Insurance law updated to reflect new risks from terrorism

Changes have included the mutualisation of new risks by a trade body; the extension of cover through new legislation, and a reinsurance scheme's response to developments in the open market.

Acts of terrorism on UK soil in 2017 were the worst since the IRA bombings in the 1980s and 1990s. The suicide bombing at the Ariana Grande concert at the Manchester Arena, and the Westminster Bridge, Borough Market and Finsbury Park mosque attacks came within a few months of one another.

In the case of the latter three incidents, the attacks involved the use of vehicles as weapons - a new tactic that has brought a response from UK motor insurers. Last year the Motor Insurance Bureau (MIB) announced that its members had agreed to share the costs involved in meeting third party claims raised by victims of terrorist attacks involving vehicles.

The new arrangement applies to acts carried out after 1 January 2019 where vehicles are used to injure or kill people. For the MIB's scheme, the definition of 'terrorism' is taken from section 1 of the Terrorism Act 2000. It is a broader definition to the one that applies under the Pool Re scheme.

Pool Re is the government-backed terrorism reinsurer. It was established in 1993 in response to the IRA's campaign of bombings in England. It is a mutual reinsurer, with members making up the vast majority of the insurers and Lloyd's syndicates that offer commercial property insurance in the UK. Membership of Pool Re provides insurers with a guarantee that they can provide cover for losses resulting from acts certified as terrorism, regardless of the scale of the claims.

The definition of 'acts of terrorism' pertinent to Pool Re cover is set out in the Reinsurance (Acts of Terrorism) Act 1993.

Traditionally, the guarantee available through Pool Re was limited to covering losses caused by damage to commercial property and business interruption arising from that damage. Last year, though, the UK government introduced draft legislation to extend coverage to business interruption losses where there is no damage to the insureds own property. The change will mean that businesses within a police cordon which are forced to close during an extended investigation period may be entitled to claim for loss suffered.

The Counter Terrorism and Border Security Bill recently passed through its third reading in the UK parliament, but is still awaiting royal assent.

The Bill has been criticised by the Law Society and human rights groups amongst others in relation to the new police powers that the legislation will provide, including in relation to detention and interview of people suspected of carrying out terrorism offences.

For insurers and businesses, section 20 of the Bill is relevant. That section would amend the Reinsurance (Acts of Terrorism) Act 1993 so that Pool Re can extend its business interruption cover to include losses that are not contingent on physical damage to property.

The moves by the MIB to take on greater liability around terrorism and by the government to extend the scope of Pool Re are just two examples of the response seen in the UK to the changing face of terrorism.

Last year, the scope of Pool Re cover was extended to include physical damage from cyber terrorism for the first time. That change, effective from April 2018, takes account of terrorism via "remote digital interference" and its impact on property. Damage to money and data are excluded from scope, however, as is damage stemming from cyber terrorism perpetrated by nation states.

Individual insurers are also stepping up to plug previous gaps in terrorism cover. This led Pool Re to announce earlier this year that it is to stop providing so-called contingency cover for sporting events, concerts and tours, citing sufficient capacity in the commercial markets.

For businesses, an act of terrorism has the potential to cause direct damage to their physical property and indirectly to trade in the aftermath of incidents. While companies should continue to carefully consider the wording and definitions in policies available, they will welcome the moves to strengthen the insurance and reinsurance regimes around terrorism in the face of continued risk and uncertainty.

Nick Bradley is an insurance and reinsurance expert at Pinsent Masons, the law firm behind Out-Law.com. He addressed the topic of terrorism cover at a recent breakfast seminar hosted by Pinsent Masons at Lloyd's in London.