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US Terrorism Risk Insurance Act of 2002 (November 2002)

Published 21 November 2002

Circular No. 3/2002 22 November 2002

TO THE MEMBERS OF ASSURANCEFORENINGEN GARD -gjensidig-

Dear Sirs,

US Terrorism Risk Insurance Act of 2002

This legislation is likely to come into effect on the 28th November 2002, or soon thereafter, and could have very serious consequences for P&I Clubs and their members.   In particular, the Act compels your Club to provide you with insurance against a terrorist attack (as defined) up to the limit of ordinary P&I Club cover. This is a risk that is un-reinsurable and, even with the Federal assistance offered, one that could bankrupt your Club. Clearly the premium for such a risk will inevitably be very high.   When the Act comes into effect, your Club will be obliged to offer you the cover at whatever premium it deems appropriate, though you are not, of course, obliged to accept it. This premium will probably amount to several million dollars per vessel. Accordingly, on or around 28th November 2002, you will receive a notice to pay an additional premium if you wish to take advantage of the additional cover provided under the Act. If you decline to pay this additional premium by the due date your ordinary P&I cover and the existing special War Risks P&I cover in respect of terrorism will continue as at present. You will not then be liable for the additional premium requested.   You will find attached a brief memorandum which explains in more detail the reasons why this step is having to be taken.   Yours faithfully, GARD SERVICES AS As agent only for Assuranceforeningen Gard -gjensidig- Claes Isacson Chief Executive Officer

MEMORANDUM

US Terrorism Risk Insurance Act of 2002

The United States is introducing legislation the intention of which is to ensure that insurance companies extend to their clients cover for terrorist acts in the United States on the same basis as existed prior to the 11th September 2001. Under this legislation the Federal Government will provide an indemnity of up to 90% of incurred losses.   Unfortunately, the approach the legislators have taken to achieving this result is to require insurers to offer terrorist cover to the same extent and limit as is offered for non-terrorist risks. In the case of P&I Clubs cover is currently provided for war risks (including terrorism) up to a limit of USD 200 million by way of a separate war risks cover subject to an excess equivalent to the ship's proper value, which is covered as part of the hull and machinery policy. For non-war risks the limits are significantly higher. Each P&I Club is therefore faced with a situation whereby the legislation will require cover to be provided in respect of terrorism up to these higher limits albeit with some degree of indemnity from the US Government. This risk is not currently poolable nor would it be covered by reinsurance.   The legislation has been agreed by both the House of Representatives and by the Senate and will come into immediate effect as soon as it has been signed by the President, probably on 28 November 2002 or soon thereafter. The legislation is mandatory which means that each Club will be obliged from that date to provide cover in respect of terrorist risks up to the same limit as the general P&I cover.   The legislation was principally intended to aid property insurance in the United States and was not intended to have this extreme effect on the marine market which has always operated parallel cover in respect on war risks and non war risks. It is hoped therefore that when regulations are prepared to give detailed implementation to the statute it will be possible to provide for the special circumstances of the Clubs. In the meantime however we are advised by US lawyers that it will be necessary to use the provisions of the Act itself to avoid its most draconian effects for Clubs and their members.   The Act provides that exclusions can be reinstated either   if the insurer has received a written statement from the insured that affirmatively authorizes such reinstatement, or   if the insured fails to pay an increased payment charged by the insurer for providing such terrorism coverage   It is hoped that the Clubs' position can be clarified under the proposed Regulations in advance of the next renewal. However, if this is not possible it is suggested that members will be able to provide affirmative authority to reinstate the terrorism exclusion as part of the renewal process. In the meantime it is suggested that for the balance of the policy year Clubs have no alternative but to charge an additional premium in respect of this period unless the member affirms in writing that he authorises the exclusion to be reinstated. However, given that no pooling and no market protection are currently available it can be confidently predicted that the premium charged will be very substantial indeed since it will have to reflect each Club's exposure to the risk of terrorism up to a limit which is only attained in respect of traditional P&I risks by sharing with other Clubs and buying substantial reinsurance. It is anticipated that in these circumstances most members will express themselves content with their existing war risks cover of USD 200million excess of the vessel's proper value. Members may express this preference by so affirming in writing. If they do not do so and have not paid the requested premium by the due date, they will not have this cover by operation of law.   As soon as the Bill is signed into law, probably on 28 November 2002 or soon thereafter, all Clubs will therefore issue a notice requiring all members to pay a substantial additional premium as a consequence of the US Terrorism Insurance legislation.

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