March 3, 2002 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 RE: February 28, 2003 TRIA Comments Dear Sirs: The American Association of Insurance Services (AAIS) appreciates the opportunity to provide comments on the Interim Final Rule (the Rule) and related Supplementary Information (SI) related to the implementation of the Terrorism Risk Insurance Act of 2002 (TRIA) that were published on February 28, 2003 at 68 FR 9803 and 9814.  It appears that this Rule is primarily directed toward determining which companies are to be included in the Program and determining what premiums are to be used in calculating the amount of insured loss payments and the insurer deductible. These are important issues, however, we feel that some sections of this Rule have implications beyond these purposes. In our opinion, the issue of determining the earned premium subject to the TRIA is inseparable from determining the applicability of coverage for certified terrorism losses. As such, we are concerned that language of the Rule and related SI may impact how terrorism coverage will be interpreted for reinsurance provided by the TRIA, as well as the coverage provided by terrorism primary insurance. These same Rule sections could have even further implications should recoupment ultimately be needed. Our concerns regarding the coverage provided by terrorism primary insurance arise from the fact that the various state insurance departments have accepted endorsements that govern coverage for, and exclusion of, loss caused by certified acts of terrorism on the basis that such endorsements fall within the scope of TRIA. As provided by TRIA, such endorsements have been placed on file in each state under the waiver of prior approval and waiting periods.  AAIS and our affiliated insurers would appreciate additional clarification from the Treasury on the two items described below. 1. We respectfully request that, in its Final Rule, Treasury clarify whether policies covering the exposures related to one to four-family dwellings that are regularly rented or held for rental to others constitute personal or commercial insurance. (The property and liability premiums for such policies fall within Lines 1, 2.1, and 17 on the NAIC Annual Statement of the Exhibit of Premiums and Losses.)  These policies cover buildings used primarily for personal, family, or household purposes which, according to the SI (specifically, the Analysis of the Interim Final Rule) and the Rule's definition of 'direct earned premium', constitutes personal insurance. However, these buildings are typically owned for business purposes (to generate income), which constitutes a commercial interest. Treasury's determination of whether these policies are personal or commercial insurance will enable insurance companies to properly comply with the TRIA.  2. We are concerned that the SI that corresponds to the definition of direct earned premium in the Rule is not appropriate for policies that insure farm operations. Furthermore, the SI does not appear to be entirely in sync with the Rule itself. The Rule includes a number of provisions under Subsection 50.5, Definitions, that apply to state licensed or admitted insurers with respect to the definition of direct earned premium. Paragraph (d)(1)(iv) indicates that insurers may allocate the premiums of policies that cover both commercial and personal risk exposures in accordance with the proportion of risk between commercial and personal components in order to ascertain direct earned premium. Part C, of Section II of the SI provides substantive commentary with respect to discerning between commercial and personal lines of insurance. This section of the SI indicates that, for policies that cover both commercial and personal exposures and that are not primarily personal policies, insurers should allocate the proportion of risk between commercial and personal components in determining what portion of the policy falls under the Program.  We note that that the Rule and the SI do not share uniform terms, in that the SI uses the term 'should' while the Rule uses the term 'may'. However, our concerns are not limited to the lack of uniform terminology between the Rule and the SI. The direction provided by the SI with respect to the calculation of direct earned premium and insurer deductible may be construed to place coverage for farm dwellings and the contents of such dwellings outside of the Terrorism Risk Insurance Program established by the TRIA.  In most instances, all the real property and most of the personal property at the farm location will be insured under a single policy. Mechanisms already established for purposes of complying with the TRIA, including the required policyholder notices and the mandatory offer of coverage, address farm risks as a whole, without distinguishing among the types of property that are covered by policy.  Furthermore, the risk of loss to the farm residence and its contents as a result of a certified act of terrorism is inextricably linked to the risk of loss to other buildings and property on the same premises. We believe that all property and liability exposures associated with a farm location that are insured under a single policy should be construed as falling within the commercial lines of insurance that are addressed by the TRIA.  Eliminating eligibility for coverage under the Program for certain aspects of the farm risk will defeat the purpose of the TRIA with respect to such risks, to the extent that the TRIA was intended to provide a means of sharing the risk of loss from future terrorist attacks, address market disruptions, and ensure widespread availability and affordability of property and casualty insurance for acts of terrorism.  Again, AAIS appreciates the opportunity to comment on the published Interim Final Rule. Should the above comments require any additional clarification, please contact me at 1-800-564-2247, ext. 288, or at LarrisL@AAISonline.com. Sincerely, Larris R. Larsen, CPCU, ACP Director of Compliance and State Filings