| Issued and entered December 20, 2002 by Frank M. Fitzgerald, Commissioner
of Financial and Insurance Services
Background
There has been much uncertainty in the markets for commercial
lines property and casualty insurance coverage in light of the substantial
losses experienced by the industry on September 11, 2001. Soon after the
tragic events, many reinsurers announced that they did not intend to provide
coverage for acts of terrorism in future reinsurance contracts. This led
to a concerted effort on behalf of all interested parties to seek a temporary
federal backstop to calm market fears over future terrorist attacks and
the ability of the insurance industry to allocate capital to provide coverage
for these unpredictable and potentially catastrophic events. Congress
recently enacted and the President has signed into law, the Terrorism
Risk Insurance Act of 2002 (The Act). This federal law provides a federal
backstop for defined acts of terrorism and imposes certain obligations
on insurers.
The intent of this bulletin is to advise you of certain provisions of
the Act that may require insurers to submit a filing in this state and
to inform you regarding a voluntary procedure for insurers to use to expedite
the filing and timely review of the disclosure notices, policy language
and the applicable rates that are discussed in the Act.
Before discussing the Act and how it relates to Michigan's rate and form
laws, it is appropriate to highlight that years ago Michigan substantially
reduced rate and form filing requirements with respect to commercial lines
insurance products. Bulletins 94-5, 95-1, and 97-3 should be read in conjunction
with this bulletin, which adheres to the NAIC model bulletin. They continue
in effect and are not in any way diminished by the current bulletin. Thus,
an insurer that has no duty to make a commercial filing due to Bulletin
97-3 does not need to make a commercial filing based upon any filing requirements
discussed in the current bulletin.
Additionally, Michigan Senate Bill 1213 has been enrolled and awaits
the Governor’s signature. The bill would virtually eliminate all rate
and form filing requirements in Michigan for insurance “sold to an insured
that purchases the insurance for other than personal, family, or household
purposes.” If signed, the law would take effect toward the end of March
2003. To see the bill itself, find out if it has been signed and, if so,
learn of its effective date, you may go to http://www.michiganlegislature.org/mileg.asp?
page=getObject&objName=2002-SB-1213&userid=
Subsection 102(6) of the Act defines “insurers” for purposes of the Act.
“Insurer” means any entity and affiliate thereof--(A) that is--(i) licensed
or admitted to engage in the business of providing primary or excess insurance
in any State; (ii) an eligible surplus line carrier listed on the Quarterly
Listing of Alien Insurers of the NAIC, or any successor thereto; (iii)
approved for the purpose of offering property and casualty insurance by
a Federal agency in connection with maritime, energy, or aviation activity;
(iv) a State residual market insurance entity or State workers’ compensation
fund; (B) that receives direct earned premium for any type of commercial
property and casualty insurance coverage. The Secretary of Treasury may
extend the Act to other classes or types of captive insurers and other
self-insured arrangements by municipalities and other entities as well
as to group life insurance.
Subsection 102(12) of the Act states that the term “property and casualty
insurance” (A) means commercial lines of property and casualty insurance,
including excess insurance, workers' compensation insurance, and surety
insurance, and (B) does not include crop or livestock insurance, private
mortgage or title insurance, financial guaranty insurance issued by monoline
financial guaranty insurance corporations, medical malpractice, health
or life insurance including group life, flood insurance provided under
the National Flood Insurance Act, or reinsurance or retrocessional reinsurance.
All insurers, as defined in the Act, are required by the Act to participate
in the Terrorism Insurance Program (the Program) and make available coverage
for insured losses in all of their covered commercial lines policies.
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 such loss—(i) occurs within the United States; or (ii)
occurs in an air carrier (as described in section 40102 of title 49, United
States Code), 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 at the premises of a United States mission.
The Act also advises that insured loss excludes amounts awarded in a civil
action that are attributable to punitive damages. The Act further requires
insurers to make available property and casualty insurance coverage for
insured losses that do not differ materially from the terms,
amounts, and other coverage limitations applicable to losses arising from
events other than acts of terrorism.
The Act voids any terrorism exclusions in a contract for property and
casualty insurance that is in force on the date of enactment of this Act
to the extent that it excludes losses that would otherwise be insured
losses. The Act also voids any state approval of any terrorism exclusion
from a contract for property or casualty insurance that is in force on
the date of enactment of this Act to the extent that it excludes losses
that would otherwise be insured losses. The Act allows insurers
to “reinstate a preexisting provision in a contract for commercial property
and casualty insurance that is in force on the date of enactment of this
Act and that excludes coverage for acts of terrorism only” if one of two
conditions are met. The insurer must have received a written statement
from the insured that affirmatively authorizes such reinstatement or if
the insurer has provided notice to the insured, at least 30 days before
any such reinstatement and the insured fails to pay any increased premium
charged by the insurer for providing such terrorism coverage.
