Terrorism Insurance in Today's Market

Author:Ms Shelagh McKibbin
Profession:Herbert Smith

A standard commercial property insurance policy covers loss or damage

to property caused by fire or explosion, but where the cause of that

fire or explosion was due to a terrorist act, insurance cover was

generally limited to 100,000. However, the insured could purchase

extended cover, and since the mid 1990s, the insurance market for

terrorism insurance had been bullish and premiums relatively low.

In addition to the market generally, extended cover was available

through the Pool Re Scheme. This is a government backed reinsurance

scheme which meets the cost of claims over 100,000 occurring as a

result of terrorism in Great Britain (ie not Northern Ireland). It was

established by legislation in 1993 because the reinsurance industry

declined to cover terrorism as a result of escalating IRA attacks -

triggered by the St Mary Axe bomb in 1992. If the Pool Re funds are

exhausted the government picks up the balance of all claims as reinsurer

of last resort.

Authorised insurance companies and Lloyds Syndicates are eligible to

be members of Pool Re. The insured pays the premium for the extended

cover to the reinsured members of Pool Re; premium rates are set by

agreement with the government and are calculated by reference to

property valuers and rating zones.

Post 9/11

Even before 9/11 world insurance markets had been jittery because of

poor underwriting results and a number of high profile insurance company

failures. Insurance companies had already begun to narrow the scope of

cover they were willing to provide, and in the US, some companies had

withdrawn from the real estate insurance market altogether. Premiums

were increasing and greater emphasis was being placed on risk management


Since that tragedy, UK insurers have begun to exclude loss or damage

by terrorist action from new policies or on policy renewals after 1st

January 2002, because the re-insurance industry will no longer cover the

risk. Property owners, occupiers and mortgagees are therefore

considering the wording of insurance policies closely to check whether

they are adequately insured against loss or damage caused by an act of

terrorism. They are also examining the terms of their leases and

security documents to ascertain their position, should their premises be

damaged or destroyed by an act of terrorism.

Currently, the only available cover for terrorist risk is through the

Pool Re scheme, which has (and always has had) limitations (although at

least for the time being it has said it will cover fire and explosion

caused by any terrorist act within the definition of terrorism in the

1993 Act which established Pool Re, and hold its rates).


it is available only to insured parties whose insurers are

members of Pool Re (although most of the big insurance names


it covers terrorism damage caused by fire or explosion only,

so loss or damage caused by flood, impact (arguably) and

chemical attack are not covered;

the definition of terrorism in the Re-insurance (Acts of

Terrorism) Act 1993 which established Pool Re is limited, and of

particular significance, having regard to the events of 9/11,

does not cover terrorist activity for religious or ideological


a freeholder or landlord cannot pick and choose which of its

buildings to insure; reinsurance cover with Pool Re is available

only for the whole of a freeholder/landlord's property portfolio

(although the insured can opt not to take out cover for business

interruption, which obviously reduces the premium);

if Pool re makes a loss in any year, its insurance company

members can be called upon to make an additional payment (of up

to 10% of the premium).

The Association of British Insurers, the BPF and other interested

parties in the property market are lobbying Government to address these


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