

Treasury solicits comments on whether 

the definition of control contained in 

the interim final rule should be 

supplemented by proposing a rule to 

address situations in which a corporate 

insurance structure may contain 

multiple insurers that own, control or 

have the power to vote more than 25 

percent of the voting shares of another 

insurer. Based on available information, 

such control arrangements exist but they 

do not appear to be common. In 

particular, Treasury is considering 

consolidating direct earned premiums 

for purposes of calculating the insurer 

deductible on a pro rata basis among the 

multiple controlling owners. For 

example, if Insurer Y owns 40 percent 

of the voting shares of Insurer Z and 

Insurer X owns 30 percent of the voting 

shares of Insurer Z, then a pro rata 

allocation of premium income and 

insured loss under the Program would 

be, respectively, 57 percent and 43 

percent. 

b. Controls Election of Majority of 

Directors or Trustees. 

Pursuant to section 102(3)(B), an 

entity also is in control over another 

entity for purposes of the Program if the 

entity controls in any manner the 

election of a majority of the directors or 

trustees of the other entity. For example, 

even if Insurer A does not own or have 

the power to vote 25 percent or more of 

any class of voting securities of Insurer 

B, if Insurer A controls in any manner 

the election of a majority of the directors 

or trustees of Insurer B, then Insurer A 

‘‘controls’’ Insurer B under the Act. This 

means that, for purposes of the Program, 

Treasury will consolidate the direct 

earned premiums of these two insurers 

under Insurer A in calculating the 

insurer deductible and evaluating a 

claim for federal payment. 

c. Control Determination by Treasury 

under Section 102(3)(C). 

If no control relationship exists on the 

basis of either section 102(3)(A) or (B), 

Treasury has authority, under section 

102(3)(C), to determine, after notice and 

opportunity for hearing, that an insurer 

directly or indirectly exercises a 

controlling influence over the 

management or policies of another 

insurer. To provide further guidance for 

purposes of a control determination 

under this subsection (C), the interim 

final rule establishes several rebuttable 

presumptions. The first rebuttal 

presumption under section 102(3)(C) is 

that an entity is in control of another 

entity for purposes of the Program 

(including consolidation of direct 

earned premiums in calculating the 

insurer deductible) if a State has 

determined that a control relationship 

exists between the two entities. If a State 

has made such a control determination 

with regard to two insurers, and the 

affected insurers wish to rebut the 

presumption established in this interim 

final rule, then the insurers may request 

an informal hearing (e.g. exchange of 

documents) in which they will be given 

an opportunity by Treasury to present 

and support their position that no 

control relationship exists, prior to a 

final determination by Treasury. 

The second rebuttable presumption 

Treasury is establishing is that an 

insurer exercises directly or indirectly a 

controlling influence over the 

management or policies of another 

insurer under section 102(3)(C) if 25 

percent or more of capital of a stock 

insurer, policyholder surplus of a 

mutual insurer, or corporate capital of 

other entities qualifying as insurers is 

provided by another insurer, even in the 

absence of voting shares or of control of 

the election of a majority of the directors 

or trustees of the other insurer. The 

third rebuttable presumption is that an 

insurer exercises directly or indirectly a 

controlling influence over the 

management or policies of a syndicate 

insurer if, at any time during the 

Program Year, the insurer supplies 25 

percent or more of the underwriting 

capacity for that year to the other 

insurer that is a syndicate consisting of 

a group including incorporated and 

individual unincorporated 

underwriters. 

If the affected insurers wish to rebut 

the presumptions described above and 

established by this interim final rule, 

then such insurers may request a 

hearing in which they will be given an 

opportunity to rebut the presumption of 

control by presenting and supporting 

Federal Register / Vol. 68, No. 40 / Friday, February 28, 2003 / Rules and Regulations 9809

their position through written 

submissions to Treasury and, in 

Treasury’s discretion, through informal 

oral presentation.

Published elsewhere in this separate 

part of the Federal Register is a notice 

of proposed rulemaking in which 

Treasury solicits comment on a pro rata 

allocation method for control 

determinations under section 102(3)(C) 

of the Act, similar to the pro rata 

method under consideration for 

controlling insurers under section 

102(3)(A), in situations in which 

multiple insurers each provide 25 

percent or more of the capital of a stock 

insurer, policyholder surplus of a 

mutual insurer or corporate capital of 

other entities that meet the definition of 

insurer under the Act and in the interim 

final rule. The pro rata approach under 

consideration by Treasury would treat 

each insurer on a standalone basis for 

Program purposes such as calculation of 

direct earned premiums and the insurer 

deductible if no insurer provides 25 

percent or more of the capital of a stock 

insurer, policyholder surplus of a 

mutual insurer or corporate capital of 

other entities that meet the definition of 

insurer under the Act and the Program. 

At a later date, Treasury will be 

issuing claims procedures. In 

accordance with the consolidated 

treatment of direct earned premiums 

among insurer affiliates, Treasury 

anticipates that the controlling insurer 

will be the insurer that will be required 

to file any claim with Treasury for 

federal payment under the Program and 

that this insurer will receive the federal 

payment that is to be distributed within 

the consolidated insurer group in 

accordance with distribution of risk 

within the consolidated insurer group. 

