August 1, 2015 by Douglas D. Everett, President, CHES Special Risks, operating as Terror Risk Underwriting Specialty Team (T.R.U.S.T.)
The attacks on Canadian soldiers last fall in Ottawa and Quebec and threats directed at Canada from overseas terrorist groups are among the indicators that terrorism is an exposure that risk managers and brokers need to consider further. The passage June 18 of Bill C-51, the Anti-Terrorism Act – which gives police more power over suspected terrorists – is a sign that politicians perceive an increase in the threat.
Some recent attacks appear as if they could have been perpetrated by lone wolves, but there is still a risk of a large catastrophic terrorist attack.
Since September 11, 2001 – when 19 suicide hijackers crashed four civilian airliners in the eastern United States – most Canadian insurers have attempted to distance themselves from exposure by imposing exclusions in property and casualty policies. As early as November 2001, the Reinsurance Research Council (RRC) of Canada recommended the terrorist exclusion be applied to all general liability policies. Initially RRC and Insurance Bureau of Canada (IBC) recommended property policies provide coverage for ensuing fire. However, most insurers have strengthened their terrorist exclusions, in property policies, to exclude all loss or damage.
That means any resultant loss or damage – such as explosion, falling object, glass breakage, rupture of plumbing system or water escape, riot, strike, civil commotion, vandalism, malicious acts, theft – is also excluded.
In Ontario, there is a question as to whether the full exclusion for ensuing fire will be allowed, under Section 144(1) of the province’s Insurance Act. That stipulation currently does not provide for loss or damage by fire resulting from a terrorist act to be excluded.
In addition to the risk of direct damage and resulting business interruption from a terrorist attack, there is also a liability concern.
One violent incident that occurred on a commercial site was the September 21, 2013 attack on the Westgate Mall in Nairobi, Kenya, for which Al-Shabaab (which the United States government has designated as a terrorist organization) claimed responsibility.
Terrorist acts could cause property damage as well as bodily injury to visitors, customers and other third parties. For example, an explosive device, if planted in an urban nightclub, could explode, causing a fire. A large number of patrons could be injured by the blast and others could be hurt while attempting to escape.
Whether the perpetrators are lone wolves or belong to organized groups, terrorist attacks are designed to damage, injure and produce fear.
In Canada, provincial occupiers’ liability acts impose legal obligations beyond common law. Those acts tend to have exceptions, from strict liability, relating to criminal acts of others. However, owners and occupiers still have a legal obligation to provide adequate security.
Policies covering direct loss or damage tend to contain key common exclusions for nuclear, chemical, biological and radiation, riot, strike, civil commotion, malicious acts, vandalism, theft and cyber attacks. Some of these perils can be covered for an additional premium.
The conditions relating to insurance requirements in many commercial loan agreements contain a clause stating something in line with the following:
All policies must not contain an exclusion for Terrorism or Terrorist Acts, provided that such coverage is obtainable at a reasonable cost as determined by the Mortgagee. In the event such coverage is not available at a commercially reasonable cost but later becomes available, then the Mortgagor shall obtain and maintain such coverage at the written request of the Mortgagee.
Business interruption coverage is restricted to direct loss or damage by the insured peril to the insured premises. Unless the insured premises is covered for terrorist acts, there is no following form coverage for loss of net income and continuing expenses due to a terrorist act. There are various forms of contingent business interruption extensions (such as denial of access, neighbouring premises and failure of public utilities) available to broaden coverage.
Third-party liability coverage for losses arising from terrorist acts is generally written on a claims-made basis. This type of policy would cover events that occurred and were reported during the policy period. Many policies provide an extended reporting or discovery period, allowing an insured to report a claim up to 90 days after the policy expires. Some policies contain an “onus of proof clause,” which essentially places the onus on the insured to prove that the incident giving rise to the claim was a terrorist act. Third-party liability policies tend not to provide coverage for either tenants’ legal liability or employers’ liability.
In Canada, not all employees are covered by provincial no-fault workers’ compensation coverage.
In Ontario, for example, only 73.55% of the work force was covered, as of 2013, by Ontario’s public workers’ compensation plan, note figures from the Association of Workers’ Compensation Boards of Canada.
All employers in Ontario, regardless of whether their workers are eligible for coverage by the Workplace Safety and Insurance Board (WSIB), have a level of care mandated either by the province’s Occupational Health and Safety Act or (for federal government employees) by the Canada Labour Code. Both impose strict liability for the care and safe working conditions in the workplace.
A business that is sued as a result of an act of terrorism or sabotage will need a strenuous legal defence. Some insurance contracts covering liability for terrorist acts do not to include the same obligation – for the insurer’s right and duty to defend – as other liability policies. Therefore, a policyholder could be required to cover both its investigative and legal defence costs if it is sued as a result of a terrorist incident.
If a court finds against the insured, ordering it to pay damages – or if the insured settles – the insurer may then have a contractual obligation to indemnify the policyholder. However, this type of policy is much more onerous for the insured than a liability policy in which the insurer has the standard right and duty to defend.
Some Canadian statutes define terrorism. However Canada – unlike the United States, Britain, France and Australia – has no government financial backstop. The actual trigger – to exclude or include cover – is untested in Canada. What exactly constitutes a terrorist act? Therefore, a policyholder who submits a liability claim arising from a violent act could be faced with an insurer who refuses to defend or indemnify until such time as a court finds that the incident giving rise to the third-party’s claim against the policyholder is, in fact, an act of terrorism.
Should a place of employment be the target of terrorist activity, the employer of those employees may be held legally liable for their injuries. Even with employer’s liability coverage in place, the vast majority of these policies exclude acts of terrorism. Employer’s liability insurance covering terrorism is available under stand-alone policies.
In a 2003 publication, the U.S. Federal Emergency Management Agency suggested an explosion from a 10-pound suicide vest could cause injury at a radius of 300 metres. The explosion in Oklahoma City, in 1995, damaged 324 buildings within 16-block radius of the blast. A single building may not be the target of a terrorist act yet the collateral damage can be significant from direct damage, business interruption and possibly third party.
The terrorist acts insurance market has significant capacity for now, except in some urban areas – such as sports venues, national monuments – with higher risk exposure, and postal zones considered higher risk by underwriters.
Rates for insurance covering terrorist acts have generally come down over the last decade, but many businesses still do not purchase coverage or even ask for a price indication._Acts of terrorism and threats of terrorist activity are constantly in the news, and the threat is not diminishing. No one can accurately predict the target – or the financial impact – of the next terrorist attack in Canada, but the mechanisms to transfer risk are available and, for the most part, at a reasonable cost.