Question on Terrorism Exclusion

A concerned Insured wrote to their broker with the following question and the broker in turn asked me to assist to ensure they provided the correct response.

Question

I have previously spoken to you about the following; however, I would like to have this tabled in writing.

Given the current domestic acts of violence, we are witnessing towards [some] organisations and houses of worship, please can you clarify the following:

Coverage for Acts of Violence:

• Scenario 1: Fire damage wilfully done, but not officially declared an act of terrorism by the relevant minister.
  • What is the extent of our coverage for this scenario?
  • What is the process for filing a claim?
  • What are the applicable excess payments?

• Scenario 2: Vandalism wilfully done, but not officially declared an act of terrorism by the relevant minister.
  • What is the extent of our coverage for this scenario?
  • What is the process for filing a claim?
  • What are the applicable excess payments?

• Scenario 3: Fire damage wilfully done and officially declared an act of terrorism by the relevant minister.
  • What is the extent of our coverage for this scenario?
  • What is the process for filing a claim?
  • What are the applicable excess payments?

• Scenario 4: Vandalism wilfully done and officially declared an act of terrorism by the relevant minister.
  • What is the extent of our coverage for this scenario?
  • What is the process for filing a claim?
  • What are the applicable excess payments?

Thanks and regards

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Background Information

Prior to the horrific September 11 attack on the World Trade Centre in New York in 2001, a typical Australian insurance policy covered acts that are now legislated as terrorist attacks.

The scale of the losses arising from this one event, was so great, coupled with the fact that there was a great deal of uncertainty about further attacks being undertaken around the world led to insurers and reinsurers to become extremely concerned. As such terrorism exclusions were hastily introduced all around the world by both reinsurers and insurers.

The following example was introduced by Munich Re at the time.

“TERRORISM

x.x     Section 1 of this Policy does not cover Damage to any Property Insured caused directly or indirectly by or in connection with or arising from or occasioned through:

x.x.x   any Act of Terrorism regardless of any other cause or event contributing concurrently or in any other sequence to the Damage.

x.x.x  any action taken in controlling, preventing, suppressing or in any way relating to any Act of Terrorism.

ACT OF TERRORISM means an act, including but not limited to the use of force or violence and/or the threat thereof, of any person or group(s) of persons, whether acting alone or on behalf of or in connection with any organisation(s) or government(s), which from its nature or context is done for, or in connection with, political, religious, ideological, ethnic or similar purposes or reason, including the intention to influence any government and/or to put the public, or any section of the public, in fear.”

I am not singling out Munich Re, as everyone I know including Lloyd’s introduced an exclusion in the Australian market that had virtually the same effect.

When you read the exclusion, it is clear that is very broad in its application. The preverbal ‘sledgehammer to crack a walnut‘.

This moved the risk of terrorism from the private sector (insurers) to government. To fund this now new and at the time very real risk, many countries introduced a terrorism reinsurance pool. The Federal Government did this through the Australian Reinsurance Pool Corporation.

Insurers could elect to reinsure their terrorism exposure through the Australian Reinsurance Pool Corporation.

With this Reinsurance Pool in place, the Government issued legislation that meant that if the Government, and in particular the Finance Minister, declares an event an Act of Terrorism any terrorism exclusion in a policy of insurance is void.

In practice, the Australian Government has been loath to declare an official Act of Terrorism with only one being declared to date that being as a result of the siege at the Lindt Cafe in Sydney in 15–16 December 2014, despite many events such as the Cronulla Riots of December 11, 2005, falling within the Terrorism Exclusion.

In theory therefore, an insurer could rely, and I believe in the early days of the scheme did rely, on the Terrorism Exclusion in their policy to deny a claim, despite the Insured having paid a Terrorism levy with their premium.

That levy, on commercial property insurance including business interruption currently ranges from 16% down to 2.6% depending on the location of the risk.^1.

In practice, what we have seen of late is that where the event has not been declared an Act of Terrorism by the Federal Government, then Insurers have, in my experience, followed the Government lead and not applied the exclusion. There is good reason for this, but I will not go into that here.