Elsewhere in this separate part of the 

Federal Register, Treasury solicits 

comments on various means to ensure 

the prompt distribution of the federal 

payment as appropriate to ensure that 

the purposes of the Program are not 

thwarted or evaded, and that the 

ultimate risk bearing entities are treated 

in an equitable manner, within the Act’s 

requirements. 

C. What is the Scope of Insurance 

Coverage Under the Program? (‘‘Insured 

Loss’’, ‘‘Property and Casualty 

Insurance’’, ‘‘Direct Earned Premium’’

and Insurer Deductible’’) 

1. ‘‘Insured Loss’’

The definition of ‘‘insured loss’’ in the 

interim final rule incorporates the 

statutory definition in section 102(5) 

supplemented by the guidance 

concerning scope of the term ‘‘insured 

loss’’ that is contained in Interim 

Guidance II and Interim Guidance III. 

Section 102(5) of the Act defines 

insured loss to mean any loss resulting 

from a certified ‘‘act of terrorism’’

covered by primary or excess ‘‘property 

and casualty insurance,’’ that is issued 

by an ‘‘insurer,’’ if such loss: 

• ‘‘Occurs within the United States,’’

or 

• Occurs to an ‘‘air carrier’’; a U.S. 

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 

• Occurs ‘‘at the premises of any 

United States mission.’’

In general, if the property and 

casualty insurance coverage is provided 

within the geographic and other 

statutory parameters of the definition of 

‘‘insured loss’’ in the Act as described 

above, and is provided by an ‘‘insurer’’

as defined in section 102(6) of the Act 

(whether or not the insurer is non-U.S. 

based or owned), then such losses will 

be covered by the Program, subject to 

the conditions for payment and other 

requirements of the Act. However, if 

insurance coverage is provided by an 

entity that is not an ‘‘insurer’’ under the 

Act, then, even if a loss occurs within 

the United States, or otherwise meets 

the definitional parameters of ‘‘insured 

loss,’’ e.g. occurs to an air carrier or 

vessel or mission as defined in the Act, 

the loss would not be covered by the 

Program. In addition, if insurance is 

provided by a U.S. insurer, but the loss 

does not fall within the definition of 

‘‘insured loss,’’ for example, it occurs on 

foreign soil and not to a U.S. mission or 

covered air carrier or vessel, then the 

loss would not be covered by the 

Program. Section 102(5)(A) provides 

that ‘‘insured losses’’ means any loss 

resulting from a certified act of terrorism 

and covered by primary or excess 

property and casualty insurance issued 

by an insurer if such loss occurs within

the United States. 

As described in Interim Guidance III, 

insured losses under section 102(5)(B) 

are only those losses that are incurred

by covered air carriers or vessels, if the 

insured loss occurs beyond the 

geographic boundaries of the United 

States as described in Section 102(5)(A). 

Losses that are incurred by covered air 

carriers or vessels would include losses 

covered by insurance coverage provided 

to those entities (for example, property 

insurance coverage and liability 

coverage). Not included under section 

102(5)(B) are losses that are not incurred 

by covered air carriers or vessels, such 

as losses covered by third party 

insurance contracts that are separate 

from the insurance coverage provided to 

covered air carriers or vessels. 

2. ‘‘Property and Casualty Insurance’’

Section 102(12) of the Act defines 

‘‘property and casualty insurance’’ to 

mean commercial lines of property and 

casualty insurance. The statutory 

definition expressly includes ‘‘excess 

insurance, workers compensation 

insurance and surety insurance.’’ In 

addition, the Act specifically excludes

(i) federal crop insurance issued or 

reinsured under the Federal Crop 

Insurance Act or any other type of crop 

or livestock insurance that is privately 

issued or reinsured; (ii) private mortgage 

insurance as defined in the 

Homeowners Protection Act of 1998 or 

title insurance; (iii) financial guaranty 

insurance issued by monoline financial 

guaranty insurance corporations; (iv) 

insurance for medical malpractice; (v) 

health or life insurance including group 

life insurance; (vi) flood insurance 

provided under the National Flood 

Insurance Act of 1968; and (vii) 

reinsurance or retrocessional 

reinsurance.

Insurance is generally regulated by 

State law in the United States. There is 

no uniform or consistent definition of 

‘‘commercial property and casualty 

insurance’’ among the States. In some 

States, a line of insurance may be 

considered commercial and in other 

States the same line of insurance is 

considered personal. However, as 

Program administrator, Treasury must 

designate types or lines of commercial 

property and casualty insurance on 

which direct earned premiums and 

insurer deductibles are to be calculated 

and for which federal payments will be 

made for ‘‘insured losses’’ under the 

Program. Direct earned premiums 

received by insurers for commercial 

property and casualty insurance under 

the Program are the basis for the 

Program’s statutory reinsurance 

structure, for other terms and for federal 

payments. In developing a definition of 

property and casualty insurance for 

purposes of administrating and 

implementing the Program, Treasury 

considered the statutory definition, the 

Program structure, and effective 

administration of the Program. In this 

regard, Treasury also consulted with the 

NAIC and others regarding State law 

and premium reports filed with the 

NAIC. 

