Following the events of September 11, 2001, the reinsurance market and subsequently the primary insurance market effectively withdrew from providing cover for acts of terrorism. In response to this the Australian Government established Australia’s terrorism insurance scheme (the Scheme) by enacting the Terrorism Insurance Act 2003 (Cth) (the Act). The Act established the Australian Reinsurance Pool Corporation (ARPC). The ARPC is responsible for administering the Scheme and was established to provide terrorism reinsurance to insurers for ‘eligible insurance contracts’ (essentially commercial property risks). The scheme has been in place since 1st July, 2003. The Act obliges insurers of “eligible insurance contracts” to either provide cover for terrorism risks themselves via traditional reinsurance or reinsure such risks via the ARPC.
The Scheme including the Act and the ARPC is reviewed by the government every 3 years. The 2015 review has just been finalised and 10 recommendations were made to ensure the financial sustainability of the Scheme. One of these recommendations was to adjust the current rate that is charged. The government has adopted this recommendation meaning effective from 1st April 2016 the cost of reinsurance via the ARPC will increase by 4% for Tier A risks, 1.3% for Tier B risks and 0.6% for Tier C risks (refer below). This cost will be passed down to the insurance purchaser of ‘eligible insurance contracts’. This is the first time rates have increased since the scheme was first established.
Recent events have once again raised interest from our clients as to whether they would be covered if a terrorism event happened in Australia.
Most insurance policies define what their particular policy considers to be an act of terror. The Act defines ‘eligible terrorism loss’ and states that any particular event must be declared a terrorist incident by the Treasurer. If the Treasurer does not declare the event a terrorism incident then the scheme is not triggered and no cover will be provided. On the contrary if the Treasurer declares an event to be a terrorism incident then the scheme will be triggered.
The legislation is very specific regarding the type of risks covered by the Act. The risks must meet the definition of ‘eligible property’ and ‘eligible insurance contract’.
In general terms, only commercial property risks located in Australia and any associated business interruption or public liability meet the ‘eligible property’ and ‘eligible insurance contract’ definition and subsequently are covered by the Act. The ARPC provides a reinsurance option for these risks only.
The Act specifically excludes government, personal, domestic, marine and aviation property or any liabilities associated with such property. Travel, motor vehicle, professional indemnity, products liability, workers compensation, life and health insurance policies amongst others are also specifically excluded. Therefore, there is no legal obligation on insurers to provide cover for terrorism in these types of policies.
The ARPC collects a terrorism levy for ‘eligible insurance contracts’ from insurers who have elected to reinsure their terrorism risks with the ARPC. This levy is incorporated into the insurer’s premium for the risks the ARPC provides cover for. The amount of levy charged is subject to the level of perceived terrorism risk and is based on the postcode of the risk and divided into 3 tiers.
CBD of capital cities with a population in excess of 1 million including Melbourne, Sydney, Brisbane, Perth and Adelaide.
CBD of other capital cities and all urban areas and regional cities with population in excess of 100,000.
All remaining areas not allocated to Tier A & B.
The Act makes terrorism exclusions in ‘eligible insurance contracts’ invalid. This means that insurers who have reinsured with the ARPC must continue to have a terrorism exclusion contained in their policy wording. Insurers who bear the terrorism risk themselves or reinsure the risk via traditional reinsurance arrangements will have no exclusion in their policy wording for ‘eligible insurance contracts’.
Following qualification of the above requirements the terrorism exclusion contained in the ‘eligible insurance contract’ is rendered invalid. The insurer and the ARPC would then consider the claim subject to the limits, excesses and other terms and conditions of policy wording in place. If the damage or interruption would have been covered by the insurance policy in the absence of the declared terrorist incident then the claim would be covered, however if the damage or interruption is otherwise excluded then there would be no cover. For example, if a declared terrorist incident results in a fire and the insurance policy in place provides cover for fire then the claim would be covered. Conversely, if the declared terrorist incident involved biological contamination and the insurance policy in place excluded cover for biological risks a claim would not be covered.
Is cover for acts of terrorism available for risks excluded by the Terrorism Insurance Act?
Most insurance policies contain exclusions for terrorism as insurers generally cannot buy reinsurance for this risk. On limited occasions when reinsurance may be available it is usually at a prohibitive cost. It is safe to assume that acts of terrorism are most likely not covered outside of the provisions of the Act.
This article provides a summary of very complex legislation. You will appreciate that it cannot be relied upon for advice regarding any specific losses of this nature. Further information is available at www.arpc.gov.au. If you require specific advice in relation to your business please contact your Account Manager.
Manager – Projects and Compliance