Why blocks need terrorism insurance
In 2014, a court ruling suggested that terrorism cover is a requirement for most flats, even when their location makes the risk of attack seem remote. However, even though the 2014 “test case” should have resolved the issue, we have short memories and confusion remains. Leaseholders regularly ask why they need to pay for terrorism cover. Here’s a reminder from Alan Vine, Technical Manager at Deacon.
The lease doesn’t state that we need it - why buy it?
Many newer leases expressly provide for a landlord to insure a building against the threat of terrorism, making life straightforward for managing agents. Older leases rarely do, and so leaseholders may question the landlord’s decision to buy it and ask them to pay for it. It’s good to nip these challenges in the bud, before they sour your relationship with leaseholders.
It was just this sort of confusion over the leases that led to the 2014 case involving a block in Swindon, not a city that jumps to mind when you think of terrorism. To remind you: the Lands Chamber was asked to rule on the QDime case, so called after the landlords in question. The leases for the 1980s Swindon block reflected the practices of the time they were built. They did not expressly require insurance against terrorism.
However, in that case, because the lease did specify that the landlord must insure against explosion, and a terrorist attack would probably involve an explosion, the judges decided that terrorism cover should be in place. That had far-reaching effects because most leases require cover in accordance with CML (Council of Mortgage Lenders) recommendations, and that includes explosion.
Why is cover quoted as an extra if it’s as good as universally required?
Even though terrorism cover is almost universally required for flats, which are treated as commercial premises for insurance purposes, it is treated separately by insurers. Standard policies do not cover it, in the same way they do not cover acts of war, because of the potential scale of any losses. So, insurers have clubbed together to set up the Pool Re (www.poolre.co.uk) scheme to pool terrorism risk. Pool Re which is ultimately financially backed by the Treasury, is a private sector solution to a public policy objective. It has exposure of £2 trillion and a fund of over *8bn to draw on before assistance from the Treasury would be called upon. (*Source: Pool Re website 18 May 2017).
What are the risks?
While the likelihood of a terrorist incident is statistically low, the impact would be very high. Losses could be massive and being uninsured is too big a risk. It’s also worth making leaseholders aware that some mortgage providers will not lend on a flat unless terrorism cover is in place.
We hear of “bomb factories” in flats all too often. No doubt their target is not the block itself, but often the very amateurism of many of these people puts residents at risk. Then there is the danger of a so called “dirty bomb” and the subsequent damage it could cause.
The policy definition of terrorism is broad and not restricted to the obvious. For example, it can include the activities of animal right extremists. Could a research scientist or a politician living in the block be an unwitting target for attack? Not all policies offer cover for that and you should ask the insurer for a full list of exclusions (as indeed you should for all policies).
The UK is a difficult environment for extremists to operate in. According to Pool Re, the police and MI5 have successfully disrupted at least 14 plots against the homeland since 2013. However, the intent and capabilities of extremists in the UK shows no signs of declining.
That makes sense for city centre targets, but what are you buying for a block of flats?
The key elements of terrorism cover for blocks are:
- damage to the buildings,
- the consequences of prevention of access to the building including alternative accommodation, and
- costs, including loss of ground rent if the premises become uninhabitable.
Common exclusions are cyber-attacks and strikes or civil riots.
What if leaseholders refuse the cover?
The landlord will rarely query the need for the cover, unless it is a company owned by the leaseholders. Where there are objections the answer is simple: If they are obliged by the lease to insure and fail to do so, they will be totally uninsured and the management company directors will be personally liable for losses and consequential losses (Directors & Officers Liability cover will not indemnify them in this case).
Isn’t this just a “stealth tax” on leaseholders?
Leasehold flats are deemed by insurers to be commercial property. Insurers, brokers and managing agents must all take the law and leases of flats as we find them. Individual freehold house owners would normally need to pay extra for this cover as well, but are not obligated by a lease.
Bottom line: how much does it cost?
This will vary between blocks and locations and one size does not fit all so do check that your broker has the best deal for you. Even though only a limited number of markets offer terrorism cover, a good broker will optimise cover and minimise costs.
Deacon has produced a free fact sheet on Terrorism Insurance available at www.deacon.co.uk/guides