The price of protection against terrorist damage

Changes by insurers after IRA bombs in the City of London have left tenants liable for terrorist damage. Paul Slade reports

As the Northern Ireland peace talks lurch from optimism to cynicism to despair and back again, one forgotten element of the process is that of how to insure against the damaging effects of another UK mainland bombing campaign in the event of a breakdown in the talks.

Among those most affected are the new and fashionable breed of inner- city dwellers, drawn to live in converted offices and warehouses. In some cases, they may even be living in blocks which still contain shops or offices. If so, they could drastically cut the cost of covering their home against the risk of terrorism.

Premiums for this type of cover on commercial premises soared in 1992, when the St Mary Axe bomb in the City of London led European re-insurers to rethink their view on terrorist risk in the UK. When another City explosion caused a further pounds 1bn-plus of damage in 1993, they said they would no longer accept the risk passed on by UK insurance companies for terrorist damage.

UK insurers were forced to create their own reinsurer, Pool Re, instead. Terrorism premiums now go to Pool Re which, at the end of 1996, had amassed a fund of about pounds 700m to meet future claims.

Until 1992, terrorist damage was included in mainstream commercial property insurance. But, under the new system, only pounds 100,000 per property is covered. Pool Re cut its rates by 20 per cent in the riskiest areas at the beginning of this year, reflecting a claim-free year. But getting cover for a building's full value still means paying a hefty extra premium.

Philip Perry is terrorism underwriter at Hiscox, which runs a number of Lloyd's syndicates operating outside the Pool Re system. He says: "If you take a big commercial property in London worth pounds 100m, and insure it for fire perils, you might pay a premium of pounds 30,000 or pounds 40,000. The terrorism cover will cost you another pounds 115,000. Previously, you, as a client, had that cover for free, because it was within the pounds 30,000."

Perry's example refers to Pool Re's standard premiums for commercial property in the highest-risk areas of central London. Residential rates in the same areas would mean paying just pounds 8,000. Both figures are before insurance premium tax.

This leaves leaseholders in a vulnerable position. The freeholders who own residential or mixed blocks will typically buy cover for the whole block and pass it on piece by piece to individual tenants.

But they can get cover at residential rates only if they can demonstrate to Pool Re that 80 per cent or more of the property in question is devoted to residential use. Lower rates should then apply to the residential part of the block, and be passed on to tenants.

Mike Thomsett is managing director of Reality Insurances, whose clients include the huge central London Grosvenor Estates. He says: "I think it is quite reasonable for tenants to approach their landlord and ask them to confirm there is terrorist cover on the building, and to make enquiries to see whether it's possible to pay the residential rate rather than the commercial rate - because that can produce an enormous saving."

Some fear the increased cost of buying terrorism insurance separately may lead local councils or private landlords to save money by not buying the cover. When the Docklands bomb exploded in February 1996, two of the residential blocks damaged turned out to be uninsured. One was owned by Tower Hamlets local authority and the other by a private developer.

Leslie Lucas, chief executive of Pool Re says: "The Tower Hamlets building was occupied by tenants but, for some reason or another, the local authority had decided not to buy the cover. The other building had no tenants and, because there were no tenants, there was no one to charge the premiums out to. It would have been quite a hefty premium, and they decided to run the risk themselves.

"Both those buildings sustained very substantial damage. I think the temptation is there to save money, and people have to weigh up the risks."

But what happens if you are a leaseholder living in an uninsured property which is damaged as a result of terrorism? The position will depend partly on the details of your own lease. If the lease contains a covenant stating the landlord will take out insurance, you may be able to insist he reimburse you for any damage from his own pocket.

Equally, however, the lease may contain a clause saying you will take insurance for your own part of the block. If you have not done so, it may be the landlord who is pursuing you.

Homeowners are not affected by the 1992 changes. In their case terrorism cover is still included in their basic house and contents policy.

Thomsett is a trenchant critic of the whole system of terrorism insurance here, which he believes is far more tortuous than it need be. He says: "You walk down a street in SW1, and you can't tell from the outside whether it's commercial offices or a residential house. A bomb doesn't identify the residential bits as being less bombable, so the whole thing's a nonsense, really."

where you'are most likely to get blown up

Commercial insurance rates for terrorist damage are higher than residential ones because these are the properties thought to be the principal targets. But any city centre now will contain a complex mix of commercial and residential properties, putting the residential ones at risk too. The danger is highest in central London, followed by outlying districts of London and the central business areas of other major cities. Except for the big cities there, Scotland, Wales, Devon and Cornwall are the safest part of the UK. Pool Re divides the country by postcode into four groups, the riskiest of which is zone A. Zone A consists entirely of central London postcodes, which are: E1, E14, EC1, EC2, EC3, EC4, SE1, SW1, W1, WC1 and WC2.

Of course, as Manchester residents are in a position to testify, London is not the only area potentially liable to attack in the event of a resumption of hostilities by the Provisional IRA or any other Irish republican organisation. It may be small comfort to them after suffering several hundred million pounds' worth of damage in 1996, but at least they are placed in a cheaper insurance risk category and would have to pay marginally smaller premiums to cover themselves against another terrorist outrage.