Insuring property against acts of terrorism

 

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Are you covered for a terrorist attack?

The catastrophic events in New York in September 2001 demonstrated that damage caused by terrorism can be on a scale previously unimagined.

London and Manchester experienced bomb attacks in the 1990's that devastated swathes of commercial property and London was hit again this summer. This article is intended as a review of the insurance available to property owners and occupiers to compensate against damage or destruction by terrorist activity.  The position of tenants will also be covered.

Insurances available

The insurance industry offers cover against terrorism.  By means of paying an additional premium, cover for damage caused by terrorism is "bought back".  Insurers have created pool reinsurance – known as "Pool Re". Premium money goes into the pool out of which claims from terrorism are met.  The insurer has to bear the first £100,000 of the claim.  If the fund is not sufficient to cover all claims in an underwriting year, the Government will top it up, thereby acting as an insurer of last resort.

Insurance points to bear in mind

  • Pool Re does not apply to privately owned housing since cover is still available under ordinary insurance policies.  But it does apply to housing owned by companies and to housing developments under construction.
  • Buying back terrorism cover is not available as a stand-alone option – ordinary insurance against fire and explosion has to be taken out first.
  • An insured has 30 days from the making of an offer of terrorism cover to take it up.  Cover can still be taken outside the 30-day period, but an insured will be asked to pay a full year's premium for less than a year's cover.
  • Large landowners cannot pick and choose which properties in their portfolios to insure– the insurers have adopted an "all or nothing" rule and if an owner requires terrorism cover then all properties must be covered.
  • Pool Re can be terminated from 31st December in any year by either the insurers or the Government, giving at least 120 days written notice.

Insurance action points for property owners

Review insurance cover:

  • Is terrorism cover in place?
  • If not, is it required?  Risk assessment may be needed – is your property a potential terrorism target, either because of the identity of the occupier or the activities carried out there?  Remember that terrorism takes many forms and can include activities directed against businesses and corporations as well as directly against Governments.
  • Should terrorism cover include business interruption cover?
  • What is the premium for terrorism cover and how is this to be paid?

An owner will also include a tenant of commercial property with an obligation to insure the property.

Typical insurance obligations in commercial leases

The Landlord insures the building against specified risks in the full rebuilding or re-instatement value; and has the right to recover the costs of taking out such insurance from the Tenant.  (In long ground Leases, where the capital is provided by the Tenant, it is more usual for the Tenant to be required to insure and to do so in the joint names of the Tenant and the Landlord.)

Rent is suspended (usually for a maxi of three years) if premises have been made unfit for occupation by the occurrence of an insured risk.

The Tenant is exonerated from repairing obligations if damage occurs as a result of an insured risk.

Insurance check list for tenants

If your Lease is already in place:

  1. Insist on seeing a full copy of the insurance policy terms and details of current cover.
  2. Read the policy carefully; take expert advice from Surveyor and Insurance expert on terms and level of cover.
  3. If you think the building is at risk, ensure that the Landlord's cover includes terrorism.
  4. Ensure you are notified of any changes in circumstances.
  5. Ensure your business interruption cover provides adequate cover – you could be without your premises for three years or more and you could have to pay rent and service charge on a property you cannot use.
  6. Obtain advice on your Lease from a solicitor and consider whether you need back up cover because the Lease provisions and/or the Landlord's insurance are not adequate.

If you are about to enter into a Lease, follow steps 1 to 6 outlined above; and in the Lease ensure your solicitor negotiates:

  • a right to terminate the Lease if the premises are not made fit for occupation after (say) 3 years
  • an obligation for the Landlord to insure against specified risks (which might include terrorism)
  • repair obligations to be suspended where the premises are damaged by an insured risk
  • if a specific risk becomes un-insurable, then who pays for the damage?
  • Landlord to be obliged to make up any shortfall in insurance monies.

Insurance checklists for Landlords

If your Lease is already in place:

  • Read the policy and take advice regularly on the terms and level of cover;  purchase terrorism cover if you think the building is at risk and check the Lease enables you to recover the premium from the Tenant.
  • Ensure your loss of rent cover is adequate – you may be unable to recover rent and service charge for 3 years or more.
  • Check the provisions of the Lease as to insurance – there is no "standardisation" of these provisions

If you are about to enter into a Lease then a careful consideration of the insurance provisions to be included in the draft Lease prepared by your solicitor will be useful at the beginning and can anticipate the points likely to be taken up by the well-advised Tenant.  This will reduce time spent later negotiating Lease provisions.

This article first appeared in NewsBrief, Spring 2002