The interim final rule defines the 

scope of commercial property and 

casualty insurance for purposes of the 

Program to include commercial property 

and casualty insurance, including those 

lines of insurance expressly included in 

section 102(12) of the Act and excluding 

9810 Federal Register / Vol. 68, No. 40 / Friday, February 28, 2003 / Rules and Regulations 

those lines of insurance expressly 

excluded by the same statutory 

definition. Treasury’s interim final rule 

incorporates the suggested guidance in 

Interim Guidance I that commercial 

lines within the following lines of 

insurance coverage that are reported on 

the NAIC Annual Statement of the 

Exhibit of Premiums and Losses—

commonly known as Statutory Page 14 

are included in the Program: Line 1—

Fire; Line 2.1—Allied Lines; Line 3—

Farmowners Multiple Peril; Line 5.1—

Commercial Multiple Peril (non-liability 

portion); Line 5.2—Commercial 

Multiple Peril (liability portion); Line 

8—Ocean Marine; Line 9—Inland 

Marine; Line 16—Workers’

Compensation; Line 17—Other Liability; 

Line 18—Products Liability; Line 19.3—

Commercial Auto No-Fault (personal 

injury protection); Line 19.4—Other 

Commercial Auto Liability; Line 21.2—

Commercial Auto Physical Damage; 

Line 22—Aircraft (all perils); Line 24—

Surety; Line 26—Burglary and Theft; 

and Line 27—Boiler and Machinery. 

The interim final rule also clarifies 

that premium information on such lines 

of Statutory Page 14 should only be 

included in calculating an insurer’s 

direct earned premium and insurer 

deductible to the extent that coverage is 

provided for commercial property and 

casualty exposures. In other words, 

personal insurance that is reported on 

the specified covered lines of Statutory 

Page 14 should be excluded from an 

insurer’s calculation of its direct earned 

premium and insurer deductible. In 

making that determination for purposes 

of the Program, insurers may consider 

insurance coverage primarily designed 

to cover personal, family or household 

purposes to be personal insurance and, 

therefore, not covered by the Program. 

Personal insurance policies that include 

incidental coverage for commercial 

purposes would be considered to be 

primarily personal policies. For 

purposes of the Program, as reflected in 

this interim final rule, Treasury 

considers incidental commercial 

coverage to exist where less than 25 

percent of total premium is attributable 

to commercial coverage. 

In contrast, commercial property and 

casualty insurance generally is designed 

to cover the commercial interests of 

business, civic, not-for-profit or 

governmental entities, or other similar 

individuals, organizations, or 

professional practices. In cases where an 

insurance policy covers both 

commercial and personal exposures, 

and is not primarily a personal policy, 

insurers should allocate the proportion 

of risk between commercial and 

personal components in determining 

what portion of the policy falls under 

the Program. In suggesting this 

allocation, Treasury is not establishing a 

new reporting requirement at this time, 

but is suggesting a method by which 

insurers may calculate their deductibles 

and for Treasury to verify any claims 

under the Program. 

Insurers that do not report premiums 

to the NAIC on Statutory Page 14 may 

use the guidance provided above as an 

analogy or reference point in 

determining whether and what lines of 

their commercial property and casualty 

insurance are included in the Program 

and in calculating their direct earned 

premium and insurer deductible. In this 

regard, as discussed earlier, the 

insurance coverage of federally 

approved insurers within the Program 

covers only those lines for which the 

insurer has received federal approval. 

3. ‘‘Direct Earned Premium’’

Section 102(4) of the Act defines 

direct earned premium as a ‘‘direct 

earned premium for property and 

casualty insurance issued by any insurer 

for insurance against’’ insured losses as 

defined in section 102(5). As discussed 

below, the term ‘‘insurer deductible’’ is 

based on direct earned premiums 

received by insurers during specified 

time periods. Interim Guidance I and II, 

provided guidance to concerning the 

term ‘‘direct earned premium’’ in 

relation to the terms ‘‘insurer 

deductible’’, ‘‘insured loss’’ and 

‘‘property and casualty insurance’’. The 

interim final rule reflects this previous 

guidance but contains further 

clarifications and supplementary 

guidance. For insurers that report 

premiums to the NAIC on Statutory 

Page 14, ‘‘direct earned premium’’ is the 

information reported on column 2 for 

the lines of commercial property and 

casualty insurance referenced above, 

with the specified adjustments to 

remove personal insurance coverage. 

This interpretation of direct earned 

premium information is consistent with 

scope of ‘‘insured loss’’ as defined in the 

Act and will be used by Treasury to 

calculate the insurer deductible for 

these insurers. 