Definition of Insured Loss
Section 102(5) of the Act provides a definition of insured loss.
It states: “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 such loss—(A) occurs within the United States; or (B)
occurs to an air carrier (as defined in section 40102 of title 49, United
States Code), 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 at the premises of any United States mission.”
As a result of the definition contained in the Act, there are essentially
two distinct types of losses that a business might face that result from
terrorism. One type of loss is the insured loss that is defined
within and covered by the provisions of the Act. For convenience, we will
adopt the moniker of “certified loss” to refer to losses resulting from
certified acts of terrorism. The second type of loss that a business might
face is one that does not fit within the definition of insured loss
as described in the Act. For convenience, we will adopt the moniker of
“non-certified loss” to refer to losses resulting from terrorism that
is not certified. The most significant difference between these losses
is that the certified losses will always involve a foreign person
or foreign interest, while the non-certified losses may not.
Please note that the preemption of this state’s filing law, MCL 500.2236,
applies only to contract language that is applicable to certified losses.
If an insurer intends to reinstate an exclusion on in-force policies as
allowed under the Act, it may only reinstate an exclusion that previously
existed on the policy.
This state has allowed, and will continue to allow, some significant
limitations that provide coverage for acts of terrorism under certain
circumstances. For policies providing property insurance coverage the
following limitations apply to non-certified losses:
- Exclusion for acts of terrorism only apply if the acts of terrorism
result in industry-wide insured losses that exceed $25,000,000 for related
incidents that occur within a 72 hour period;
- Exclusions for acts of terrorism are not subject to the limitations
above if:
- The act involves the use, release or escape of nuclear materials,
or that directly or indirectly results in nuclear reaction or
radiation or radioactive contamination;
- The act is carried out by means of the dispersal or application
of pathogenic or poisonous biological or chemical materials; or
- Pathogenic or poisonous biological or chemical materials are
released, and it appears that one purpose of the terrorism was
to release such materials.
For policies providing liability insurance coverage the following limitations
apply to non-certified losses:
- Exclusion for acts of terrorism only apply if the acts of terrorism
result in industry-wide insured losses that exceed $25,000,000 for related
incidents that occur within a 72 hour period; or
- Fifty or more persons sustain death or serious physical injury for
related incidents that occur within a 72 hour period. For purposes of
this provision serious physical injury means:
- Physical injury that involves a substantial risk of death;
- Protracted and obvious physical disfigurement; or
- Protracted loss of or impairment of the function of a bodily
member or organ.
- Exclusions for acts of terrorism are not subject to the limitations
above if:
- The act involves the use, release or escape of nuclear materials,
or that directly or indirectly results in nuclear reaction or
radiation or radioactive contamination;
- The act is carried out by means of the dispersal or application
of pathogenic or poisonous biological or chemical materials; or
- Pathogenic or poisonous biological or chemical materials are
released, and it appears that one purpose of the terrorism was
to release such materials.
Definition of Act of Terrorism
Section 102(1) defines an act of terrorism for purposes of the
Act. Section 102(1)(A) states, “The term “act of terrorism” means any
act that is certified by the Secretary of the Treasury, 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—(I) human life: (II) property; or (III) infrastructure; (iii)
to have resulted in damage within the United States, or outside the United
States in the case of—(I) an air carrier or vessel described in paragraph
(5)(B); or (II) the premises of a United States mission; and (iv) to have
been committed by an individual or individuals acting on 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.” Section
102(1)(B) states, “No act shall be certified by the Secretary as an act
of terrorism if—(i) the act is committed as part of the course of a war
declared by the Congress, except that this clause shall not apply with
respect to any coverage for workers’ compensation; or (ii) property and
casualty insurance losses resulting from the act, in the aggregate, do
not exceed $5,000,000.” Section 102(1)(C) and (D) specify that the determinations
are final and not subject to judicial review and that the Secretary of
the Treasury cannot delegate the determination to anyone.
This state will not allow exclusions of coverage for acts of terrorism
that fail to be certified losses solely because they fall below
the $5,000,000 threshold in Section 102(1)(B) on any policy that provides
coverage for certified losses. Insurers required to file policy
forms may submit language containing coverage limitations for certified
losses that exceed $100 billion.