With this background, I answer the question in respect of commercial property. If readers would like me to address other classes of insurance say home and contents, please leave a comment and I will do so.

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Answer 1: (Commercial Material Damage and Business Interruption Policies)

The process in all claims, based on current practice is exactly the same from the perspective of an insured for all four scenarios.

In all cases they deal with their normal insurer.

Behind the scenes, if it an event is declared an act of terrorism then the terrorism exclusion in the policy is declared void, and the insurer meets the claim. Then, depending on the reinsurance coverage the insurer has arranged through the Australian Reinsurance Pool Corporation, the Insurer can make a claim for the losses they have paid out, less their (the Insurer’s not the Insured’s) deductible under the reinsurance policy.

I am not aware of the deductible this client has but unless it states something different on the schedule, I would expect the Insured’s deductible would be the same under all four scenarios.

What needs to be understood, is that this is not a separate policy between the Insured and the Australian Reinsurance Pool Corporation. The Insured’s policy remains the same, only the terrorism exclusion is made void.

So, if the policy the Insured has is subject to co-insurance or is subject to a separate exclusion that would apply, then this will apply regardless of whether the event is declared a terrorism event.

For example, let us say a terrorist blows up a dam and floods a property. If the policy that covers that property does not have flood cover, then the loss would not be paid as it does not cover flood despite the fact the Insured has paid a terrorism levy.

Similarly, heaven forbid a terrorist blows up the Sydney Harbour Bridge. If an Insured’s business suffered a business interruption loss through prevention of access, then under a standard policy the claim would not be met as losses as a result of damage to bridges is a typical standard exclusion.

The terrorism levy only covers the terrorism coverage that would have been in the policy but for the terrorism exclusion. It does not provide any additional coverage above the policy the Insured has in place with their Insurer once the Terrorism Exclusion is removed. Similarly, it does not provide any additional sum insured or limit of liability.

Any adjustment of the claim due to under insurance would still occur. Therefore, it is important to review sums insured / declared values regularly.

Answer 2:

The answer is that the client needs to notify their insurance broker who would notify insurers who in turn would notify the insurer. They would most likely engage a loss adjuster or other experts to investigate and assess and quantify the damage.

Under a quality policy a broker has arranged, if the claim warranted it, i.e. large or complex, the broker would recommend the appointment of a licensed and experienced claims preparer to assist the insured in the preparation of their claim and to ensure they obtain their full entitlement. The fee for this service would be met by the policy subject to the Sub-Limit.

Answer 3:

I cannot answer this without reviewing the specific Policy Schedule. In my experience, a typical policy would have the same deductible (policy excess) for both fire or malicious damage. No additional deductible would be applied if the event were to be declared an Act of Terrorism. At the same time, any deductible for fire or malicious damage would still apply.

The reality is that typically such losses would fall under a broad definition of deductible such as ” all other losses $xxx.

I hope this fully explains the situation.

A Personal Comment

Like most fair-minded Australians, I am appalled by all acts of terrorism, particularly in our wonderful country. Many people have come to Australia to get away from the cruelty and destructiveness of terrorism and war. I am honoured to be assisting in the recovery of the Adass Synagogue in Melbourne. Those who I have met from the community are gentle, honest folk who are proud Australians. The attack has left many of them frightened but determined to rebuild. It is such a waste while accomplishing nothing in the long run except we hope very long prison sentences for those cowards who perpetuated the attack. There were people in the building at the time of the arson attack but thankfully they escaped and scared the terrorists off.

If the perpetrators are not Australian citizens, then I for one fully support their deportation as they have no place in our society.

^1. Reinsurance premiums

Australian Reinsurance Pool Corporation premiums are set using three tiered rates specified by postcode of location of the insured property. Tiers are representative of risk and are based on population density being:

• Tier A: CBD areas of Australian cities with a population of over 1 million people.
• Tier B: Urban areas of all state capital cities and cities with a population of over 100,000 people.
• Tier C: Those postcodes not allocated to either tier A or B.

Source: https://arpc.gov.au/reinsurance-pools/terrorism/postcodes/