On 15 December 2014, Man Haron Monis walked into the Lindt Chocolate Café in Sydney’s Martin Place, sat down and? ordered dessert. He then asked Tori Johnson, the café manager, to lock the doors and declared that this was an attack and that he had a bomb. Hostages were ordered to hold a flag with Islamic inscriptions facing out the window of the café. Mr Johnson was told to call 000 and to say that Australia was under attack by the Islamic State.  The Sydney CBD was in shut down 10 days before Christmas.  

So commenced the Sydney siege, the latest of the few terrorist attacks to have taken place in this country. The siege ended with the tragic death of Tori Johnson and Sydney barrister, Katrina Dawson. 

On 15 January 2015, Treasurer Joe Hockey, in consultation with Attorney General George Brandis, declared the siege a “terrorist incident” for the purposes of the Terrorism Insurance Act 2003. But what does this mean for insurers and those affected by the siege?

Terrorism Insurance Act 2003

In his media release, the Treasurer said that the effect of the Ministerial declaration was that insurers would be prevented from relying on terrorism exclusion clauses to refuse claims made by affected businesses. This is true, but not for all policies. It will depend on whether the policy is an “eligible insurance contract” under the Terrorism Insurance Act. 

The Act states that any terrorism exclusion clauses in an eligible insurance contract will have no effect where there is a loss or liability arising from any declared terrorist incident. 

When does the Act apply?

An eligible insurance contract covers loss or damage to “eligible property” and associated business interruption and public liability losses caused by an “eligible terrorism loss”.

Eligible property:- includes commercial buildings, as well as structures, works and property located in or on them. Farms are included but only where they are covered for property and business interruption risks. Residential property is not covered by the Act.  

Eligible terrorism loss:- arises from a declared terrorist incident but does not include any loss from nuclear attacks.

The Act does not affect any other part of an eligible insurance contract. Cover will continue to depend on policy terms and conditions, except for the fact that any terrorism exclusion is treated as if it did not exist.

Any sub limit for terrorism related loss in an eligible contract won’t be enforceable. A terrorism sub limit is seen to be an exclusion within the meaning of the Act.

Curiously the Act does not affect policy exclusions for loss caused by biological and chemical pollution or contamination.

Terrorism reinsurance scheme

The Australian Reinsurance Pool Corporation (ARPC) administers the terrorism reinsurance scheme and provides insurers with reinsurance for commercial property as well as associated business interruption and liability losses arising from a declared terrorist incident. 

The ARPC can provide $13.6billion in cover which includes a $10billion Commonwealth Government guarantee. Where the loss is likely to exceed this amount, insurers who reinsure with the ARPC can reduce the amount payable to the insured by a “reduction percentage” to ensure that no more than the $10billion guarantee is drawn. An insurer not reinsured with ARPC does not get the benefit of the reduction percentage.

Insurers who reinsure with the ARPC will have a retention of anywhere between $1million and $10million per incident. There is a maximum industry retention of $100million. All of the Sydney siege claims have (so far) fallen below each insurer’s retention.

Looking after the victims

The focus of the Terrorism Insurance Act 2003, and access to the ARPC fund, is limited to commercial (and farm) property/income and associated business losses and third party liability risks. In all other insurance policies terrorism exclusions are permissible and prevalent.

As well as policies covering residential premises, the Act does not apply to life insurance, income protection insurance, workers compensation insurance, health insurance and all other non-eligible insurance contracts.

What we are left is a terrorism reinsurance scheme which focuses on property rather than people, profits rather than livelihoods, and seems to ignore that reality of large residential towers spread throughout Australia’s major cities which are just as susceptible to terrorist attack as commercial buildings.

The Act is required to be reviewed every three years to consider the continuing need for the terrorism insurance scheme and the ARPC. The latest report was submitted to the government in January this year. Although some commentators say that the reinsurance market now has the capacity and appetite to provide terrorism reinsurance cover, there is no obvious push to disband the scheme and similar schemes established overseas are there for the long term.

Rather than a review as to whether the scheme should be shut down, there are solid grounds for considering whether there should be a more expansive national response to those affected by terrorist acts. The focus on commercial interests ignores the real victims of terrorist attacks.

In conducting any such review it would be wrong to simply load up the insurance industry with another levy. This is an easy option which has been taken too many times before. Terrorism is a global issue that demands something more.

Compensation is available to Australian victims of overseas terrorist attacks and their families through an Australian Victim of Terrorism Overseas Payment.  But there is no such payment if the attack happens on home soil.

The Productivity Commission is ideally placed to consider available options and one would expect bipartisan support for the swift introduction of a victims compensation scheme.