On 10 April 1992, a huge truck bomb exploded outside the Baltic Exchange building in the City of London. Three people were killed and more than £800 million of damage was caused. The incident was one of a series of bombings during the early 1990s that rocked the foundations of terrorism insurance for the construction industry.
Mutual reinsurer, the Pool Reinsurance Company Ltd, was formed in 1993, as a response to insurance industry worries surrounding these ongoing attacks. Now, in 2018, the year that marks its quarter century, Pool Re is regarded as the key element of construction terrorism cover.
Why does my company need to know about Pool Re?
Pool Re only reinsures against terrorism-related damage. However, not all terrorism cover is underwritten by Pool Re. Many contractors, owners and developers are unsure about their terrorism cover when arranging construction all risks (CAR) insurance; there is little knowledge of how Pool Re could affect policies purchased from their own insurers.
MI5 classes the UK threat level from international terrorism as Severe1 at the time of writing. It is crucial, therefore, that risk managers understand Pool Re’s role in construction-related terrorism coverage. Construction contractors and developers / facilities managers will need to make important decisions with regard to their terrorism insurance.
What is Pool Re?
Pool Re is a mutual reinsurer owned by its members; some 157 entities are currently members (this being the vast majority of insurers and Lloyd’s syndicates offering commercial property insurance in the UK). They are underpinned by a HM Treasury commitment to support Pool Re if it ever lacks sufficient funds to pay a valid claim. It pays a premium to the government for this protection and would have to repay the money over time in the event the guarantee was ever called upon. Pool Re’s fund is currently in excess of £6 billion.
Why was Pool Re formed?
The formation of the reinsurer was prompted by the terrorism incidents of the early 90s, which were linked to the political situation in Northern Ireland. Other significant attacks included an explosion in April 1993, where again a truck bomb was detonated in the City of London, this time at Bishopsgate. It killed one person, injured 40 and caused £262 million of damage (£800 million at today’s values). Such events were not limited to London; the central Manchester bombing of 15 June 1996 saw the biggest bomb detonated in Britain since World War II.
These events prompted firstly reinsurers and then insurers to review and ultimately withdraw coverage for terrorism-related damage for commercial properties. It was felt that any withdrawal of such cover would leave businesses uninsured with serious consequences for the UK economy. As a result, the UK insurance industry and government worked together and in 1993 the Pool Re scheme began operations.
In the 25 years since its formation, Pool Re has paid out for 13 separate terrorism incidents, covering losses of more than £600 million. Currently, it underwrites some £2 trillion of exposure in commercial property to terrorism risk across the UK.
How does Pool Re operate?
The coverage provided by the mutual reinsurer is only in respect of losses flowing from damage to commercial property; it does not cover life or personal injury and nor will it insure private property.
The property insured must be located in England, Scotland or Wales and does not apply to property located in Northern Ireland, the Isle of Man or the Channel Islands. A policy holder must insure all or none of their property for terrorism. Pool Re does not allow a policy holder to only insure part of their portfolio.
Insurance for terrorism is always arranged through an insurer and not directly with Pool Re. Each participating insurer is free to set its own terrorism rates and different insurers may offer different premiums. This will normally entail renewing terrorism insurance at the first and subsequent anniversaries of the project start date.
Pool Re reimburses the member insurer for the costs it pays under the terrorism coverage it provides, subject to a premium being paid to Pool Re. This reimbursement will be subject to a retention held by the member insurer, which is based upon the size of its terrorism insurance portfolio.
The scheme utilises the definition of an Act of Terrorism from the Reinsurance (Acts of Terrorism) Act 1993, as follows:
“…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 in the United Kingdom or any other government de jure or de facto.”
This definition determines the ability of an insurer to make a recovery from Pool Re. Often, the wording offered by insurers is wider than this, for example, most property policies routinely cover malicious damage.
How has Pool Re adapted to the changing face of terrorism?
Prior to the 9/11 attacks in the US, Pool Re’s cover to insurers was limited to damage caused by acts involving fire or explosion.
In recognition of the limited amount of coverage that would be available if this stance continued, Pool Re widened coverage in July 2002 to offer coverage on an all risks basis, ie, no longer restricted to fire or explosion.
Since 2003, Pool Re has extended coverage to include attacks involving chemical, biological, radiological and nuclear (CBRN) devices. And from April 2018, coverage was extended to include cyber terrorism, ie, cyber triggers used by terrorists to cause property damage.
How to obtain the best terrorism insurance
Terrorism risk is multi-faceted and so is the insurance. The definition of the word ‘terrorism’ will differ from insurer to insurer, with some underwriters using the Terrorism Act 2000 to define acts of terrorism that are excluded from policies. Even if a policy provides cover against terrorism in its widest sense, care should be taken to check for specific exclusions.
While a party should be aware of Pool Re and the issues surrounding terrorism insurance, it should still take specialist insurance advice from its brokers before agreeing any contract wording.
These do not offer the breadth of cover that Pool Re does, an example being CBRN coverage (ie, the use of chemical, biological, radiological and nuclear weapons), which is not usually available from these ‘open market’ insurers. There are compensations, however, as open market terrorism insurance is not limited to 12 months and can be purchased on a multi-year basis.
Additionally, risk managers should not assume that specialist advice received in the past is applicable at the moment; the insurance market is notoriously volatile.
Cyber terrorism: Am I at risk?
Terrorism-related cyber crime is a growing hazard for the construction industry. Read JLT’s Cyber Risks white paper, analysing the threat and the surrounding risk and insurance issues.
TALK TO AN EXPERT
To find out more about terrorism risk and insurance, please contact Duncan Willcocks, Construction Division Partner, JLT Specialty on +44 (0)20 7528 4604.