The recent series of suicide bombings in Tel Aviv, Riyadh and Casablanca has thrust the issue of terrorism to the top of the international agenda once again. This time, however, the threat strikes much closer to home. Tel Aviv was not perpetrated by a hardliner from the Middle East, but by two young British nationals, and the uneasy question this has raised is whether the UK could be targeted next?
If a suicide bombing did happen in the UK, the potential damage would be enormous, even if one leaves aside the human and emotional cost of such a tragedy. After all the politicians have given their condemnatory sound bites and the necessary recriminations have been made, one question will remain – who should pick up the cost?
Historically, the insurance industry has made it quite clear that terrorism is something that falls beyond its remit. During the renewal season following the 1992 IRA bombing of the Commercial Union and Baltic Exchange that cost the industry approximately £760 million, reinsurers and insurers excluded damage arising from terrorist acts from their cover going forward. This raised the spectre of massive uninsured losses to commercial properties in the event of another explosion.
As a result, the government was forced to step and the resolution that emerged was a public/private initiative between the insurance industry and the Treasury based on a straightforward reinsurance/retrocession structure that remains in place today.
Under this arrangement, direct property insurers agreed to offer their insureds coverage of £100,000 per head of cover in respect of any loss caused by an ‘Act of Terrorism’. Beyond this limit, insureds were able to purchase further cover from their insurer, for which their insurer would in turn obtain reinsurance from Pool Re, a new mutual company set up for this specific purpose. Pool Re then entered into a retrocession with the Treasury, who became the insurers of the last resort.
The beauty of this arrangement lay in its simplicity. Only one short piece of legislation needed to be passed - the Reinsurance (Acts of Terrorism) Act 1993 (“the 1993 Act”) - and only a small staff was needed to manage Pool Re. Furthermore, it appears to have worked remarkably well. Pool Re has only had two claims made on its resources; the Treasury, as the retrocessionaire, has never had to pay out; and there has never been any dispute as to whether Pool Re’s reinsurance should respond to a particular event or not.
That said, the scope of Pool Re’s cover has never really been tested and recently a debate has been ongoing between the insurance industry and the government as to whether the current arrangement is adequate to address the modern day terrorist threat, the scope of which was demonstrated so tragically on September 11th 2001.
The main focus for the debate concerns Pool Re’s definition of what constitutes an “Act of Terrorism” for the purposes of its reinsurance. According to the terms of Pool Re’s cover, an “Act of Terrorism” encompasses:
“Acts of persons acting on behalf of, or in connection with any organisation which carries out activities directed towards the overthrowing or influencing, by force or violence, of Her Majesty’s Government “de jure or de facto””
This definition, however, was formulated in 1992 and is very much a product of its time. Back then, the principle terrorist threat to mainland Britain was from the IRA and the definition was formulated with that organisation very much in mind. Hence the requirement that the perpetrator of the act must be acting on behalf of or in connection with “ an organisation” whose activities are directed at “influencing her Majesty’s government by force or violence.”
Yet is Pool Re’s definition sufficient to capture the current terrorist threat? The insurance industry has suggested it is far too limited. In the case of many of the recent terrorist atrocities, there simply has not been the evidence to establish the “connection” between the perpetrator of the act and any “organisation”. Take the Tel Aviv and Riyadh bombings, for example. Al Quaeda, or indeed a splinter group of Al Quaeda, is only “suspected” of being the organisation responsible the acts. A suspicion simply would not suffice for the purposes of establishing that a loss falls within the scope of a reinsuring clause – proof would be necessary; and if the reinsured was unable to prove that the terrorist was acting for an organisation (let alone the identity of that organisation) then this would not be enough to satisfy Pool Re’s definition.
The widespread view in the insurance industry is that the nature of terrorism has moved on to such an extent since 1992 that Pool Re’s definition has become outdated. The world we now live in is not one where the terrorist organisation is willing to claim responsibility for an event through a series of pre-arranged coded messages, the modus operandi of the IRA. Today’s terrorist is the suicide bomber who claims responsibility for the act by paying the ultimate sacrifice and in so doing takes any evidence regarding his organisational backers with him. Indeed, the government recognised the need to redefine terrorism and enhance the powers of its security forces by passing the Terrorist Act 2000 (“the 2000 Act”).
Further, the terms of Pool Re’s cover simply do not allow sufficient time for evidence to be collected so that a fully informed decision on coverage can be made. The Treasury is only given 10 business days to make a decision as to whether an event satisfies the definition of an Act of Terrorism. This would simply not be feasible in the case of a suicide bombing.
The government has not remained entirely unmoved to the insurance industry’s exaltations. Pool Re’s cover was extended towards at the end of 2002. It now includes “all risks” and not just “fire and explosion” caused by an Act of Terrorism.
Yet the government remains of the view that the definition of Act of Terrorism in Pool Re’s cover is perfectly adequate. To the insurance industry, this stance appears difficult to justify, especially when even prior to September 11th, the 2000 Act introduced a far wider definition of terrorism than has ever been seen before. The 2000 Act definition requires no connection to be established between the perpetrator of the act and an organisation, the most limiting factor in Pool Re’s definition. It does not even require the act itself to be committed – a threat will do. Further, as long as the act was committed for “political, religious or ideological” purposes, the 2000 Act definition is satisfied.
The insurance industry has taken the very existence of the 2000 Act definition as proof that Pool Re’s definition is no longer adequate. Insurers have recognised that if Pool Re does not cover an event, then they could be on the hook for the full unreinsured loss. As such, in the aftermath of September 11th the majority of property insurers adopted wide ranging terrorist exclusion clauses based on the 2000 Act definition and have only written back into their policies terrorist cover on the limited basis for which they are reinsured by Pool Re.
As in 1993, therefore, the prospect of massive uninsured losses has raised its ugly head. This time, however, the commercial reinsurance industry has stepped in to assist in closing the gap by offering “gap cover” which responds when Pool Re’s cover does not. But this is by no means a complete solution. The uptake for “gap cover” has not extended to the whole market, nor in many cases is the scope of that cover enough to close the entire gap (the terms exclude certain types of damage).
So wherein lies the answer? If a suicide bombing was perpetrated in the UK, who would pay? Unfortunately, unless the government’s position changes, the answer may only emerge from costly litigation that might ensue in the aftermath of so tragic an event.
For further information please contact Belinda Schofield at
belinda.schofield@cms-cmck.com
