TERRORISM INSURANCE BUYERS: THE INFORMED & THE OBLIGED

So what different motivations are there for an terrorism insurance buyer to buy the cover? What is the typical profile of a terrorism insurance buyer?

I would posit that there are two main camps in to which most terrorism insurance buyers fit; the informed and the obliged; or perhaps, those that want it and those that need it.

The informed are aware of the threat of terrorism and of the terrorism exclusions which will apply to most (not all) policies, unless specifically arranged and insured. They have likely considered the location and type of their risk and exposure and have made the conscious decision to purchase insurance since they prefer the known cost of an insurance policy to the unknown potential cost of an act of terrorism.

The obliged (whilst they may also be informed) are forced to arrange coverage due to contractual or legal obligations; most often as the result of a covenant or perhaps a contract agreed in the course of borrowing money against an asset, most commonly a mortgage against a building. In the case of there being conditions upon a mortgage or a commercial loan, lenders will have their own criteria for deciding if coverage must be in place and those criteria are by no means standardised or shared across lenders. Some lenders very rarely insist on the coverage, even in large cities, whilst others insist on the coverage even outside of large city centres.

In the case of obligation by covenant or legal obligation, one example might be a property management company or similar organisation responsible for arranging coverage on behalf of others for a ‘shared asset.’ In the case of a large block of flats, with a management company, RTM, managing agent or similar managing the property and arranging coverage, they are purchasing that cover on behalf of many parties and its very likely that they are obliged by covenant or similar to insure against ‘explosion’. This is important since it can result in an accidental or overlooked gap in coverage, if they then neglect to insure against terrorism. There is an important piece of case law here; in the landmark case of QDime Ltd v Bath Building (Swindon) Management Company Ltd (2014). The court ruling upheld that where a contract includes a requirement any insurance must include ‘explosion’ , then this should be understood to include terrorism. Explosion is typically required to be covered (although we should remember, it’s the specific terms of the individual contract in place which will govern this Written and published by James Woolerton BA (Hons) ACII, MD TriStar Special Risks Ltd – May not be reproduced without consent and these naturally differ from case to case). Where it is required, there is a direct and clear duty for the property management company or similar arranging the cover to insure against terrorism.

It is true that there are a large number of organisation and individuals who opt against insuring against terrorism. The circumstances of each and unique and there is nothing to say that the decision is wrong, but in some cases that decision is based on some spurious or misguided assumptions. I believe that its important to challenge these such that where a client is making the decision not to have any terrorism cover in place; this is at least an informed decision.

So what are some of these potentially dangerous misconceptions?

My property/business is not in London, and so I will not suffer a loss.

There have been well publicised incidents in a number of UK cities, as well as arrests made provincially, in regions not ordinarily associated with terrorism. An incident could occur anywhere.

My property/business will not be a target.

It doesn’t matter. Claims might more often be BI based; with authorities restricting access to an area in the aftermath of an incident; causing a denial of access. A direct, targeted, property damage ‘blast’ type attack might be the popular image of terrorism, but its not the only way a loss can be incurred. Coverage is available for non-damage business interruption and denial of access up to a 1 mile radius.

It’s a waste of money/it’s too expensive?

Terrorism has a low frequency, high severity profile. In the case of having no terrorism coverage at all, and an outstanding mortgage/commercial loan or similar against a building, can you afford to repay the loan if the building were destroyed and you became deprived of that asset? In a business continuity scenario; can a business afford the uninsured loss in trading activity for what could be a prolonged period depending on the nature and severity of the attack.

The State/Government will just pay for any losses/damages?

Not for me to speculate on, but likely a dangerous assumption. In conclusion, as a closing comment, there are varied motivations for buying terrorism insurance and it’s likely that some of that is reluctant on behalf of the insurance buyer. The key area where the insurance industry needs to educate potential clients, in my view, is in educating them regarding their obligations and perhaps also challenging some misconceptions about their exposure.

There is an opportunity for the informed and proactive broker to capitalise in what is currently an under-served market in terms of real broker advice. TriStar Special Risks Ltd invites enterprising brokers to take advantage of our product, service and underwriting expertise to provide better advice, protection and solutions for your clients. If you are interested in learning more about this subject, have any questions or would like to know how TriStar Special Risks Ltd can help you, please do get in touch. James Woolerton, BA (Hons) ACII Managing Director TriStar Special Risks Limited – The Specialists in Terrorism Insurance Solutions

James Woolerton, BA (Hons) ACII
Managing Director
TriStar Special Risks Limited – The Specialists in Terrorism Insurance Solutions