The world is witnessing real change with respect to the terrorism threat: differences in how attacks are being delivered; differences in targets; and differences in apparent objectives.
A protective response is needed to answer all of those changes. That said, has related cover moved in step with the evolution of terrorist acts?
If existing coverage is not accessible or affordable, is not clearly understood by commercial clients or is not being viewed as worthy of concern, that makes the job of brokers all the more important.
Insurance brokers must be thoroughly versed on which policies apply (or which do not) and which acts are covered (or which are not) to ensure that clients, too, have enough of a solid understanding of the potential risk to determine what protections make most sense for their organizations.
Standard commercial liability policies do not cover claims arising from terrorism. Couple that with limited stand-alone cover for cyber terrorism and brokers must ensure that they inform clients where their gaps are and what stand-alone policies are available in the market.
Understanding the gaps and the cover could prove critically important in light of the altering face of terrorism. For example, in its 2016 Terrorism and Political Violence Risk Map, Aon plc notes that between 2010 and 2015, “bomb attacks” accounted for 58% of terrorist attacks in Western countries, but that image had flipped by 2015, when 52% of terrorist attacks in Western countries were shootings and just 34% were bombings.
In 2014, two Canadian military members died – one after being shot in Ottawa and another after being deliberately struck by a vehicle in Quebec. South of the border, 50 people died this past June at a Florida nightclub after Omar Mir Seddique Mateen took hostages.
“Shootings have become more common than bombings,” notes Aon’s Terrorism and Political Violence Risk Map. Industries most targeted by terrorists in 2015 were, in order, transport, retail, extractives, critical infrastructure and the financial sector, the report adds.
“Brokers should be looking to offer cover to their clients for terrorism and sabotage,” recommends Gary Hirst, president and chief executive officer of CHES Special Risk Inc., a Canadian managing general agent and Lloyd’s coverholder.
“The principal terrorist threat to Canada remains that posed by violent extremists who could be inspired to carry out an attack in Canada,” Public Safety Canada notes in its 2016 Public Report on the Terrorist Threat to Canada.
After 9-11 – inflation-adjusted insured losses from which were approximately US$42.9 billion – “terrorism risk insurance quickly became either unavailable or very, very expensive and unaffordable,” in the United States, Gregory Meeks, a member of the U.S. House of Representatives, commented during a debate in 2014.
More recently, there has been “a move away from many terrorism events which are basically taking down huge buildings, to attacks against softer targets and these sorts of lone-wolf scenarios,” says Tarique Nageer, leader of Marsh Inc.’s property terrorism placement and advisory practice in New York City.
The problem for risk managers and brokers is that lone-wolf attacks, although covered by sabotage, “are actually not covered under the definition of terrorism” in insurance policies, reports Hirst. His view is that “there is a misunderstanding of what terrorism risk is actually defined as” in an insurance policy.
“Sabotage does cover acts of lone-wolf (and) domestic terrorism,” he points out. “That’s really one of the biggest issues. If you’ve got a lone wolf, that could just be somebody who is a disgruntled employee that decides to go down to Home Depot and buy fertilizer and make a bomb to go and blow up his ex-employer’s place of work,” Hirst goes onto say.
“That is home-grown terrorism, which is not covered generally under a (terrorism) definition, so you need the sabotage extension,” he explains.
There may also be a need to rethink the traditional link between terrorism and property damage and business interruption (BI) losses, given the greater targeting of public places meant to produce more casualties.
An increase in “terrorist-inspired” acts – as opposed to “terrorist-directed” acts – “can significantly disrupt operations for some companies,” Marsh Inc. suggests in the firm’s 2016 Terrorism Risk Insurance Report.
For example, airlines, hotel chains and travel websites “experienced drops in their stock prices” following the March 2016 bombing at the Brussels Airport, the report points out.
However, as terrorism shifts away from large explosions towards lone-wolf-type attacks, there is “a clear trend for terrorism risk to evolve from mostly property damage related to events similar to the (November 13, 2015) Paris attack,” KPMG advises in Political Risk and Crisis Management Insurance: Opportunities for Growth, released in 2016.
In the Paris attacks, KPMG explains, “asset damage was limited whilst the estimated cost of business interruption according to various economists might reach” US$12 billion.
Marsh reports that some coverage enhancements available relate to active shooter situations and resulting consequences, extra expense for evacuating people because of a threat, contingent interruption of operations, cancelled reservations and loss of attraction.
An active shooter policy acts “as a liability policy designed to go hand-in-hand with (or as an alternative to) a (general liability) policy,” explains Joseph Gilliland, a terrorism underwriter for Beazley plc, which manages syndicates in the Lloyd’s market.
But the terrorism issue still does not seem to be high on the list of many commercial clients. Noting that he has been in the brokerage business for 36 years, Rodney Hancock, chief executive officer of McFarlan Rowlands, says that his firm has never been asked for commercial terrorism coverage and has never sold it.
