When it comes to flats and blocks of flats insurance, the issue of terrorism insurance has long been one of the most controversial. To date there have been two significant milestones which have affected the way the insurance industry provides terrorism insurance for flats and blocks of flats and these have made it a complicated area to deal in.
To clarify the situation I’ve written ‘Flats and Blocks of Flats Terrorism Insurance: A History’ to outline these milestones, examine their significance and the changes in perception of risk that brought them about.
The Formation of Pool Re and Pool Re Cover
In March 1993 a bomb exploded at St Mary Axe in the City of London causing major damage to property. As a direct result of this re-insurers decided that the threat of terrorism was too great and withdrew terrorism insurance cover from the re-insurance market. In doing so they effectively declared a terrorist event as being uninsurable because the magnitude was too great and such an event presented what is known as a ‘Fundamental Risk’. In other words, the cost of paying a claim could be so great that no one insurer, or re-insurer, was financially capable of doing so. This obviously presented a problem to blocks of flats owners and other freeholders who wanted insurance protection in the event of a terrorist incident. If a terrorism insurance solution was to be provided, however, it needed to be done so by someone with financial resources far greater than any existing insurer or re-insurer. Enter Her Majesty’s Government.
Pool Re Cover
In March 1994, Pool Reinsurance Company Ltd (Pool Re as it is commonly known) was formed as a specific, government-backed provider of property terrorism insurance in the UK. By having government backing Pool Re had the financial capacity to offer terrorism cover and enabled UK insurers to continue to provide this cover to its property clients. Under the so called “Heads of Cover Agreement” insurers automatically offered insurance cover up to £100,000 for commercial properties and £2,500,000 for residential properties. Additional insurance cover could be purchased for fire and explosion (the then perceived causes of damage by terrorist activity) for a small additional premium. This was a change that went largely unnoticed by flat owners because it only affected larger blocks of flats and, even then, the premiums were still relatively small.
Changes to Terrorism Insurance in 2003
In 2002 a number of large property freeholders with significant portfolios of both commercial and residential property were becoming increasingly nervous about a perceived change in the terrorism threat. Their concern was that a so called “dirty bomb”, I.e. one that distributed airborne contamination, which presented an enormous threat as it could cause an area of contamination so great that entire blocks of flats might be affected and fail financially as a result. In response to this threat, The Association of British Insurers lobbied the government and it was finally agreed that the scope of re-insurance provided by Pool Re would be expanded to cover this threat.
With effect from 1st January 2003 the whole mechanism and basis of flats insurance cover changed, with all new or renewing policies for commercial customers excluding terrorism; the option being provided to buy it back on a full all risks basis that included nuclear, biological and radiological means. This effectively provided an insurance mechanism to protect the failure of the freehold system as a result of terrorist activities.
This change, unlike the one in 1994, was enormously significant for flats insurance and flat owners. It impacted them financially as the new cover came at considerable cost and, because it applied to all commercial customers, effectively meant the buildings insurance of almost all blocks of flats.
The insurance industry treats blocks of flats as commercial customers because the lease mechanism identifies them as a separate entity making the freeholder either a company, unincorporated association or a sole trader. And, as ever in freehold matters, this presented a new challenge in interpreting leases. In essence, any lease that required insurance against “comprehensive” or “normally available perils” could probably only now be discharged by including the new terrorism insurance extension. Most prudent freeholders accepted the interpretation that the new all risks cover from Pool Re was available in the block of flats insurance market and a comprehensive cover. This has recently been clarified, or at least in part, by the Upper Tribunal Lands Chamber determination Qdime Ltd v Bath Road (Swindon)
Many blocks of flats though have elected not to include the terrorism insurance extension; however, in light of the Qdime determination, this may be something they should re-visit. Often the decision not to take out a terrorism insurance extension for a block of flats has been made around the emotive argument that the block is not at risk and this is possibly because the risk of airborne contamination is not fully understood. Your street may be safe, but what of the ones upwind? And how can you tell?!
Do Flats and Blocks of Flats need Terrorism Insurance?
The decision as to whether you need terrorism insurance for your flats or block of flats should now be a fairly simple one: ‘Do I require terrorism insurance cover to discharge the insurance requirements of the lease?’ It would appear that the answer for most blocks of flats is yes, which in turn means, yes, you need terrorism insurance for your flats or block of flats.