Other insurers that are required to 

participate in the Program but that do 

not report on Statutory Page 14 may use 

the discussion above with reference to 

Statutory Page 14 as an analogy in 

developing a comparable means by 

which they may calculate their direct 

earned premiums. Treasury will use 

similar premium information (compiled 

by these entities or their State 

regulators) to calculate an insurer’s 

deductible. For county or town mutual 

insurers that do not report to the NAIC, 

for purposes of calculating direct earned 

premium, data that is reported to their 

State regulator or maintained by the 

insurer should be adjusted to: (1) Reflect 

an appropriate breakdown between 

commercial and personal risks as 

outlined above; and (2) if necessary, restated to reflect the accrual method of 

determining direct earned premium 

versus direct premium. In addition, 

such entities should also consider other 

types of payments that compensate an 

insurer for the risk of loss (for example, 

assessments, contributions, or other 

similar concepts) as being equivalent to 

premium income for purposes of the 

Program.

Eligible surplus line carrier insurers 

may determine the scope of insurance 

coverage and their insurer deductible 

under the Program for policies that are 

in-force as of the date of enactment or 

that are entered into prior to January 1, 

2003, with reference to the geographic 

scope in the definition of ‘‘insured 

loss,’’ and with reference to the covered 

commercial property and casualty lines 

of insurance described above. For 

policies issued by eligible surplus line 

carriers after January 1, 2003, as stated 

in Interim Guidance II, the premium for 

insurance coverage within the 

geographic scope of ‘‘insured loss’’ must 

be priced separately by eligible surplus 

line carrier insurers. 

In calculating the appropriate 

measure of direct earned premium to 

determine the deductible for Program 

Year 1, eligible surplus line carriers may 

use and rely on the same allocation 

methodologies contained within the 

NAIC’s ‘‘Allocation of Surplus Lines 

and Independently Procured Insurance 

Premium Tax on Multi-State Risks 

Model Regulation’’ for allocating 

premium between coverage within the 

geographic scope of ‘‘insured loss’’ and 

all other coverage to estimate the 

appropriate percentage of premium 

income for such policies that applies to 

such risks. 

Similarly, consistent with the scope of 

insurance coverage under the Program 

and other limitations that apply to 

federally approved insurers, such 

insurers should a use methodology 

similar to that used by eligible surplus 

line carriers in calculating the 

appropriate measure of their direct 

earned premium. 

4. ‘‘Insurer Deductible’’

The Act defines an ‘‘Insurer 

Deductible’’ in Section 102(7) for the 

various ‘‘Program Years’’ and other 

periods covered by the Program. For 

example, Section 102(7)(B) defines the 

insurer deductible for Program Year 1 

(January 1, 2003 through December 31, 

2003) as ‘‘the value of an insurer’s direct 

Federal Register / Vol. 68, No. 40 / Friday, February 28, 2003 / Rules and Regulations 9811

earned premiums over the calendar year 

immediately preceding Program Year 1 

multiplied by 7 percent’’. A State 

licensed or admitted insurer may 

estimate its insurer deductible by 

multiplying the applicable percentage 

(listed in the Act for each of the Program 

Years) by the direct earned premium 

information for commercial lines of 

property and casualty insurance 

reported on Statutory Page 14 with the 

appropriate adjustments as described 

above. Other entities should follow a 

similar methodology based the 

definitions of ‘‘insured loss,’’ ‘‘property 

and casualty insurance,’’ and ‘‘direct 

earned premium.’’

Section 102(7)(E) provides Treasury 

with authority to determine the 

appropriate methodology for measuring 

the direct earned premium if an insurer 

has not had a full year of operations 

during the calendar year immediately 

preceding the Program Year. 

Because new companies have only 

had limited business operations, it is 

likely that their premium income will 

be somewhat volatile. Such volatility 

could persist throughout the life of the 

three-year Program. Thus, to treat these 

newly formed insurers in a manner that 

is consistent with other insurers under 

the Program and to prevent newly 

formed insurers from having the unfair 

advantage of lower relative deductibles, 

this interim final rule specifies that the 

deductible measure for new companies 

formed after the date of enactment 

(November 26) will be based on 

contemporaneous data for direct earned 

premium that corresponds to the current 

Program Year. If a newly formed insurer 

does not have a full year of operations 

within a particular Program year, this 

interim final rule provides that an 

insurer’s direct earned premium for 

Program year will be annualized to 

determine an insurer’s deductible. 

III. Procedural Requirements 

The Act established a Program to 

provide for loss sharing payments by the 

Federal Government for insured losses 

resulting from certified acts of terrorism. 

The Act became effective immediately 

upon the date of enactment (November 

26, 2002). Preemptions of terrorism risk 

exclusions in policies, mandatory 

participation provisions, disclosure and 

other requirements and conditions for 

federal payment contained in the Act 

applied immediately to those entities 

that come within the Act’s definition of 

‘‘insurer.’’ In the near term, Treasury 

will be issuing additional regulations to 

implement the Program. This interim 

final regulation provides critical 

information concerning the definitions 

of Program terms that lays the 

groundwork for Treasury’s 

implementation of the Program. No one 

can predict if, or when, an act of 

terrorism may occur. There is an urgent 

need for Treasury, as Program 

administrator, to lay the groundwork for 

Program implementation through 

interim final regulations to provide 

clarity and certainty concerning which 

entities are required to participate in the 

Program; the scope and conditions of 

Program coverage; and other 

implementation issues that immediately 

affect insurers, their policyholders, State 

regulators and other interested parties. 