That lack of concern surprises the former president of the Insurance Brokers Association of Ontario, in light of what happened last year in Strathroy, Ontario, where the firm has an office.
This past August, Aaron Driver was shot by police while inside a taxi, believed to be headed for London, Ontario. It was reported at the time that Driver had made a martyrdom video in which he suggested that he was planning to detonate a home-made bomb somewhere in an urban centre.
“We have had quite a lot of near-misses in the last four years,” suggests Alan Bell, president of Toronto-based Global Risk International Inc.
“The average Canadian company and the average Canadian in the street doesn’t think about that,” Bell maintains. “I get people saying to me all the time, ‘This is Canada. Nothing really happens in Canada,’ and I say, ‘Well, it has happened in Canada, but you have forgotten about it,'” he relays.
Commercial terrorism insurance is “often overlooked” by business clients, agrees Lalita Mohabir, the national product leader and personal accident and special risks manager for Burns and Wilcox Canada, a coverholder in the Lloyd’s market.
“Standard commercial policies generally exclude all acts of terrorism,” Mohabir says. “While terrorism insurance coverage is not mandatory to do business, the mindset towards its importance should change,” she recommends.
Terrorism risk is difficult to model because it “differs substantially” from severe weather events and, in part, because losses from attacks are not accidental, states the report, Terrorism Risk Insurance Act: The Commercial Consumer’s Perspective, from the Risk and Insurance Management Society Inc.
Without terrorism coverage, “businesses may end up having to pay for physical property damage and business interruption expenses not covered in standard commercial policies resulting from terrorist acts, war, malicious damage, strikes, riots and civil commotions,” Mohabir says.
That being the case, Hancock recommends that commercial brokers protect themselves from errors and omissions (E&O) claims by informing clients what is not covered and asking them what risks are of most concern.
“Most policies are called ‘all-risk,’ and then they list all the exclusions,” Hancock says. “You should tell them, ‘These are the things you don’t have, and if you need them, tell me, I can probably get them, but you have to tell me,'” he points out.
“I think if you tell people what’s not covered and ask them what their concerned about, that should protect you from an [E&O] perspective, because you can certainly document that conversation,” says Hancock.
What can brokers do to help ensure that risks are properly assessed? On its terrorism cover application form, for example, Totten Insurance Group asks an applicant, among other things, if it has a perimeter fence, if it has access control and whether or not its premises are within 500 metres of certain types of property. These include military premises, tourist attractions, sporting venues, religious institutions and international hotels.
COVERED OR NOT?
Commercial all-risks property damage and BI policies “tend to exclude terrorism and most of the political violence perils globally,” says Christof Bentele, head of global crisis management at Allianz Global Corporate and Specialty SE. “They do, however, cover strike/riots/civil commotion and/or malicious damage losses,” Bentele reports.
Economical Insurance does not provide coverage for property damage or third-party liability arising from acts of terrorism, a company spokesperson notes, but adds that the insurer’s commercial insurance does cover “fire or any gas explosions that may result from acts of terrorism.”
Hancock explains that when insurers write property policies, “they basically say there is no coverage for terrorism, but if the damage caused by terrorism is the result directly of a fire or explosion, they will cover that part of it.” Insurers “will cover the damage to the building or the contents,” he notes.
But that still leaves a coverage gap with third-party liability.
“For a retail client, if someone goes in there and starts firing off weapons in a mall and injures shoppers, theoretically, you could be sued for that,” Nageer points out. This is because entities such as hotels and retailers “could be liable for ‘lax security’ if a situation like that does occur,” he explains.
“Products are becoming more available for terrorism liability, active assailant and active shooter types of losses,” Nageer adds.
That said, with a standard commercial liability policy, “someone being injured on your premise as a result of terrorism or sabotage attack would not be covered,” Hirst explains.
“The liability part of a standard policy basically excludes that cover completely,” Hancock comments.
While “there are extensions available that, in the event that a bomb goes off on your property and it injures a visitor, a third party or a neighbouring property, then with the liability extension, that would be covered,” Hirst explains. Still, “I don’t think a great deal of brokers are aware that you can actually buy a third-party terrorism cover,” he says.
In stand-alone policies, the definition of terrorism is “clearly stated in the policy wording and covers a broad range of coverage, including acts committed for political, religious and ideological purposes, as well as acts of sabotage,” reports Arthur J. Gallagher & Co.
Advantages of stand-alone terrorism policies, the company information, suggests, include coverage for political violence such as war, civil war, strikes, riots, civil commotion, malicious damage, insurrection, rebellion, revolution, coup d’états and mutiny.
“As I understand at this point, you can add the property coverage for terrorism, but you can’t add the liability,” Hancock comments of terrorism insurance. “You have to buy a stand-alone. That said, they are readily available,” he says.
