WASHINGTON 05/30/2002 (BestWire)-Insurance advocates are glad to see signs of movement in the form of a recent Senate Republican proposal to get a federal terrorism backstop.

Sens. Phil Gramm, R-Texas, and Mitch McConnell, R-Ky., have made a counteroffer to earlier Senate Democrats' proposals for getting a bill done.

The proposal could show up as a bill to be introduced the week of June 3, said David Farmer, senior vice president of federal affairs for the Alliance of American Insurers, adding that the Bush administration has voiced support for this proposal.

The major obstacle has been Republican insistence on not allowing punitive-damage lawsuits when catastrophic acts of terrorism are involved. Democrats generally have favored no limits on lawsuits, which was the biggest reason a terrorism bill hasn't been agreed upon in the Senate. A bill has passed in the House, however.

The Gramm/McConnell proposal would allow punitive-damage lawsuits only if a person was convicted of violating a state or federal criminal law--not a civil law, said Julie Gackenbach, director of government relations for the National Association of Independent Insurers.

This language is an attempt to strike a balance, Gackenbach said. The key is "convicted of a criminal act," she said.

The GOP is saying it doesn't want the victim of a terrorist attack--for example, the owners of the World Trade Center--being assessed punitive damages, Gackenbach said.

If claims for the industry exceed $10 billion, the federal government would pay for 90% of the losses above that amount through the end of 2003. The industry aggregate loss trigger jumps to $20 billion if the program is in place for 2004.

But the proposal causes concern, Gackenbach said, because it does not call for a per-company trigger, in addition to the industry aggregate amount. Many in the industry have supported the idea of the federal government stepping in for individual companies when losses reached a certain percentage of net written premiums, for instance.

The per-company retention part is important in providing incentives for companies to get back into the business of writing terrorism insurance, said Gary Karr, a spokesman for the American Insurance Association.

Only 21 commercial writers in the United States have annual net written premium of more than $1 billion, Gackenbach said, but there are some 1,700--or 83% of the commercial writers in the country--with less than $100 million of annual net written premium.

A widespread loss may not reach $10 billion, but it could wipe out smaller companies, she said.

The industry has said it would shoulder a large share of the burden, but without a per-company trigger, the smaller companies are at a serious competitive disadvantage, Gackenbach said. "The smaller writers would be most exposed. If you're a reinsurer looking at smaller companies you'll realize there's a lot more risk there."

Participation in the backstop is mandatory for commercial insurance writers under this proposal, Gackenbach said, and voluntary for personal lines insurers.

Perhaps the biggest value of the proposal is that it presents a chance for the Senate to resume discussions on the legislation. The Gramm/McConnell proposal is circulating in the form of an amendment to the terrorism bill passed by the House in November. Amending that bill is a procedural move that could speed up the debate process.

That the two sides are "continuing to trade paper" is reason for optimism, Karr said.

The House bill, H.R. 3210, calls for a loan to be paid back by the industry, so if the Senate makes and passes major changes like the Gramm/McConnell proposal, the bill would go back to the House, which would then ask for a conference to settle the differences in an effort to come up with one bill.

(By Dennis Kelly, Washington bureau manager, BestWeek: dennis.kelly@ambest.com)

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