Insights from Latest TRIA Regulations
On June 9, U.S. Treasury released updated regulations reflecting the extension of the Terrorism Risk Insurance Program through 2027. While many of the changes are straight-forward, Treasury’s reactions to public comments offer a few valuable insights.
Economic Loss to Drive Calculation of $5 Million Threshold for Certification
Under the program, the Secretary of Treasury cannot consider an event for certification as an act of terrorism unless “property and casualty insurance losses” resulting from the event exceed $5 million.[1] Treasury has now adopted a definition of “property and casualty insurance losses” as:[2]
[A]ny amounts subject to payment under a property and casualty insurance policy, even if the policyholder declined to obtain terrorism risk insurance under the policy or is otherwise ultimately responsible for the payment.
Treasury states that this definition is meant to capture the “total economic loss of an event involving TRIP-eligible lines of insurance.”
As a practical matter, the new rule means that the $5 million certification threshold can be satisfied (in whole or in part) by losses that would be covered by commercial property and casualty insurance policies but those losses are:
- The responsibility of the policyholder through a policy deductible, self-insured retention, or similar mechanism; or
- Excluded or limited should the Secretary of Treasury decide to certify the act as an act of terrorism.
Treasury’s “total economic loss” approach to the certification threshold tends to push very small events toward eligibility for certification. Certification of small-scale events has only one practical consequence: Triggering terrorism exclusions for policyholders that elected not to pay a terrorism premium.
Treasury’s Rationale is More Nuanced
Treasury offers just that justification for its approach: “Treasury declines to adopt … a definition that would facilitate the provision of coverage to policyholders that consciously declined to purchase it.” That is, Treasury does not want to protect policyholders that made a poor choice in rejecting available terrorism insurance coverage.
Treasury then offers a more pragmatic view when it observes “that it is within the Secretary’s discretion to consider factors, such as policyholder take-up rates, when determining whether to certify any particular event as an act of terrorism.” That is, the Secretary actually has the power to decide not to certify an act of terrorism that satisfies the $5 million threshold in order to protect policyholders that made a poor choice in rejecting available terrorism insurance coverage.
Recall that the Secretary of Treasury is the sole decider whether to certify an act as an act of terrorism and that decision is final and unreviewable by any court. Treasury is subtlety admitting what we knew all along. Certification is a political — not a legal — decision.
A Stern Warning against Gaming the System
As it has form time-to-time, Treasury warns program participants to play it straight:
Policy structures and arrangements providing for special treatment where an ‘‘act of terrorism’’ is involved, with the goal of increasing claims for the Federal Share of Compensation, will be subject to significant scrutiny by Treasury in both the claim approval process and any subsequent audit process as contemplated under TRIA.
Program participants should remember that compliance enforcement is almost entirely back-end loaded. While state insurance regulators have the authority to enforce compliance with TRIA’s disclosure, anti-abuse, and other provisions, none have done so in any meaningful way.
Compliance enforcement is deferred until after an act of terrorism has been certified and program participants turn to the backstop for reimbursement. It is only then that TRIA compliance programs will be put to the test — starting with a personal compliance certification delivered to U.S. Treasury and signed by the insurance company’s CEO or CFO. At that point, there will not be much of an opportunity to fix TRIA compliance problems.
[1] TRIA, Sec. 102(1)(B)(ii).
[2] 31 CFR § 50.4(b)(2)(ii).