Other terrorism-related risks are either not insured or are very expensive. So-called “blanket” contingent business interruption (CBI) from a terrorism event, “where a client does not declare who their contingent business suppliers are,” is one example of uninsurable risk, Nageer says.
“The underwriters need to have an idea as to what exactly they are covering and what exactly their exposures are,” he says of CBI coverage for terrorism.
“So they could cover these kinds of contingent loss scenarios, but within a certain radius or a certain city,” he says. “But a blanket policy for that – it’s uninsurable,” Nageer argues.
While government and commercial buildings are “relatively easy to insure” for terrorism risk, it may be considerably more difficult to place terrorism insurance for some occupancies.
“What is difficult or a bit more expensive is religious buildings, as an example, because, unfortunately, a lot of religious buildings are vandalized and they do tend to see a lot of malicious acts against them,” Hirst reports. “What we are finding is incredibly difficult are clinics that offer things like abortion.”
Other hard-to-place terrorism policies are for organizations testing substances on animals, he notes.
“We found if there are cigarette factories that test cigarettes on animals or there are make-up manufacturers that are putting eye shadow in animals’ eyes, they tend to attract a lone-wolf-type attack. Where you do have the radical side of the associations for animal rights, they will actually go in and attack the laboratories that are carrying out that type of testing,” he says.
As of December 2016, Hancock reports that there was “no cyber coverage at all on anything that I could find” for terrorism risk. “If you just get hacked and you don’t know who it is, you can certainly buy coverage for that,” he explains, but adds that if the hackers then went public and turned out to be terrorists, there would be no coverage.
“Stand-alone terrorism policies generally do not cover cyber attacks,” says Mohabir. There is some coverage – albeit limited – for chemical, biological, radiological and nuclear (CBRN) attacks.
“Most commercial property insurance policies have a standard CBRN exclusion,” Nageer explains. “The same thing holds for the stand-alone terrorism policies. However, there are stand-alone terrorism policies available, which could cover you for CBRN events.”
Although available, CBRN coverage “is very expensive,” Hancock says, and his understanding is that not much of that specific coverage is sold.
Events triggering such an exclusion may surprise some.
“Hospitals and clinics do have very large X-Ray machines that typically have radioactive isotopes in them, which are required to power the actual X-ray mechanism,” Hirst explains. “Typically, a number of sabotage and terrorism policies have a radioactive exclusion on it,” he says.
Hirst points out that such an incident could cause pollution in the surrounding area, resulting in damage to third parties and shutting down the healthcare facility. “It is possible to cover physical bodily injury to visitors on your premise, either through a third-party extension or by buying a personal accident extension,” he says.
This is one reason that brokers need to ask clients about their businesses, says Nageer. If a terrorism event occurs at a site with radioactive material, “you could technically have a dirty bomb scenario, but not caused directly by a dirty bomb, but caused by a regular terrorism bomb going off,” he explains.
“There is some language which could be added to policies which could cover you for contamination or decontamination that results from CBRN material which you may have stored on your premises,” he says.
“You really have to watch the exclusionary language because a blanket exclusion for CBRN without any carve-back for chemicals or materials stored on premises, which are impacted by a terrorism event, could cause you to be left with a hole in your insurance in the event that it’s not fully clarified with the insurance underwriter,” Nageer says.
The same gap could exist on sites where chemicals are stored, he explains.
“The thing to do is get to know your clients well,” Nageer recommends. “Get to know their business well and know what their risk is, so you have to ask the right questions,” he adds.
Brokers need to make sure clients have proper coverage for sudden and accidental pollution caused by terrorism or sabotage, Hirst advises. “If it’s a regular property placement, obviously, that does exclude sabotage and terrorism, so the peril of accidental seepage and pollution as a result of a terrorism attack isn’t covered,” he notes.
“You could have some sort of petroleum storage facility which is attacked and it creates contamination of surrounding property. You need to look at the coverage to make sure that you do have sudden and accidental seepage and pollution extensions,” Hirst says.
Nageer points out that policies covering CBRN exist both as stand-alone products and as sub-limits on policies that cover terrorism. “If you want a huge amount of CBRN limits, for example, in a major metropolitan city, that likely would be very costly for you and, potentially, uninsurable,” he says.
Other coverage gaps arise if there is a denial of access to company property as a result of a terrorist incident or threat, says Hirst.
“It is possible to buy insurance for the perils of terrorism and sabotage that cover what we would call a loss of attraction, i.e., the police, for everyone’s safety, have closed down a shopping mall,” he relays.
Brokers should tell clients that terrorism insurance “is inexpensive, dependent on the limit of liability,” Mohabir advises. They should also inform clients that coverage for terrorism also includes protection against sabotage and BI.
For clients with operations outside of Canada, brokers need to discuss political violence coverage, not just terrorism coverage, Nageer contends.
Civil wars, rebellions, insurrections and coups are more common in emerging markets than in developed nations, he goes on to say.