Congress passes terrorism insurance law
Treasury Secretary must decide if law applies to self-insurance pools
12/10/02 - The terrorism insurance bill signed into law by President Bush Nov. 26 includes a provision NSBA has lobbied for - school districts that are self-insured or use self-insured risk pools could be eligible for federal assistance. That provision was not included in earlier versions of the bill.
The Terrorism Risk Insurance Act of 2002 (H.R. 3210) requires the insurance industry to provide coverage for terrorism and requires the federal government to reimburse the insurance industry for as much as $100 billion a year in claims resulting from terrorism. Many large-scale construction projects have been halted since Sept. 11, 2001, because insurance companies would not provide coverage for damage caused by terrorist acts.
But while the act does allow self-insured entities to be covered under the bill, it calls for the secretary of the treasury to determine if the act should apply to them. This decision must be made before a terrorist incident occurs.
NSBA will be working to urge the Treasury Department to ensure that school districts are covered under the act.
"It was the intent of Congress to apply the provisions of the act to public school districts that are self-insured or use self-insured risk pools," states a Nov. 25 letter from NSBA Associate Executive Director Michael A. Resnick to Treasury Secretary Paul O'Neill.
Excluding school districts from this coverage "could lead to increased insurance premium costs, decreased choice in carriers or insurance, or loss of coverage for acts of terrorism," Resnick states. "Construction of new schools, as well as major refurbishing of existing facilities, will be adversely affected without equal access to terrorism coverage." As a result, "all school districts and taxpayers would be subject to increased costs."
The act will be triggered when the federal government determines that an event meets the definition of terrorism. The event must cause losses of at least $5 million. Insurance companies that provide commercial property and casualty insurance must participate in the program. They will be responsible for paying certain amounts in claims before federal assistance becomes available. The act expires Dec. 31, 2005.
School districts and other governmental entities join self-insurance pools because they can get better rates and because there are fewer private companies willing to insure them.
As many as two-thirds of the school districts across the nation participate in self-insurance pools, says James Sandner, president and chief executive officer of Brokers' Risk Placement Service. Brokers' Risk manages pools for the state school boards associations in Illinois, Michigan, and Minnesota and provides re-insurance coverage for more than 20 other state associations.
More than half of the 2,000 school districts in Illinois, Michigan, and Minnesota pool their property and liability coverage, Sandner says. In Illinois more than 65 percent of the school districts bought workers compensation coverage from pools.
Nationwide, about 30 to 50 large urban districts have their own self-insurance, Sandner says.
"It's hard to tell what impact the new law will have on school districts until we see how the treasury secretary rules on it," says Dubravka Romano, associate executive director of the Texas Association of School Boards and head of the TASB Risk Management Fund, a separate legal entity created by TASB.
"We don't know how long that process will take or how it would work, but anything that provides protection against terrorist attacks is a help," she says. "We hope the Treasury Department will act swiftly in setting the rules and that they make sense for school districts."
About 1,020 Texas school districts participate in the fund, including 720 districts who use the fund for property casualty insurance and 400 who use it for workers compensation insurance. The fund also provides unemployment insurance, which is not covered in the new law, and administrative services to districts that self-insure employee benefits.
For many years, insurance policies excluded coverage for war and terrorism, but "9/11 was traumatic for the insurance industry. The concept of terrorism changed," Romano says. "Until then, no one had thought about flying planes into buildings."
If you can't quantify the likely damages from a terrorist incident, you can't set a rate, she says. That event led the insurance industry into "unchartered waters," she says. "We don't know how the Treasury Department will define terrorism or what will be covered."
The law defines terrorism as any act certified by the treasury secretary in concurrence with the secretary of state and the attorney general to be an act of terrorism and to be a violent act or an act that is dangerous to human life, property, or infrastructure.
The act also must "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 by coercion."
It's unclear how that would work for school districts, Romano says. For example, if a student decides to plant a bomb in a school because he is unhappy with the school district, a government entity, is that terrorism? Traditionally, insurance policies would have covered this type of situation under vandalism or arson.
Sandner predicts the treasury secretary will allow self-insured pools and self-insured entities to be covered under the Terrorism Risk Insurance Act. "The only question is, will it be voluntary?"
The act is mandatory for insurance companies, he says, but some pools "might not want to participate because of concerns that it might lead to more regulatory oversight." Currently, some pools operate autonomously without regulation.
Ultimately, if school districts are not covered by the act and their schools are struck by terrorists, it will be the taxpayers who will foot the bill.
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| Reproduced with permission from the Dec. 10, 2002, issue of School Board News. Copyright © 2002, National School Boards Association. Opinions expressed in this newspaper do not necessarily reflect positions of NSBA. This article may be printed out and photocopied for individual or educational use, provided this copyright notice appears on each copy. This article may not be otherwise transmitted or reproduced in print or electronic form without the consent of the Publisher. For more information, call (703) 838-6789. |