The second layer will be financed through a government loan program as outlined in the House bill. The third layer will be a quota-share in which the government directly pays most of the claims, with no industry payback provision, as in the Senate bill.

The issue the conferees have to resolve is when the second and third layers are triggered. And this will be a major battle that could split the industry and damage it politically.

The industry, my sources tell me, in particular want the second layer–the loan program–to be as small as possible. The prevailing view is that anything more than a nominal loan program wont do anything to encourage insurers to write terrorism-related risks, because the loan amount will have to be carried on insurance company books as a liability.

The problem is that whatever the merits of this argument substantively, I dont believe it flies politically. I say this for two reasons. First, in an atmosphere in which the ethics of all corporations are treated with suspicion, to put it mildly, it will be extremely difficult for Congress to enact a program that critics are going to term a massive corporate bailout.

Please note that I am NOT suggesting this charge is fair, only that the charge will be made.

I have difficulty seeing Congress withstanding the resulting criticism in this environment. Moreover, the insurance industry could become the focus of a lot of unwelcome media scrutiny. (For an example, see the reports of alleged abuses in the use of life insurance that followed in the wake of revelations that Enron executives benefited from large split-dollar policies. The life insurance industry is still reeling from effects of this, and even worse fallout may follow when Congress reconvenes.)

But beyond that, the fact that the House bill is a pure loan program, in which every penny of government money must be repaid, is a point of pride for the two major forces behind it: House Financial Services Committee Chair Mike Oxley, R-Ohio, and Rep. Richard Baker, R-La. The committee has issued several press releases and statements touting the payback provision as a major feature of the Houses approach.

I have to wonder whether the industry risks alienating Reps. Oxley and Baker if it fights very aggressively against the payback–a real danger considering that the industry has a variety of important issues pending before the committee.

I know there is a minority school of thought among some in the industry that the dangers of fighting against a substantial payback are too great. The real issue, some say, is that terrorism risk is socialized, and it should not matter that much whether the risk is socialized among the rate-payer base or the taxpayer base.

My guess is that, like it or not, the industry will have to swallow a larger payback provision than it would like.

As for another major issue–individual company retention–I dont think the dangers are as great. Sen. Phil Gramm, R-Texas, who is one of the conferees, does not like individual company retention provisions because he thinks it forces the government to get involved too quickly. Sen. Gramm will likely push his views aggressively. But I think the chances are slim that he will prevail.

For one, he seems to be a lone voice for this point-of-view. The other conferees, as far as I can tell, dont feel strongly about individual company retention. Moreover, Sen. Gramm is retiring from the Senate, which reduces his clout. I think he will make some very forceful and thoughtful arguments in favor of his position, as he always does, but my guess is that the individual retention will stand.

Finally, this brings us to tort reform, another issue in which a powerful player in this drama, President George W. Bush, has staked some prestige.

Following passage of the Senate bill, the President said the following: “The final terrorism package must include reasonable litigation procedures so that Americans who are victimized by terrorism do not also fall victim to predatory lawsuits and punitive damages.” Does this mean the President will veto a bill that does not bar punitive damages?

I suspect not. I think the key words are “reasonable litigation procedures.” Although the Senate bill does not contain the strict tort reforms of the House bill (such as a ban on punitive damages and limitations on attorneys fees), it does contain procedural reforms.

Under the Senate bill, all tort suits related to a terrorist act will be consolidated in a single federal court. One of the main criticisms of the current legal system raised by tort reform advocates is that plaintiffs lawyers are able to “forum shop”–that is, file lawsuits in states known to be generous in awarding punitive damages. That would not be allowed under the Senate bill. So the President should be able to claim victory even if the strict tort reforms of the House bill are dropped from the final package.

As the process dragged out, I became more and more skeptical that a bill would be enacted. Now that Congress has reached this point, Im starting to think something will get done, but not necessarily something the industry likes.

Steven Brostoff is NU's longtime Washington Editor.

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, August 5, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.