When terrorists hijacked jet-liners and attacked the US in September 2001, it was more than just the World Trade Centre that crumbled. The attacks also destroyed global insurance appetites for terrorism risks.

Faced with a hugely damaging withdrawal of cover for terrorism losses, governments across the world invested in terrorism pools to ensure key sectors were still able to obtain cover.

In Australia, this took the form of the Australian Reinsurance Pool Corporation, which was instituted in 2003. The ARPC was put to its first test last year, when a single armed gunman and some inflammatory rhetoric was enough to shut down Sydney’s CBD, causing significant business disruption and loss.

Officially declared a terrorist incident by Federal Treasurer Joe Hockey at the beginning of the year, the episode has raised many queries about how exactly terrorism is handled by insurance in this country.

How it works

ARPC CEO Dr Christopher Wallace says, at its heart, the scheme provides primary insurers with reinsurance for commercial property and associated business interruption losses arising from a declared terrorist incident.

Business might be evacuated from their store for an extended period of time in the event of a major attack.

Once such an incident is declared, the Terrorism Insurance (TI) Act 2003  voids any terrorism exclusion clauses in eligible contracts.

“The TI Act contains a list of 40 exclusions that remove risks such as home, motor, life insurance, etc from the definition of eligible policies,” Wallace says. Once those exclusions are applied, the insurance policies that remain eligible fall into four categories:

  1. commercial/industrial buildings, the contents
    within those buildings, the business
    interruption associated with those buildings
    and the public liability as the owner or
    occupier of those buildings,
  2. commercially owned infrastructure such as roads, tunnels, dams, railways and pipelines,
  3. construction projects, and
  4. farms with business interruption cover.

Under the terms of the TI Act, a sub-limit is considered a terrorism exclusion, so sub-limit also cease to apply in the event of a declared terrorist incident. However, any losses arising from incidents involving nuclear materials are excluded from this.

Taking cover

While losses from the Martin Place siege are estimated to total around $600,000, the fall-out from a larger-scale attack could be vastly more damaging. A key consideration, often overlooked, is how long a successful terrorist attack could shut down businesses while authorities investigate.

Terror timeline

“It is important for businesses to consider that they might be evacuated from their store for an extended period in the event of a major attack and they should purchase cover in accordance with their risk appetite,” Wallace says.

“Business interruption policy terms and conditions vary and some businesses choose not to buy adequate cover. In the Australian market, some business interruption covers require indemnifiable material damage to trigger a claim, while others might only require restriction of access.

“Businesses will be affected by the type of interruption cover they buy, the adequacy of the amount of cover and the deductible that is applied to the business interruption component.”

Lessons learnt

Wallace praised Australian insurers for responding to the Martin Place siege in a professional and understanding manner.

“Feedback indicates claims were addressed efficiently with minimal disruption to businesses,” he says. “ARPC has been provided with excellent information on claims payments.”

However, the process was not without confusion. “One issue that arose early in the process was that some policy holders did not understand that the normal terms and conditions of their ‘eligible’ insurance policy operate as normal (ignoring the terrorism insurance clause), so some insurers had to explain this aspect of the TI Act to theircustomers,” Wallace says.