In an area of insurance that has created relatively little discussion recently, Katie Edwards, Associate at specialist property solicitors JB Leitch, looks at the challenges surrounding insurance against terrorism and the implications for leaseholders and landlords in determining sufficient cover.
The premise
Landlords are usually subject to covenants within leases to insure their buildings in respect of risk of damage or destruction and leaseholders will be required to make payment of their proportion of the insurance as rent or via the service charge.
Where there is a dispute as to whether terrorism insurance is required, leaseholders are entitled in the usual way to challenge the reasonableness of service charge and insurance rent.
Payability and reasonableness
The subject of terrorism insurance is frequently raised in respect of payability and as usual the lease will be the starting point in assessing whether the terrorism insurance is a risk capable of recovery from the leaseholders. Assessing the services to be provided and the lessees’ covenants will be required. A specific obligation upon the landlord to include terrorism insurance as an insurable risk would be ideal and provide certainty but this is not necessarily required. Leases may provide the landlord with reasonable discretion as to what risks are to be insured.
But a key question is how far does a discretionary provision or other stated insurable risk extend to enable recovery of the terrorism premium?
The leading Upper Tribunal authority of Qdime v Bath Building (Swindon) Management Company [2014] UKUT0261 (LC) provides us with useful guidance where there is not specific reference to terrorism as an insurable risk within the lease.
In Qdime the lease provided for insurance for “...the usual comprehensive risks in accordance with the CML [Council of Mortgage Lenders] recommendations...and such other risks as the Landlord may in its reasonable discretion think for to insure against...”. The CML recommends to insure against the risk of explosion. The Upper Tribunal determined that the term explosion, in this context, included an explosion incurred by a terrorist act. Additionally the inclusion of terrorism insurance by the landlord was lawful and reasonable in its decision to include the same.
Properties outside of London and major cities can be disputed by leaseholders as to whether they are necessarily to be insured against acts of terrorism - but again, the lease provisions and any discretion held by the landlord will be fundamental in whether the premium is payable under the terms of the specific lease.
It is also important to note that what is considered to be a terrorist attack will depend upon interpretation and definition within each individual policy, however geographical areas that may be considered as being at a lesser risk of a terrorist threat do not necessarily prevent the need for the same.
It is our view that insurance policies should be checked for damage to a building as a result of an indirect act of terrorism for example, damage from falling debris or damage caused by vehicles deliberately intending to cause terror and damage that may unintentionally damage part of a building. Such cover may be provided within the definition of a malicious act or riots which may be seen in newer leases that cover a wider range of defined risks, especially post 9/11 and 7/7.
Portfolio insurance
The terrorism insurance of a building may be contained in a separate insurance policy to the usual building insurance cover as specialist policies are generally required. Pool Reinsurance Company Limited (“Pool Reinsurance”) was introduced in 1993 following the bombing of the Baltic Exchange.
Pool Reinsurance provides cover for insurers who in turn insure buildings for landlords against the threat of terrorism, which (for the purposes of Pool Reinsurance) includes “…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”.
Whilst the act causing damage or destruction must meet this definition for a claim under Pool Reinsurance, other policies may provide a wider interpretation than this - for example explosion or malicious damage. Additionally, Pool Reinsurance excludes cover for war and computer hacking etc. and it is yet to be tested by the Courts as to whether these exclusions would render the terrorism insurance inadequate in the level cover given the increasing rise in computer targeted threats. It also comes into question how the policy would be interpreted in the event of an organised group committing an act that is considered to be within the realms of the “war against terror” frequently referred to within the media and by the government generally.
Implications and points for landlords to consider
When considering whether to insure under Pool Reinsurance, landlords are required to insure their whole portfolio with the policy and are unable to select which of their buildings to include. Additionally landlords may insure their buildings as part of their larger portfolio, which generally may result in lower premiums.
In summary, and assuming a landlord insures their entire portfolio because they are required to, if they elect to use the Pool Reinsurance scheme or on a bulk basis, this does not necessarily ensure recoverability of the premium via the differing leases for each building. Additionally, considerations would need to given as to how to split of the premium between each building and are some more high risk than others? How will a claim on one building effect the premium for the rest of the portfolio? These questions may be raised when assessing reasonableness and advice should be sought where there is uncertainty.
Phil Parkinson, Legal Director and Katie Edwards, Associate at JB Leitch
