Does Your Lease Require Terrorism Insurance?

Most older leases simply refer to “comprehensive risks or perils” or “commonly available perils” sometimes with expressions such as “as available in the market”. Is it safe to assume a lease in this form, without reference to the CML, automatically requires terrorism insurance? The ordinary meaning suggests “yes”. For 10+ years terrorism insurance has been commonly available under the Pool Re scheme on an all risks basis. By definition, this has to be considered as “normally available” or “comprehensive”.

Terrorism insurance has remained a controversial insurance element of block buildings policies because of the cost implication.

The cost exists because of the perceived risk by the insurance industry. Cover has been available since January 2003 under the Pool Re scheme on an all risks basis including nuclear, biological and radiological (NCBR) threats. This was a direct response to an ever changing threat and the demands of large freeholders with portfolios of both commercial and residential properties.

The issue of explosion was of fundamental importance in this case. The danger of a so called “dirty bomb” and the subsequent damage it could cause is a valid reason for this insurance to exist. Many leaseholders fail to grasp this in their assessment of the risk of terrorism.

The Council of Mortgage Lenders recommendations exist to instruct conveyancing solicitors. Section 6.14 of the CML handbook simply outlines a lender’s minimum requirements for insurance to provide lending. This is to protect the interests of lenders - not necessarily the best advice for freeholders or flat owners.

The Lloyds insurance market offers alternative solutions for terrorism insurance which, unlike the Pool Re scheme, do not include NCBR and, therefore, cannot be described as “all risks”. Although not tested by the Tribunal, this would likely have discharged the first insurance covenant but only Pool Re would have satisfied the second.

There is a real argument for more debate and authoritative guidance being published for the public domain. My conclusion is the Qdime Ltd appeal offers some certainty that did not exist before, since most lease forms can now be interpreted as requiring terrorism insurance.

There are many blocks of flats which currently do not arrange terrorism insurance. This decision will, no doubt, force many to reconsider the basis upon which they have made that decision.