This includes the need to supplement, 

or modify as necessary, previously 

issued interim guidance. 

Accordingly, pursuant to 5 U.S.C. 

553(b)(B), Treasury has determined that 

it would be contrary to the public 

interest to delay the publication of this 

rule in final form during the pendency 

of an opportunity for public comment. 

For the same reasons, pursuant to 5 

U.S.C. 553(d)(3), Treasury has 

determined that there is good cause for 

the interim final rule to become 

effective immediately upon publication. 

While this regulation is effective 

immediately upon publication, Treasury 

is seeking public comment on the 

regulation and will consider all 

comments in developing a final rule.

This interim final rule is a significant 

regulatory action and has been reviewed 

by the Office of Management and 

Budget under the terms of Executive 

Order 12866. 

Because no notice of proposed 

rulemaking is required, the provisions 

of the Regulatory Flexibility Act (5 

U.S.C. chapter 6) do not apply. 

However, the Act and the Program are 

intended to provide benefits to the U.S. 

economy and all businesses, including 

small businesses, by providing a federal 

reinsurance backstop to commercial 

property and casualty policyholders and 

spreading the risk of insured loss 

resulting from an act of terrorism.

List of Subjects in 31 CFR Part 50 

Terrorism risk insurance.

Authority and Issuance 

For the reasons set forth above, 31 

CFR Subtitle A is amended by adding 

Part 50 to read as follows:

PART 50—TERRORISM RISK 

INSURANCE PROGRAM

Subpart A—General Provisions

Sec. 

50.1 Authority, purpose and scope. 

50.4 Mandatory participation in Program. 

50.5 Definitions. 

50.6 Rules of construction for dates. 

50.7 Special rules for Interim Guidance safe 

harbors. 

Subpart B—Disclosures as Conditions for 

Federal Payment [Reserved] 

Subpart C—Mandatory Availability 

[Reserved] 

Subpart D—State Residual Market Insurance 

Entities; Workers’ Compensation Funds 

[Reserved] 

Subpart E—Self-Insurance Arrangements; 

Captives [Reserved] 

Subpart F—Claims Procedures [Reserved] 

Subpart G—Audit, Investigative and Civil 

Money Penalty Procedures [Reserved] 

Subpart H—Recoupment and Surcharge 

Procedures [Reserved]

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).

Subpart A—General Provisions

§ 50.1 Authority, purpose and scope. 

(a) Authority. This Part is issued 

pursuant to authority in Title I of the 

Terrorism Risk Insurance Act of 2002, 

Pub. L. 107–297, 116 Stat. 2322. 

(b) Purpose. This Part contains rules 

prescribed by the Department of the 

Treasury to implement and administer 

the Terrorism Risk Insurance Program. 

(c) Scope. This Part applies to 

insurers subject to the Act and their 

policyholders.

§ 50.4 Mandatory participation in Program. 

Any entity that meets the definition of 

an insurer under the Act is required to 

participate in the Program.

§ 50.5 Definitions. 

For purposes of this Part: 

(a) Act means the Terrorism Risk 

Insurance Act of 2002. 

(b) Act of terrorism. (1) In general.

The term act of terrorism means any act 

that is certified by the Secretary, in 

concurrence with the Secretary of State 

and the Attorney General of the United 

States: 

(i) To be an act of terrorism; 

(ii) To be a violent act or an act that 

is dangerous to human life, property, or 

infrastructure; 

(iii) To have resulted in damage 

within the United States, or outside of 

the United States in the case of: 

(A) An air carrier (as defined in 49 

U.S.C. 40102) or 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); or 

(B) The premises of a United States 

mission; and 

(iv) To have been committed by an 

individual or individuals acting on 

9812 Federal Register / Vol. 68, No. 40 / Friday, February 28, 2003 / Rules and Regulations 

behalf of any foreign person or foreign 

interest, as part of an effort to coerce the 

civilian population of the United States 

or to influence the policy or affect the 

conduct of the United States 

Government by coercion. 

(2) Limitations. The Secretary is not 

authorized to certify an act as an act of 

terrorism if: 

(i) The act is committed as part of the 

course of a war declared by the Congress 

(except with respect to any coverage for 

workers’ compensation); or 

(ii) property and casualty losses 

resulting from the act, in the aggregate, 

do not exceed $5,000,000.

(3) Judicial review precluded. The 

Secretary’s certification of an act of 

terrorism, or determination not to certify 

an act as an act of terrorism, is final and 

is not subject to judicial review. 

(c)(1) Affiliate means, with respect to 

an insurer, any entity that controls, is 

controlled by, or is under common 

control with the insurer. An affiliate 

must itself meet the definition of insurer 

to participate in the Program. 

