Landlords and tenants are now familiar with the insurance issues arising from damage caused by terrorist activity. However, they may shortly have to reconsider their approach as a result of The Terrorism Bill which is currently in the House of Lords.
The Bill seeks to make permanent provisions relating to terrorism. One of the effects of the Bill is to introduce a new definition of terrorism which property owners, investors and tenants should carefully consider.
The existing statutory definition of terrorism, contained in the prevention of Terrorism (Temporary Provisions) Act 1989, is limited to violence for political ends (including putting the public in danger). The new definition, as it is most likely to be enacted, is wider. It means the use or threat of action for advancing political, religious or ideological causes which involves serious violence to people or property or endangers life, or creates a serious risk to health or safety to the public.
This wider definition would probably encompass the "anarchists" demonstrations in the City of London last summer, (threatened to be repeated this summer).
If enacted, which is almost definite, a number of consequences flow for property owners, investors and occupiers, including:
Insurance
Most building insurance policies carve out terrorism risk (in respect of fire and explosion only), which is then covered separately through Pool Re. The standard exclusion defines terrorism in a third way: "activities directed towards overthrowing or influencing any government de jure or de facto by force or violence" by or on behalf of or in connection with any "organisation".
This seems wider than the existing statutory definition, but narrower than the proposed new definition. For example, the new definition could apply to the activity of one individual (such as the recent activities of the "Mardi Gras" bomber in trying to blackmail Sainsbury and Barclays). The insurers' definition requires there to be an "organisation".
Property owners and occupiers will need to check how their insurers will deal with the new definition. The possibilities are:
- Insurers leave policy wording as it is - legally, this may not be an issue in terms of claims, as anything within the new widened definition should be covered by the existing policy (through general cover in respect of fire or explosion (which is not as a result of a narrower definition of terrorism in the policy), or through the other heads of cover such as riot, civil commotion or malicious damage). Anything covered by Pool Re will continue to be covered through the Pool Re insurance policy.
- Insurers change their policy wording - if this happens, then the terrorist damage exclusion will become wider. The extra risk would need to be covered. It is essential that the Government then extends Pool Re, otherwise there will be a serious gap in potential cover for property owners and occupiers.
In terms of insurance, therefore (provided Pool Re is extended if policy wording is changed), the practical consequences are unlikely to be significant. The Association of British Insurers will no doubt comment shortly.
Leases
Of more significance are the consequences on the relationship between landlords and tenants under leases. Leases may need to be revisited. Here, the possibilities are:
- The lease is silent on terrorism risk - the new definition will not change the relationship between landlord and tenant. The relative risks taken by the landlord and the tenant are unlikely to change.
- The lease contains specific provisions relating to terrorism, but terrorism is not specifically defined. The lease may then be interpreted by reference to the new definition. Specific provisions can include: (a) a landlord's obligation to insure against terrorism or an exclusion of the tenant's liability for uninsured terrorism damage. If insurance cover should cease to be available then the landlord may be in breach of its obligation to insure, or the tenant may be released in circumstances which neither party had contemplated when the lease was granted. (b) a tenant's right to break in the event of terrorism damage - it will be unusual for a tenant to have a simple break; it will normally be linked to uninsured damage. However, if it is not, or the wider risks cannot be insured against, then the tenant may be able to break in circumstances which were not contemplated. (c) provisions for sharing risk in relation to terrorism damage - e.g. the tenant agrees to cover what might have been covered under a loss of rent policy and the landlord what might have been covered under a buildings policy. The sharing of this risk may be extended to the new wider statutory definition. Should insurance cease to be available, or the scope of the cover change, then the consequences contemplated at the time of the grant of the lease may extend to cover new situations which were never intended.
- The lease contains specific provisions of the type referred to above and terrorism is specifically defined in the lease (usually to track the wording of the policy exclusion) - the various provisions should not be affected as long as the same cover is available and the parties should not face unintended consequences.
What to do next:
- Contact your insurance brokers or your landlord/tenant (depending on who insures) for a view on what changes may be made to your policy.
- If policy wording is being changed by insurers then the industry will need to ensure that the Government makes arrangements to change the Pool Re arrangements.
- Check the terms of any lease where you have agreed any unusual provisions on terrorism.
- Cater for the likely new definition on any new leases you are negotiating.
Conclusion
Although unlikely to have a significant effect on the majority of owners and occupiers, the new statutory definition will have some implications and people need to ensure they are fully aware of the potential consequences of the proposed change.
For further information on this topic, please contact Pranai Karia at pranai.karia@cms-cmck.com or on +44 (0)20 7367 3000.
This article first appeared in the Estates Gazette on 8th July 2000
