On 15 January 2015, Treasurer Joe Hockey declared that the incident which took place at the Lindt Café in Martin Place on 15 December 2014 was an act which constituted a "declared terrorist incident" for the purposes of the Terrorism Insurance Act 2003 (Cth).
The declaration meant that terrorism exclusions in certain "eligible insurance contracts"' were of no effect. It did not mean that all losses in connection with the Sydney Siege were immediately covered. To be covered, an insured would need to have held an 'eligible insurance contract' and that insurance would need to have responded to the losses (disregarding the terrorism exclusion). If relying on the Terrorism Insurance Act, an insured's ability to recover would also be subject to the various exclusions and limitations in the Terrorism Insurance Act.
There appears to be some confusion in the market as to how the Terrorism Insurance Act affects the rights of individual insureds and the extent to which the Terrorism Insurance Act creates a right to recover from the Australian Reinsurance Pool Corporation (ARPC) for loss or damage arising from a terrorist incident.
While we hope that no further terrorist incidents occur, it is important that those managing the risks of a business ensure that appropriate cover is in place to protect the business should it be affected by a terrorist incident in the future.
Terrorism cover under the Terrorism Insurance Act
The Terrorism Insurance Act does not create a regime for directly covering companies against loss caused by a terrorist incident. The way it operates is to make a terrorism exclusion in an "eligible insurance contract" of no effect in respect of a "declared terrorist incident". The overriding of terrorism exclusions applies only to the extent provided for in the Terrorism Insurance Act. In this way, the legislation obliges insurers to pay claims which would otherwise have been denied due to a terrorism exclusion.
The ARPC then reinsures those insurers who are liable to pay claims as a result of the Terrorism Insurance Act making their exclusion ineffective. In doing so, the ARPC effectively provides the ultimate cover for terrorist incidents.
A terrorist incident will be a "declared terrorist incident" if the Treasurer, after consulting the Attorney-General, is satisfied that a "terrorist act" (as defined in the Terrorism Insurance Act) has happened in Australia. In those circumstances, the Treasurer must declare that the act constitutes a "declared terrorist incident" for the purposes of the Terrorism Insurance Act.
Loss or liability arising from a declared terrorist incident constitutes "eligible terrorism loss". Section 8 of the Terrorism Insurance Act provides that a terrorism exclusion in an "eligible insurance contract" has no effect in relation to a loss or liability to the extent to which the loss or liability is an "eligible terrorism loss".
Eligible insurance contracts
The Terrorism Insurance Act applies to a limited range of insurance contracts. A contract of insurance is an "eligible insurance contract" to the extent that it provides insurance cover for one or more of the following:
- loss of, or damage to, "eligible property" (being specified types of property located in Australia) that is owned by the insured;
- business interruption and consequential loss arising from loss of, or damage to, eligible property that is owned or occupied by the insured, or inability to use eligible property, or part of eligible property, that is owned or occupied by the insured;
- liability of the insured that arises out of the insured being the owner or occupier of eligible property.
Contracts of reinsurance are not eligible insurance contracts. The Terrorism Insurance Regulations 2003 (Cth) also lists several exclusions to what constitutes an eligible insurance contract.
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The policy needs to respond in the first place
The Terrorism Insurance Act operates to make terrorism exclusions ineffective. In order for the Terrorism Insurance Act to be of any assistance to an insured, the insuring clause of the insured's eligible insurance contract would need to be broad enough to respond to the relevant loss.
In respect of loss or damage to property, an insurance policy which responds only to specified events or perils is unlikely to respond at all in the event of a terrorist incident. If so, the insurer would not need to look to the terrorism exclusion to deny cover and the Terrorism Insurance Act would have no application. The insured would likely need to be covered under an "all risks" policy in order for the cover to respond.
Similarly, in respect of business interruption loss, the insured would need cover to be triggered before the insurer could turn to a terrorism exclusion. For example, a typical industrial special risks (or "ISR") policy would only provide cover for business interruption to the extent that it arises from loss of or damage to insured property otherwise covered by the policy. If the interruption is caused by damage to a nearby property, e.g. because access to the insured's property is not possible for a period of time, the insured may find that it is not covered for such interruption.
In many cases, the insured is unlikely to have any cover for business interruption losses which arise because authorities have instructed the business to close or have prevented public access to the area in which the business operates. In those circumstances, the mechanism in the Terrorism Insurance Act to override terrorism exclusions is of no relevance. The insurance simply would not cover the loss.
Only terrorist acts which occur in Australia are covered
An insured covered under an Australian insurance policy for its global business interests should be mindful of the limited extent to which the Terrorism Insurance Act applies geographically.
Under section 4 of the Terrorism Insurance Act, the Act extends to acts, omissions, matters and things outside Australia. However, a terrorist act may only be a "declared terrorist incident" if it happens in Australia and "eligible property" includes only property located in Australia. Insureds who conduct business in other jurisdictions would need to consider the extent to which they are covered in those jurisdictions.
Three practical considerations with the Terrorism Insurance Act
Some practical difficulties may arise for an insured if its insurer seeks to apply a terrorism exclusion and there is uncertainty as to whether that exclusion will later become ineffective because of a declaration made by the Treasurer.
For there to be a "declared terrorist incident", there must be one or more "terrorist acts" within the meaning given by section 100.1 of the Criminal Code. Many policies on the market have terrorism exclusions which describe excluded terrorist acts in much broader terms, so an incident may trigger an exclusion but never become a declared terrorist incident.
There is also a timing issue. The facts needed to ascertain whether or not the Sydney Siege was a "declared terrorist incident" were available a short time after the incident occurred, if not during the incident. Despite this, the incident only became a declared terrorist incident a full month later. There is a risk that a future incident which involves a more complex matrix of facts might lead to a more substantial time lag between the happening of an incident and the incident becoming a "declared terrorist incident" for the purposes of the Terrorism Insurance Act.
An insured who has suffered a loss may need to get its hands on insurance proceeds as quickly as possible. Delays may be costly. Until such time as the incident becomes a declared terrorist incident for the purposes of the Terrorism Insurance Act, an insurer would be entitled to deny a claim in reliance on a terrorism exclusion. That being so, without certainty that an incident will eventually become a declared terrorist incident, an insured may feel compelled to compromise its position to achieve an immediate outcome. For example, an insured may accept a settlement which is less favourable than the position it could have achieved had it been able to wait for a declaration from the Treasurer.
What you can do to manage your insurance for terrorism risks
The starting point is to consider the extent to which an entity is exposed to the risk of a terrorist incident and to assess the extent to which existing insurance policies respond to those risks, taking into account the operation of the Terrorism Insurance Act.
If there is a significant uninsured risk exposure, the entity should consider what it could do to effect the desired level of cover. This may include, for example:
- amending the terms of its existing property insurance policy to ensure that the policy is subject to and has the benefit of the Terrorism Insurance Act,
- purchasing a different "all risks" policy which would respond in the event of a terrorist incident or
- considering the purchase of stand-alone terrorism insurance.