(2) For purposes of paragraph (c)(1) of 

this section, an insurer has control over 

another insurer for purposes of the 

Program if: 

(i) An insurer directly or indirectly or 

acting through one or more other 

persons owns, controls, or has power to 

vote 25 percent or more of any class of 

voting securities of the other insurer; 

(ii) An insurer controls in any manner 

the election of a majority of the directors 

or trustees of the other insurer; or 

(iii) The Secretary determines, after 

notice and opportunity for hearing, that 

an insurer directly or indirectly 

exercises a controlling influence over 

the management or policies of the other 

insurer, even if there is no control as 

defined in paragraph (c)(2)(i) or (c)(2)(ii) 

of this section. 

(3) For purposes of a determination of 

controlling influence under paragraph 

(c)(2)(iii) of this section, the following 

rebuttable presumptions will apply: 

(i) If a State has determined that an 

insurer controls another insurer, there is 

a rebuttable presumption that the 

insurer that is determined by the State 

to control another insurer exercises a 

controlling influence over the 

management or policies of the other 

insurer for purposes of paragraph 

(c)(2)(iii) of this section; and 

(ii) If an insurer provides 25 percent 

or more of another insurer’s capital (in 

the case of a stock insurer), policyholder 

surplus (in the case of a mutual insurer), 

or corporate capital (in the case of other 

entities that qualify as insurers), there is 

a rebuttable presumption that the 

insurer providing such capital, 

policyholder surplus, or corporate 

capital exercises a controlling influence 

over the management or policies of the 

receiving insurer for purposes of 

paragraph (c)(2)(iii) of this section. 

(iii) If an insurer, at anytime during a 

Program Year, supplies 25 percent or 

more of the underwriting capacity for 

that year to an insurer that is a syndicate 

consisting of a group including 

incorporated and individual 

unincorporated underwriters, there is a 

rebuttable presumption that the insurer 

exercises a controlling influence over 

the syndicate for purposes of paragraph 

(c)(2)(iii) of this section. 

(4) An insurer deemed to be in a 

control relationship pursuant to 

paragraph (c)(2)(iii) of this section as a 

result of the rebuttable presumption in 

paragraph (c)(3)(i), (ii) or (iii) of this 

section may request a hearing in which 

the insurer will be given an opportunity 

to rebut the presumption of control by 

presenting and supporting its position 

through written submissions to Treasury 

and, in Treasury’s discretion, through 

informal oral presentations. 

(d) Direct earned premium means the 

direct earned premium(s) received by an 

insurer for commercial property and 

casualty insurance issued by the insurer 

against insured losses under the 

Program. 

(1) State licensed or admitted 

insurers. For a State licensed or 

admitted insurer that reports to the 

NAIC, direct earned premium is the 

premium information for commercial 

property and casualty insurance 

coverage reported by the insurer on 

column 2 of the NAIC Exhibit of 

Premiums and Losses of the Annual 

Statement (commonly known as 

Statutory Page 14). (See definition of 

property and casualty insurance). 

(i) Premium information as reported 

to the NAIC is included in the 

calculation of direct earned premiums 

for purposes of the Program only for 

commercial property and casualty 

coverage issued by the insurer. 

(ii) Premiums for personal property 

and casualty insurance coverage 

(coverage primarily designed to cover 

personal, family or household risk 

exposures) are excluded in the 

calculation of direct earned premiums 

for purposes of the Program. 

(iii) Personal property and casualty 

insurance coverage that includes 

incidental coverage for commercial 

purposes is primarily personal coverage, 

and therefore premiums are excluded 

from the calculation of direct earned 

premium. For purposes of the Program, 

commercial coverage is incidental if less 

than 25 percent of the total direct 

earned premium is attributable to 

commercial coverage. 

(iv) If a property and casualty 

insurance policy covers both 

commercial and personal risk exposures 

and is not primarily a personal 

insurance policy, insurers may allocate 

the premiums in accordance with the 

proportion of risk between commercial 

and personal components in order to 

ascertain direct earned premium. 

(2) Insurers that do not report to 

NAIC. An insurer that does not report to 

the NAIC, but that is licensed or 

admitted by any State (such as certain 

farm or county mutual insurers), should 

use the guidance provided in paragraph 

(d)(1) of this section to assist in 

ascertaining its direct earned premium. 

(i) Direct earned premium may be 

ascertained by adjusting data 

maintained by such insurer or reported 

by such insurer to its State regulator to 

reflect a breakdown of premiums for 

commercial and personal property and 

casualty exposure risk as described in 

paragraph (d)(1) of this section and, if 

necessary, re-stated to reflect the accrual 

method of determining direct earned 

premium versus direct premium. 

(ii) Such an insurer should consider 

other types of payments that 

compensate the insurer for risk of loss 

(contributions, assessments, etc.) as part 

of its direct earned premium. 

