By: Celia R. Clark, ,J.D., LL.M
Some of the recent coverage of the Avrahami case (149 T.C. No. 7 (2017)) has made me – a fact witness in the case and a former attorney for the Avrahamis – wonder how many commentators are actually familiar with the case record.
I. Government Reports
No one seems to be aware that four U.S. Government reports are part of the trial record: One prepared by the President’s Working Group on Financial Markets (“PWG”), chaired by the U.S. Secretary of the Treasury (September 2006), and one prepared by the U.S. Government Accountabiliy Office (December 2008)(“GAO Report”). These t reports deal with various aspects of the terrorism risk insurance market in the U.S. The reports a.re thorough, analytical and supported by extensive data. (Two other Governmental reports were admitted into evidence – one by the Department of Homeland Security and one by the National Infrastructure Protection Center. Neither of these reports is discussed here.)
The PWG was required by the Terrorism Risk Insurance Extension Act of 2005 to perform an analysis regarding the long-term availability and affordability of insurance for terrorism risk, including coverage for chemical, nuclear, biological and radiological (“CNBR”) events, and to submit its report to Congress. Besides the U.S. Secretary of the Treasury, the other members of the PWG were the Chairman of the Board of Governors of the Federal Reserve System, the Chairman of the Securities and Exchange Commission, and the Chairman of the Commodity Futures Trading Commission. The report states that the group was assisted by staff of the member agencies who reviewed academic and industry studies and met with insurance regulators, policyholder groups, insurers, reinsurers, modelers, and other government agencies.
A few of the findings and comments of the PWG Report are as follows: Insurers generally avoid insuring CNBR risk, and virtually no reinsurance for this risk is available; some limited coverage is available but is expensive – 5% rate on loss limit; and captives have been promoted in the industry as a means of obtaining CNBR coverage. A few of the findings and comments from the GAO Report: One solution to the shortage in the commercial markets would be to form a group of insurance companies to pool assets for terrorism risk, as has been done in the United Kingdom; captives that insure terrorism risk also often insure other risks; the Internal Revenue Code should be amended to permit broader tax deductions for terrorism risk reserves.
Both the PWG Rep01t and the GAO Report were referenced in the ACR Solutions Group Report on terrorism risk insurance, also a part of the Avrahami record. The ACR Solutions Group Report recommended a range of pricing for the Pan-American risk pool at issue in Avrahami: 5%-8%, including coverage for business interruption losses. Note that the PWG Report cited a 5% rate on loss limit for property damage only.
II. Reinsurance Agreements
There is another part of the case record that warrants brief mention. As many readers know, the Tax Court’s opinion includes a determination that the Avrahamis’ captive (Feedback Insurance) could not show adequate risk distribution because the Court found that the captive reinsured an insurer (Pan-American) that was insolvent, undercapitalized and/or was not a bona fide insurance company. The Quota-Share Reinsurance Agreements between Pan-American and the participating captives, including Feedback Insurance, explicitly state that the captives continue to be liable for their assumed quota share of Pan-American’s risk (establishing risk distribution among all participants) in case of Pan-American’s insolvency, receivership status or other corporate change in status.
Finally, the Quota-Share Reinsurance Agreements include a provision, “Exceptions to Coverage,” stating that no captive is liable for any share of losses attributable to an entity related to that captive, directly or indirectly. This clause prohibits a circular flow of funds from an insured to Pan-American to a related captive and back to the insured.
Note: The full references of the Government reports discussed here are as follows:
“Terrorism Risk Insurance: Report of the President’s Working Group,” September 2006, Established by Executive Order 12631.
“Terrorism Insurance: Status of Coverage Availability for Attacks Involving Nuclear, Biological, Chemical or Radiological Weapons,” U.S. Government Accountability Office, Report to Congressional Committees, December 2008 (GAO-09- 39).