The Australian Government has declared the siege at the Lindt Café in Martin Place, Sydney, a “terrorist incident” for the purpose of the Terrorism Insurance Act 2003 (Cth). This has  the effect of nullifying terrorism exclusions in eligible property, public liability and business  interruption insurance contracts.

In December 2014, an armed man held hostages captive at the Lindt Café in Martin Place, Sydney, for 16 hours. The siege, in the centre of the CBD,  forced the evacuation or lockdown of a number of neighbouring buildings, some remaining closed for  days after the event. This incident has brought the operation of the Terrorism Insurance Act 2003  (Cth) (the Act) into focus as business owners’ deal with losses caused by the siege.

The Terrorism Insurance Act 2003 (Cth) The Act came into existence in direct response to the withdrawal of insurance, particularly for  commercial property, following the terrorist attacks in the United States in September 2001. There  was a concern that the dearth of insurance would impact investment in the sector and the Government  stepped in to assist businesses and reinforce the market.

Under the terms of the Act, the Australian Government’s Australian Reinsurance Pool Corporation  (ARPC) was established to operate a reinsurance scheme for terrorism- related losses. Subscribing  insurers would, for a premium, be compensated for payments made due to the non-effect of the  terrorism exclusion in eligible insurance contracts, subject to an applicable retention.

The general effect of the Act is to nullify terrorism exclusions in eligible insurance contracts,  being those which indemnify an insured for:

  • Loss of or damage to property
  • Business interruption and consequential loss arising from loss of or damage to property or  inability to use property
  • Liability that arises out of the insured being the owner or occupier of eligible property

As the Act is intended to provide relief under commercial property insurance and related business  interruption or public liability policies, the Terrorism Insurance Regulations  2003 (Cth)  expressly excludes an extensive list of other types of insurance contracts from the scheme set up  by the Act. These include home and contents insurance, product liability insurance, professional liability,  life and car insurance.

“Declared terrorist incident”

The scheme relies upon a declaration by the Treasurer, after consultation with the  Attorney-General, that a terrorist act in Australia is a “declared terrorist incident”. The Act  does not define “terrorist act”, but refers to section 100.1 of the Criminal Code Act 1995 (Cth),  which broadly defines it as an action or threat of action where:

  • The action causes serious physical harm to a person or serious damage to property, endangers a  person’s life, creates a serious risk to the health or safety of the public or seriously interferes  with, disrupts or destroys an electronic system
  • The action is done or the threat is made with the intention of advancing a political, religious  or ideological cause
  • The action is done or the threat is made with the intention of:
    • Coercing, or influencing by intimidation, the government of the Commonwealth or a State,  Territory or foreign country
    • Intimidating the public or a section of the public 

Protests or industrial action are generally excluded, as is an act of war. Further, a threat of terrorist action can only form the basis of a declared  terrorist incident if that threat resulted in economic loss to a person and the threatened action  would take place in Australia.

On 15 January 2015, the Australian Treasurer made a declaration that the siege at the Lindt Café is  a declared terrorist incident for the purposes of the Act, which means that terrorism exclusions in  eligible insurance contracts will be inoperable. While the ARPC has advised that the siege was estimated to have cost business owners approximately AUD 600,000, losses are not  expected to exceed insurer retentions and the ARPC does not intend to make any payments in relation  to this incident.

The future of the ARPC

The decision to classify the siege at the Lindt café a declared terrorist incident demonstrates the  willingness of the Australian Government to use the mechanisms provided by the Act, while also  reinforcing the role of the ARPC.

The ARPC was originally established as only a temporary measure until the market regained its  appetite for offering insurance for terrorism-related losses on reasonable terms. The need for the  Act is reviewed every three years to evaluate whether commercial market capacity for terrorism  insurance is sufficient to meet demand. The last review, in 2012, concluded that the Act should  continue. A further review is to be held this year, but it appears likely that the ARPC will endure.