(3) Certain eligible surplus line carrier 

insurers. An eligible surplus line carrier 

insurer listed on the NAIC Quarterly 

Listing of Alien Insurers must ascertain 

its direct earned premium as follows: 

(i) For policies that were in-force as of 

November 26, 2002, or entered into 

prior to January 1, 2003, direct earned 

premiums are to be determined with 

reference to the definitions of insured 

loss and property and casualty 

insurance by allocating the appropriate 

portion of premium income that falls 

within the definition of insured loss. 

The same allocation methodologies 

contained within the NAIC’s 

‘‘Allocation of Surplus Lines and 

Independently Procured Insurance 

Premium Tax on Multi-State Risks 

Model Regulation’’ for allocating 

premium between coverage within the 

definition of insured loss and all other 

coverage to ascertain the appropriate 

percentage of premium income to be 

included in direct earned premium may 

be used; and 

(ii) For policies issued after January 1, 

2003, premium for insured losses 

covered by property and casualty 

insurance under the Program must be 

priced separately by such eligible 

surplus line carrier insurers. 

(4) Federally approved insurers. A 

federally approved insurer under 

section 102(6)(A)(iii) of the Act should 

use a methodology similar to that 

Federal Register / Vol. 68, No. 40 / Friday, February 28, 2003 / Rules and Regulations 9813

specified for eligible surplus line carrier 

insurers in paragraph (d)(3) of this 

section to calculate its direct earned 

premium. Such calculation should be 

adjusted to reflect the limitations on 

scope of insurance coverage under the 

Program (i.e. to the extent of federal 

approval of commercial property and 

casualty insurance in connection with 

maritime, energy or aviation activities). 

(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.

(f) Insurer means any entity, including 

any affiliate of the entity, that meets the 

following requirements: 

(1)(i) The entity must fall within at 

least one of the following categories: 

(A) It is licensed or admitted to 

engage in the business of providing 

primary or excess insurance in any State 

(including, but not limited to, State 

licensed captive insurance companies, 

State licensed or admitted risk retention 

groups, and State licensed or admitted 

farm and county mutuals); 

(B) It is not licensed or admitted to 

engage in the business of providing 

primary or excess insurance in any 

State, but is an eligible surplus line 

carrier listed on the Quarterly Listing of 

Alien Insurers of the NAIC, or any 

successor to the NAIC; 

(C) It is approved or accepted for the 

purpose of offering property and 

casualty insurance by a Federal agency 

in connection with maritime, energy, or 

aviation activity, but only to the extent 

of such federal approval of commercial 

property and casualty insurance 

coverage offered by the insurer in 

connection with maritime, energy or 

aviation activity; 

(D) It is a State residual market 

insurance entity or State workers’

compensation fund; or 

(E) As determined by the Secretary, it 

falls within any other class or type of 

captive insurer or other self-insurance 

arrangement by a municipality or other 

entity, to the extent provided in 

Treasury regulations issued under 

section 103(f) of the Act. 

(ii) If an entity falls within more than 

one category described in paragraph 

(f)(1)(i) of this section, the entity is 

considered to fall within the first 

category within which it falls for 

purposes of the Program; 

(2) The entity must receive direct 

earned premiums for any type of 

commercial property and casualty 

insurance coverage, except in the case 

of: 

(i) State residual market insurance 

entities and State workers’

compensation funds, to the extent 

provided in Treasury regulations; and 

(ii) Other classes or types of captive 

insurers and other self-insurance 

arrangements by municipalities and 

other entities, if such entities are 

included in the Program by Treasury 

under regulations in this Part. 

(3) The entity must meet any other 

criteria as prescribed by Treasury. 

(g) Insurer deductible means: 

(1) For an insurer that was in 

existence on November 26, 2002 and 

has had a full year of operations during 

the calendar year immediately 

preceding the applicable Program Year: 

(i) For the Transition Period 

(November 26, 2002 through December 

31, 2002), the value of an insurer’s 

direct earned premiums over calendar 

2001, multiplied by 1 percent; 

(ii) For Program Year 1 (January 1, 

2003 through December 31, 2003), the 

value of an insurer’s direct earned 

premiums over calendar year 2002, 

multiplied by 7 percent; 

(iii) For Program Year 2 (January 1, 

2004 through December 31, 2004), the 

value of an insurer’s direct earned 

premiums over calendar year 2003, 

multiplied by 10 percent; 

(iv) For Program Year 3 (January 1, 

2005 through December 31, 2005), the 

value of an insurer’s direct earned 

premiums over calendar year 2004, 

multiplied by 15 percent; and 

(2) For an insurer that came into 

existence after November 26, 2002, the 

insurer deductible will be based on data 

for direct earned premiums for the 

current Program Year. If the insurer has 

not had a full year of operations during 

the applicable Program Year, the direct 

earned premiums for the current 

Program Year will be annualized to 

determine the insurer deductible. 

(h) NAIC means the National 

Association of Insurance 

Commissioners. 

(i) Person means any individual, 

business or nonprofit entity (including 

those organized in the form of a 

partnership, limited liability company, 

corporation, or association), trust or 

estate, or a State or political subdivision 

of a State or other governmental unit. 