The Act includes a definition of acts of terrorism that is used within
this bulletin to mean certified losses. Policies subject to policy
form filing requirements should also define what constitutes an act of
terrorism for non-certified losses. For non-certified losses,
this state would accept the following definition, or one that is more
liberal to policyholders:
The phrase “non-certified act of terrorism” means a violent act or
an act that is dangerous to human life, property; or infrastructure
that is committed by an individual or individuals and that appears to
be part of an effort to coerce a civilian population or to influence
the policy or affect the conduct of any government by coercion, and
the act is not certified as a terrorist act pursuant to the Federal
Terrorism Risk Insurance Act of 2002.
Submission of Rates, Policy Form Language and Disclosure
Notices
Insurers are required to comply with the Act and with state law. Section
106(a)(2)(B) of the Act states that “during the period beginning on the
date of enactment of this Act and ending on December 31, 2003, rates and
forms for terrorism risk insurance coverage covered by this title and
filed with any State shall not be subject to prior approval or a waiting
period under any law of a State that would otherwise be applicable…” The
subsection further notes that rates remain subject to subsequent regulatory
review based on whether a rate is “excessive, inadequate, or unfairly
discriminatory” and other applicable state law. Similarly, policy forms
are subject to subsequent review based on all applicable laws and regulations.
Thus, a system is created where insurers can immediately implement prospective
rate changes for coverage of insured losses related to acts
of terrorism as defined in the Act. Policy language for terrorism
risk and insurance covered by the Act (granting coverage or excluding
coverage for insured losses) is only exempt from prior approval
or waiting periods to the extent that the policy language relates to insured
losses as defined in the Act. Other policy language changes and related
pricing remain subject to current applicable state law and will be processed
in an expedited manner.
If an insurer relies on an advisory organization to file loss costs and
related rating systems on its behalf, no rate filing is required unless
an insurer plans to use a different loss cost multiplier than is currently
on file for coverage for certified losses. The rate filing should
provide sufficient information for the reviewer to determine what price
would be charged to a business seeking to cover certified losses.
This state will accept filings that contain a specified percentage of
premium to provide for coverage for certified losses. Insurers
may also choose to use rating plans that take into account other factors
such as geography, building profile, proximity to target risks and other
reasonable rating factors. The insurer should state in the filing the
basis that it has for selection of the rates and rating systems that it
chooses to apply. The supporting documentation should be sufficient for
the reviewer to determine if the rates are excessive, inadequate or unfairly
discriminatory. For the convenience of insurers, this state will waive
its requirements for supporting documentation for rates for certified
losses for filings that apply an increased premium charge of between 0%
and 20% and do not vary by application of other rating factors.
Insurers subject to policy form regulation must submit the policy language
that they intend to use in this state within a reasonable time after they
are implemented. This state considers 30 days to be a reasonable time
for purposes of completing an expedited filing of policy language. The
policy should define acts of terrorism and both certified
and non-certified losses in ways that are consistent with the
Act, state law and the guidance provided in this bulletin. The definitions,
terms and conditions should be complete and accurately describe the coverage
that will be provided in the policy.
The Commissioner requests that the disclosure notices be filed for informational
purposes, along with the policy forms, rates and rating systems as they
are an integral part of the process for notification of policyholders
in this state and should be clear and not misleading to business owners
in this state. The disclosures should comply with the requirements of
the Act and should be consistent with the policy language and rates filed
by the insurer. Details about the applicable requirements are contained
in the following two paragraphs.
In-force business receives special consideration under the Act. Section
105(a) voids any terrorism exclusion on existing policies to the extent
that it excludes losses that would otherwise be insured losses
as defined in the Act. It details a process for insurers and policyholders
to reinstate the voided exclusions. Under that process, an insurer may
reinstate a preexisting provision in a contract that is in force on the
date of enactment of this Act and that excludes coverage for an act of
terrorism only if the insurer has received a written statement from the
insured that affirmatively authorizes such reinstatement or if the insured
fails to pay any increased premium charged by the insurer for providing
such coverage and the insurer provided notice, at least 30 days before
any such reinstatement as provided in Section 105 of the Act.
There are also disclosures required for new business and renewal business.
Although voidance of contract language is not an issue, insurers must
make certain disclosures to policyholders to remain in compliance with
the Act. Section 103(b)(2) requires insurers to provide a clear and conspicuous
disclosure to the policyholder of the premium charged for covered insured
losses and advise that a federal program exists where the federal
government will share significant portions of major insured losses
with insurers.
