Insuring against the unthinkable
While it is, thankfully, several years since we suffered a major terrorist attack on the British
mainland, the terrible events in New York and Washington serve as a reminder that no one is
immune to the possibility of terrorist attack and that new dangers are appearing, even if more
familiar threats are presently in abeyance.
In these circumstances, businesses need to consider how well prepared they are to cope with a
major man-made or natural disaster. This can be done by employing a software-based risk
assessment programme such as that recently developed by Lupton Fawcett and which includes
consideration of property issues. What areas may be relevant?
First, are there contingency plan for business continuation? Are there back-up computer systems
maintained off site, to ensure that key data is not lost and that contact with key clients and
customers can be maintained? Does management have up-to-date addresses and phone
numbers for staff and a programme specifying who will contact them with details of any
contingency plans which need to be implemented? Alternative premises will be required on at
least a short-term basis until the original premises have been reinstated or new long-term
premises have been acquired. Can a small building outside the major towns and cities be acquired
now for use as a temporary base or, if not, have agents been made aware of your likely immediate
space requirements in the event of a disaster? What would happen if your property was not itself
damaged, but was in an area to which the police denied access for a significant period of time
while checking for bombs or the safety of buildings near a blast site? It is unlikely that any claim
could be made under a conventional buildings insurance policy and care should be taken to check
that cover would be provided by a business interruption policy, and that contingency
arrangements are in place to run the business from alternative premises.
Steps should therefore be taken to check what insurances are in place, both for business
interruption and also for buildings and property. It will be a condition of a business interruption
policy that the insurers are notified of premises occupied by the business. A note should be made
to inform the insurers of the acquisition of a new property.
In respect of an owner-occupied property, the business should check that the property is fully
insured. Where it is not, it is likely that any claim will be "subject to average", where the insurers
will only pay out a proportionate part of the loss suffered. For example, if a property is worth
£600,000 but is only insured for £400,000 and damage worth £400,000 occurs, the insurers will
only be liable to pay for two thirds of this where the policy includes an "average clause". Had the
policy not been "subject to average" the insurers would have been liable for the full £400,000.
A prudent property owner will want to insure against the widest possible range of risks. Typically,
insurers now limit the amount of cover available against terrorism (following the IRA bombings in
London in the early 1990s), but additional cover is available through a Government-backed fund
known as Pool Reinsurance Company.
A tenant should still be concerned to check on the insurance of the property he occupies. A tenant
under a full repairing and insuring lease will be liable to repair and reinstate a property unless the
damage has been caused by an insured risk. A tenant will therefore want to check the range of
risks which his landlord has insured against and that the premiums have been paid and the policy
is in force. Where a lease only specifies limited insurance risks, a tenant should either persuade his
landlord to extend the cover, or take out his own insurance. This insurance should cover his
liability to repair, and his obligation to continue to pay rent while the property is unfit, following
damage by risks against which the landlord has not insured.
A tenant will wish to see that his lease provides for the payment of rent to be suspended while the
property is unfit for use following damage by an insured risk. His landlord will also want to have
loss of rent insurance in place for sufficient time to allow for demolition, site clearance, obtaining
planning permission and rebuilding.
Sometimes, leases contain break clauses entitling one or both parties to terminate a lease
following substantial damage or total destruction - usually if reinstatement has not occurred
within a specified period of time. Leases should be checked, and appropriate notes made, so that
any time limits for service of a break notice are not overlooked.
Now is the time for all businesses to assess their vulnerability to an unexpected attack or natural
disaster and to make appropriate plans.
Please note that the article above is not advice to any person and may not be taken as a definitive statement of
the law in general or in any particular case. Neither the author nor Lupton Fawcett accepts any responsibility for
anything that any person does or does not do as a result of reading it.