(j) Program means the Terrorism Risk 

Insurance Program established by the 

Act. 

(k) Program Years means the 

Transition Period (November 26, 2002 

through December 31, 2002), Program 

Year 1 (January 1, 2003 through 

December 31, 2003), Program Year 2 

(January 1, 2004 through December 31, 

2004), and Program Year 3 (January 1, 

2005 through December 31, 2005). 

(l) Property and casualty insurance

means commercial lines of property and 

casualty insurance, including excess 

insurance, workers’ compensation 

insurance, and surety insurance. 

Property and casualty insurance: 

(1) Includes commercial lines within 

the following lines of insurance from 

the NAIC’s Exhibit of Premiums and 

Losses (commonly known as Statutory 

Page 14): Line 1—Fire; Line 2.1—Allied 

Lines; Line 3—Farmowners Multiple 

Peril; Line 5.1—Commercial Multiple 

Peril (non-liability portion); Line 5.2—

Commercial Multiple Peril (liability 

portion); Line 8—Ocean Marine; Line 

9—Inland Marine; Line 16—Workers’

Compensation; Line 17—Other Liability; 

Line 18—Products Liability; Line 19.3—

Commercial Auto No-Fault (personal 

injury protection); Line 19.4—Other 

Commercial Auto Liability; Line 21.2—

Commercial Auto Physical Damage; 

Line 22—Aircraft (all perils); Line 24—

Surety; Line 26—Burglary and Theft; 

and Line 27—Boiler and Machinery; 

and 

(2) Does not include: 

(i) Federal crop insurance issued or 

reinsured under the Federal Crop 

Insurance Act (7 U.S.C. 1501 et seq.), or 

Multiple Peril Crop insurance reported 

on Line 2.2 of the NAIC’s Exhibit of 

Premiums and Losses (commonly 

known as Statutory Page 14); 

(ii) Private mortgage insurance (as 

defined in section 2 of the Homeowners 

Protection Act of 1988 (12 U.S.C. 4901)) 

or title insurance; 

9814 Federal Register / Vol. 68, No. 40 / Friday, February 28, 2003 / Rules and Regulations 

(iii) Financial guaranty insurance 

issued by monoline financial guaranty 

insurance corporations; 

(iv) Insurance for medical 

malpractice; 

(v) Health or life insurance, including 

group life insurance; 

(vi) Flood insurance provided under 

the National Flood Insurance Act of 

1968 (42 U.S.C. 4001 et seq.); or 

(vii) Reinsurance or retrocessional 

reinsurance. 

(m) Secretary means the Secretary of 

the Treasury. 

(n) State means any State of the 

United States, the District of Columbia, 

the Commonwealth of Puerto Rico, the 

Commonwealth of the Northern Mariana 

Islands, American Samoa, Guam, each 

of the United States Virgin Islands, and 

any territory or possession of the United 

States. 

(o) Treasury means the United States 

Department of the Treasury.

(p) United States means the several 

States, and includes the territorial sea 

and the continental shelf of the United 

States, as those terms are defined in the 

Violent Crime Control and Law 

Enforcement Act of 1994 (18 U.S.C. 

2280 and 2281).

§ 50.6 Rule of construction for dates. 

Unless otherwise expressly provided 

in the regulation, any date in these 

regulations is intended to be applied so 

that the day begins at 12:01 a.m. and 

ends at midnight on that date.

§ 50.7 Special rules for Interim Guidance 

safe harbors. 

(a) An insurer will be deemed to be 

in compliance with the requirements of 

the Act to the extent the insurer 

reasonably relied on Interim Guidance 

prior to the effective date of applicable 

regulations. 

(b) For purposes of this section, 

Interim Guidance means the following 

documents, which are also available 

from the Department of the Treasury at 

http://www.treasury.gov/trip:

(1) Interim Guidance I issued by 

Treasury on December 3, 2002, and 

published at 67 FR 76206 (December 11, 

2002); 

(2) Interim Guidance II issued by 

Treasury on December 18, 2002, and 

published at 67 FR 78864 (December 26, 

2002); and 

(3) Interim Guidance III issued by 

Treasury on January 22, 2003, and 

published at 68 FR 4544 (January 29, 

2003).

Subpart B—Disclosures as Conditions 

for Federal Payment [Reserved]

Subpart C—Mandatory Availability 

[Reserved]

Subpart D—State Residual Market 

Insurance Entities; Workers’

Compensation Funds [Reserved]

Subpart E—Self-Insurance 

Arrangements; Captives [Reserved]

Subpart F—Claims Procedures 

[Reserved]

Subpart G—Audit, Investigative and 

Civil Money Penalty Procedures 

[Reserved]

Subpart H—Recoupment and 

Surcharge Procedures [Reserved]

Dated: February 25, 2003. 

Wayne A. Abernathy, 

Assistant Secretary of the Treasury.

[FR Doc. 03–4831 Filed 2–27–03; 8:45 am] 

BILLING CODE 4810–25–P