Effect on Workers’ Compensation Insurance Coverage
Treatment of workers’ compensation is slightly different than for other
property and casualty insurance coverages. First, Section 102(1)(B)(i)
provides that the federal program will share the risk of loss for workers’
compensation for acts of war in addition to acts of terrorism. This treatment
occurs because of the statutory nature of the workers’ compensation program,
which does not provide an exclusion for losses resulting from an act of
war. Under Michigan’s law there is no exclusion for workers’ compensation
losses resulting from an act of war. There is no provision in the Act
that would preempt the compulsory coverage aspects of workers’ compensation
insurance policies. In other respects, however, workers’ compensation
coverage is treated under the Act as any other covered line of insurance.
Therefore, the notice requirements of Section 103(b)(2) and the mandatory
“make available” requirements of Section 103(c) apply to workers’ compensation
policies. In this connection, workers’ compensation insurers are required
to separately state (the amount of) the estimated portion of the premium
being charged a policyholder for acts of terrorism, as defined in the
Act. As this state’s workers’ compensation law does not have any exclusions
for terrorism or war, neither insurers nor policyholders may use the Act’s
procedures to create such an exclusion. With regard to the filing and
approval of rates and forms, workers’ compensation insurers are also covered
by the Act, specifically Section 106(a)(2)(B) that waives any state prior
approval or time requirements for the first year of the Act. Such insurers
shall therefore follow the alternative filing procedures established in
this bulletin.
Optional Provision for Standard Fire Policy States
In this state, the requirements for fire coverage are established by
law and where applicable, must meet or exceed the provisions of the Standard
Fire Policy. These legal requirements cannot be waived. Thus, a business
cannot voluntarily waive this statutorily mandated coverage.
Information for SERFF Filers
For insurers that use the SERFF system, there will be an expedited filing
form in that system for your use.
Explanation and Instructions for Terrorism Rate and Form Review
The Act preempts any state prior approval law pertaining to rates or
forms—including any law that imposes waiting periods—prior to use of a
rate or form for purposes of terrorism coverage, as defined by the Act.
This preemption remains in effect for the first year of the Act. Consistent
with these requirements of the Act, this bulletin establishes a system
for rates and forms, requiring insurers or advisory organizations to file
their rates and forms no later than 30 days after their first date of
use. The procedure for obtaining an expedited review of such rates and
forms is set forth below. However, nothing in this bulletin shall be construed
as establishing a rate or form filing review or approval requirement where
one does not otherwise exist under this state’s law. Policy language changes
and related pricing for non-certified losses remain subject to
current applicable state law and will be processed in an expedited manner.
Forms with Instructions
Attached to this bulletin is a uniform filing transmittal form that has
been agreed upon by this state and other states. An insurer or advisory
organization wishing to receive expedited treatment of its filing shall
complete the EXPEDITED FILING TRANSMITTAL DOCUMENT—FOR TERRORISM RISK
INSURANCE FORMS AND PRICING as directed. In addition, the insurer(s) or
advisory organization submitting the filing must certify that the filing
is consistent with this bulletin, state law and the provisions of the
Act. Certification is made by signing the appropriate blank on the transmittal
form. Filings for policy language changes and related pricing for non-certified
losses, which remain subject to current applicable state law, may
be made using the attached filing transmittal form. These filings will
be processed in an expedited manner. The attached expedited filing transmittal
document replaces all otherwise applicable filing forms and filing transmittal
forms for these filings.
To be complete, an expedited filing must include the following:
- A completed, certified Expedited Filing Transmittal Document for each
insurer or advisory organization.
- One copy of each policy form or endorsement that the insurer intends
to use, unless the insurer has given an advisory organization authorization
to file them on its behalf.
- A copy of the rates and rating systems along with the supporting documentation,
if required.
- A copy of any disclosure notices that will be used to convey information
to policyholders in this state.
- A postage-paid, self-addressed envelope large enough to accommodate
the return. Note that a comparable filing transmittal form
is available in SERFF.
If this filing is for multiple companies, please provide a copy of the
transmittal header for each company and an extra copy for return to the
company. (i.e. 7 companies = 8 copies)
Effective Date
This bulletin shall take immediate effect. The expedited filing process
outlined herein shall expire on December 31, 2003. The remainder of the
bulletin shall expire on December 31, 2005, unless Congress extends the
duration of the Act.
Any questions regarding this bulletin should be directed to:
Office of Financial and Insurance Services
Division of Conduct Review and Securities
Product Review Unit
611 West Ottawa Street
P.O. Box 30220
Lansing, Michigan 48909-7720
Phone: (517)373-0242
Toll Free (877)999-6442
Please click here
for the Expedited Filing Transmittal Document for Terrorism Risk Insurance
Forms and Pricing form.
Please click here
for a completed sample copy of the Expedited Filing Transmittal Document
for Terrorism Risk Insurance Forms and Pricing form.
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