September 24, 2004 

Dear Mr. N: 

This is a response to the request for a written interpretation of [two] questions 

relating to Treasury’s implementation of the Terrorism Risk Insurance Act (“TRIA”).1

 

* * * 

1. Issue One: The ability to issue a Terrorism (TRIA) Insurance Policy on a 

Standalone Basis via a TRIA Qualifying Captive: Excess Policy 

Your first inquiry addresses the issue of captives being utilized to provide excess 

limits coverage for terrorism-only losses over the limits of a property policy that insures a 

number of specified perils, including TRIA related terrorism risks. You label the policy a 

“standalone” terrorism policy. You note that there is no express prohibition in TRIA or 

Treasury’s regulations “in terms of providing TRIA coverage in excess of the original 

coverage grant.” You specifically ask “can a qualifying captive with a $700 mm property 

policy with TRIA coverage issue a $300 mm terrorism-only policy excess of the $700 

mm property policy and access TRIA”? 

You are correct that neither TRIA nor Treasury’s regulations prohibit any insurer 

from issuing stand-alone TRIA-only excess insurance with policy limits different from 

the limits of the underlying primary layer of coverage, whether or not issued by the same 

insurer. We believe that a terrorism-related loss sustained under the $300 mm terrorismonly excess policy you describe would likely be an insured loss under TRIA and eligible 

for the Federal share of compensation under the Program. “Insured loss” is defined as 

“any loss resulting from an act of terrorism ... that is covered by primary or excess 

property and casualty insurance issued by an insurer” provided the loss occurs at certain 

specified locations.2

 Property and casualty insurance under TRIA is defined generally as 

commercial lines of property and casualty insurance and specifically includes excess 

insurance.3

 Moreover, we have said in our regulations that a qualifying State-licensed 

captive is an “insurer” under TRIA.4

 Thus, terrorism-related losses arising under the 

$300 mm excess policy you describe are “insured losses” provided the underlying 

property policy insures a commercial lines risk and the loss occurs at a location covered 

by the Act.5

 

 

1

 Public Law 107-297, 116 Stat. 2322, 15 U.S.C. §6701, note. 

2

 P.L. 107-297 at § 102(5). 

3

 P.L. 107-297 at § 102(12)(A). 

4

 31 C.F.R. §50.5(f)(1)(i)(A); 68 Fed. Reg. 41260 (July 11, 2003). 

5

 The Act states losses must occur in the United States or outside the United States in very limited 

circumstances specified in the Act. See 107-297 at § 102(5). 
2. Issue Two. The ability to issue a Terrorism (TRIA) Insurance Policy on a 

Standalone Basis via a TRIA Qualifying Captive: Primary Policy 

Your second inquiry is simply a permutation of the first question. Instead of the 

qualifying captive writing a terrorism-only standalone excess policy, the qualifying 

captive writes a terrorism-only standalone primary policy. You indicate Vermont 

insurance regulators have approved this insurance structure for certain captives. We see 

no conceptual or legal difference in the TRIA result for the excess limits or primary 

terrorism-only standalone coverage. The same conclusions regarding the material 

elements of the definition of “insured loss” apply. Because the TRIA definition of 

“insured loss” includes losses from both “primary” and “excess” property and casualty 

insurance, a terrorism-related loss under the “primary” policy would similarly be an 

“insured loss” as long as the policy insured a commercial lines risk and the loss occurred 

at a location covered by the Act. 

Your letter and others that we have received raise issues surrounding the strategic 

use of captives to deal with terrorism risks. We have concerns about the possibility that 

captives may be used as a tool for avoiding the requirements of the Act and implementing 

regulations, particularly where the Act’s deductible and mandatory recoupment 

provisions are involved. In a notice of proposed rulemaking in February, 2003, Treasury 

solicited public comment on whether it should prescribe other criteria for certain insurers 

pursuant to its authority under section 102(6)(C) of the Act. In particular, Treasury asked 

whether criteria should be developed to prevent newly formed insurance companies from 

participating in the Program if these companies were established for the purpose of 

evading the Act’s deductible requirements. Treasury explained that “preventing evasion 

of insurer deductible requirements by special purpose entities formed to provide terrorism 

risk only coverage” was one objective additional criteria would serve.6

 In its final rule 

published in July, 2003, Treasury explained that it was not proposing additional criteria at 

that time but that it would continue to monitor developments in the market for terrorism 

risk insurance and the market’s response to the Act.7

 

Notwithstanding our conclusions above, the issues raised in your letter and others 

seeking Treasury interpretations of the role of captives under TRIA cause us to 

reconsider whether possible future rulemaking is needed to address the special 

circumstances and issues being raised vis-à-vis captives.8

 The post-enactment formation 

or utilization of a captive insurer that will only provide stand-alone, single-risk TRIA-only

coverage for losses from acts of terrorism raises questions regarding the integrity of the 

Program. We believe that anyone considering forming a captive insurer for stand-alone, 

single risk terrorism insurance should be cautioned against undertaking such action if 

there is any evidence of an intent to avoid the Act’s deductible or recoupment 

requirements. 

 

6

 68 Fed. Reg. 9,815 (Feb. 28, 2003). 

7 Id. at 41263 (July 11, 2003). 8

 Under section 102(6)(C) of the Act, the Secretary may reasonably prescribe other criteria that an entity 

must meet to qualify as an “insurer” under the Program. 
* * * * 

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

facts and circumstances set forth in your request, as you have represented them to 

Treasury. If these facts and circumstances are not correct, or if there is a change to any of 

these facts or circumstances that is material to a conclusion presented in this response, 

then you may not rely on the conclusions in this letter 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. 

Sincerely, 

Jeffrey Bragg 

Executive Director 

Terrorism Risk Insurance Program