Bomb decision threatens property deal

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The withdrawal of insurance cover for terrorist activities is threatening a deal being negotiated between one of Britain's largest property companies and a German investor.

The threat to the sale confirms the industry's warning that the decision by insurance companies to stop paying for bomb damage could deter foreign investors from buying property in Britain. The property company negotiating the German sale, which preferred not to be identified, said it was a big stumbling block and, unless a solution was found, the deal could collapse.

The London investment property market has enjoyed a fragile recovery in recent months, sparked mainly by foreign investment. German institutions alone are expected to spend more than pounds 500m this year on London property. DIFA, one of the country's largest funds, paid pounds 73m for Finsbury Circus last week.

Michael Heseltine, President of the Board of Trade, indicated on Friday that he was prepared to discuss the problem with the Association of British Insurers but the ABI warned that time was running out. Tony Baker, ABI spokesman, said: 'We are not hanging about, it's too important. Something has got to be arranged because of the implications for the UK economy, for businesses, for property values, for life and pension funds and for the continuing solvency of industry.'

The insurers say they will be forced to stop offering companies cover against terrorist attacks after the end of this month.

Most insurers accept that the Government is unlikely to extend the arrangements that apply in Northern Ireland - where the Government picks up the bill for all bomb damage - to the mainland. But they want to persuade it to act as a reinsurer of last resort, paying for claims that are too large to be covered by commercial reinsurers.

This means they would almost certainly have picked up the tab for much of the bomb damage at the Baltic Exchange in April, estimated at pounds 800m. But repairs following the Manchester bombs, where damage is estimated at more than pounds 4m, should be covered by commercial insurers.

The lack of cover also threatens to bankrupt businesses whose premises are damaged by bombs as many insurance policies stipulate that tenants must pay for repairs if they are not covered by insurance.

Meanwhile, analysts at Smith New Court have warned that insurers will face a window of disadvantage for much of next year. This is because many insurers will continue to be exposed to the cost of bombings even though they are unable to renew their own reinsurance cover.

Most insurers renew their reinsurance treaties at the year end. Yet much of the cover the insurers offer their own corporate clients comes up for renewal at different times throughout the year.

Smith New Court's Steven Bird said this meant that a repeat of last year's City bombing could prove many times more expensive for the direct writers. The insurers would have to bear the full cost of the damage, instead of passing most of it on to the reinsurers, as happened after April's bomb.

Insurers were last week playing down the extent of the overhang, which extends into next year.

Moreover, Royal Insurance pointed out that some reinsurance is arranged to cover a particular property, and so will expire at the same time as the insurer's own direct exposure.

Francis McWilliams, the Lord Mayor of London, has also written to the Prime Minister expressing concern over the future of the City if insurers refuse to cover terrorist attacks. He has asked John Major for support on underwriting costs.