Terrorism Insurance

By Charles Anderson

The Problems

Since 11 September 2001, insurance companies have been ceasing to provide "full" terrorism cover as they have been unable to obtain reinsurance cover for terrorist damage which falls outside the Pool Re scheme. Prior to 11 September 2001, insurance companies were able to provide full terrorism cover on the following basis:

A basic cover capped at 100,000 which the insurance company itself would pay to the insured.

Reinsurance cover under the Pool Re scheme. Insurance companies became members of Pool Re which would pay out insurance monies for damage caused by fire or explosion attributable to "terrorism". This cover applied only to fire or explosion and by reference only to the Pool Re definition of "terrorism" (principally to overthrow or influence government). The Government agreed with Pool Re to be the ultimate provider of funds in the event of the Pool Re funds proving inadequate.

Reinsurance cover in respect of terrorist damage that was not covered by Pool Re.

As mentioned above, the current problem is that insurance companies are not able to obtain reinsurance cover for the damage which falls outside Pool Re. For this reason alone, Landlords and Tenants need to consider the necessary lease provisions to reflect the absence of insurance cover. Additionally, Sellers and Buyers of commercial properties should consider the necessary contract provisions in respect of the allocation of risk.

Additionally:

There were concerns that Pool Re does not cover all forms of terrorism and all damage arising from terrorism.

Tenants may now seek rent suspension in the event of damage or destruction by terrorism (irrespective of whether terrorism is an insured risk). Insurers appear to be refusing to insure loss-of-rent cover where the rent suspension is triggered by damage or destruction by terrorism.

Lease Provisions

Action to be taken by Landlords

Where Landlords covenant to insure, the obligation should not extend to cover risks or damage for which insurance cover cannot be obtained on reasonable commercial terms (ie exclude the terrorist damage in respect of which cover is not available).

There should be a Landlord's break clause giving the Landlord the right to terminate the Lease in the event of damage by terrorism whether or not it is an insured risk.

Landlords should seek to obtain additional loss-of-rent cover to apply in the event of rent suspension on account of damage by terrorism whether or not it...