Alliance articles

The devil is in the detail

Recent terrorist events in London have highlighted the importance of thorough risk assessments and clarity of business insurance programme structures. Although many companies now have insurance against damage caused by terrorism attacks it does not mean that they are necessarily fully protected. This is because the devil is, regrettably, in the detail.

The real impact of recent terrorist attacks in London - particularly on businesses like restaurants, hotels and retail outlets – was profits lost because of a loss of attraction and access to their premises.

Terrorism insurance has evolved in recent times. It was once the case that a standard insurance policy would automatically cover you for damage (material damage and business interruption) caused by terrorist acts. But losses experienced by insurers following a series of incidents in London in the early 1990’s, and more recently the September 11th attacks in the US, have changed the picture.

Following the 1990’s Bishopsgate attack in London, all commercial insurers imposed a limit of £100,000 on policies for terrorism claims. Discussions between the government and insurers saw the Reinsurance (Acts of Terrorism) Act being passed in 1993. The act saw the government establish the Pool Re company which, working through UK insurance companies, provided terrorism cover allowing businesses to top up their £100,000 limit on cover by paying an additional premium into the Pool Re.

Terrorism Buy Back
The impact of the events of September 11th 2001 forced another review of cover for terrorism attacks. Following the attack, the insurance industry suffered losses in the region of $31 billion – an attack unlike anything seen before and one which highlighted a new and rising terrorist threat to businesses.

As a consequence terrorism insurance was upgraded to cover “all risks”. This meant insurance now included cover for biological, nuclear and radioactive contamination. Importantly though, insurers withdrew the standard £100,000 cover and excluded terrorism from all commercial policies – offering instead a terrorism Buy Back i.e. adding terrorism to the list of defined perils under your policy alongside theft, storm and flood – covered at a cost.

However, purchasing a terrorism Buy Back doesn’t mean you are as protected as well as you think – or indeed as well as you should be. As many businesses learned after the recent attacks on London, it is the cover under the Business Interruption section of your policy that will make all the difference in the event of a terrorist attack.

You need to be aware of the risk terrorism poses to your business to ensure you are adequately covered.

Terrorism cover is fine but ensuring you have the correct cover is crucial. In particular the Business Interruption cover should be structured to include policy extensions such as Denial of Access and Loss of Attraction.

The $31 billion paid out after September 11th includes some $11 billion relating to Loss of Profit cover. Many companies were put out of business because of the inadequacy of their policy cover. Although they weren’t directly hit by the attack, they couldn’t get staff or customers into their premises. Some businesses depended on the tourist attraction of the Twin Towers or other nearby attractions. When people couldn’t visit the Twin Towers, they didn’t buy their lunch from the restaurant next door! Trading became impossible and the resultant fall in income was punishing.

Is it worth the risk?
You may consider your business has little chance of being the target of a terrorist attack but it’s not only the direct threat that you need to consider. What would the impact be of a hit on an airport, water supply, ports, electricity stations, and transport links? Where is your business exposed in the supply chain? How would your customers and suppliers be affected by an incident and what would be the knock on effect to your business?

We can help companies understand and then structure programmes to help mitigate this risk. We can also ensure that our customers are even covered when business is lost because of hoax threats.