What's the worst that could happen?

Earlier this summer, the financial secretary to HM Treasury announced that, as from 20 August 2002, terrorism insurance cover provided by the reinsurance company Pool Reinsurance Company Ltd (or Pool Re, as it is commonly known) would be extended to cover a wider range of terrorist risks.

The decision, which followed discussions with leading insurance bodies, addresses concerns expressed about the uninsurable 'gap' between exclusions of liability for terrorism implemented since 11 September and the previous cover offered by Pool Re.

What is Pool Re insurance?
Pool Re is a mutual reinsurance company which provides cover above a threshold (currently £100 000) for damage or business interruption resulting from any acts of terrorism. Membership of Pool Re includes most significant participants in the UK insurance market and the cover is guaranteed by HM Treasury.

From its inception in 1993, the purpose of Pool Re was to ensure that terrorism insurance would be available following withdrawal by insurers of terrorism cover for commercial property after a rise in terrorist bombings in the early 1990s.

However, the events of 11 September, exposed the limitations of existing available cover. While Pool Re provided reinsurance cover for damage and business interruption resulting from acts of terrorism causing 'fire and/or explosion', the scheme did not extend to damage caused by other forms of terrorist attack, such as impact by aircraft.

What has changed?
The main change is that the scope of cover provided by Pool Re has been expanded to an 'all risks' basis, as opposed to being limited to fire and explosion. The wider cover will apply to renewals from the date of renewal and all new policies from 1 January 2003.

As before, there will be certain limits, as cover will continue to be subject to previous exclusions (eg war risks), in addition to new exclusions such as hacking and virus damage to electronic components (due to the difficulty in proving that any given virus was, in fact, a terrorist attack).

Definition of terrorism – a residual gap?
It is important to note that Pool Re's reinsurance contract provides coverage only against acts of terrorism as defined in the Reinsurance (Acts of Terrorism) Act 1993 and there will be no change to the definition currently in use. The definition of terrorism is: '… 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'.

Participants in the construction industry should recognise that there will be greater costs for this insurance, and that they could rise further.

Even with the new changes to Pool Re there remains the possibility that some acts of terrorism will not be included. For example, the legislation refers to the overthrowing or influencing of government – what if the act of terrorism has a different motive?

Any change to the definition used by Pool Re cannot be implemented without new legislation – and this does not appear to be forthcoming.

Impact on the construction industry
The most obvious impact will be increased costs as the wider coverage essentially translates to larger premiums.

Initial premiums are likely to double but, as of next year, premiums will no longer be set by Pool Re. Whether rates will rise or fall will depend upon the state of things to come. But it has been noted that the rates charged by Pool Re have for some time been considerably discounted which, according to the JCT, has possibly had an effect on the supply of cover from other markets.

It is worth noting that the position under the JCT standard forms is essentially that terrorist cover is required to be taken out, including the 'wider' version now available. This is because the contract requires the provision of an 'all risks' policy to cover the works (see clauses 22A-22C of JCT 1998 with contractor's design) and the definition of 'all risks' does not exclude terrorism.

Although the JCT has stated that it will review its terrorism provisions to reflect the changed circumstances in Pool Re, no changes have been announced at this time.

Conclusions
The expansion of Pool Re alleviates much of the gap in cover which has developed since 11 September and this will remove an element of business uncertainty as once again premises may be adequately insured against damage by terrorists.

However, participants in the construction industry should recognise that there will be a greater cost for this and that there will still be limitations on what the cover can address.

As the market is being 'freed up' economically, it may be that in the near future costs will rise further before the market corrects itself (but much will depend on the reinsurance market generally).