Why blocks need terrorism insurance

/ Blocks of flats, Freeholders, Landlords, Leaseholders

Tragic events are keeping the risk of terrorism front of mind; but the risk to the fabric of a block of flats may still seem low and the extra cost of terrorism insurance for your block might feel like unnecessary expenditure. However, it is very likely that your lease will require that it is in place. This is because most leases require cover in accordance with CML [Council of Mortgage Lenders] recommendations, and that includes cover for things like explosions.

Donna Hunter, Underwriting Manager at Deacon explains: “Many newer leases do expressly provide for a landlord to insure a building against the threat of terrorism. However, older leases rarely do, and so leaseholders may question the landlord’s decision to buy it and pass the costs on. In fact, everyone’s hands are tied because the matter was settled by a 2014 case in the Lands Chamber.”

The 2014 case sought to resolve a leaseholder challenge over a block in Swindon.  It’s called the QDime case, after the landlords in question. The leases for that 1980s block reflected the practices of the time they were built, and did not specifically require insurance against terrorism: but they did say that the landlord must insure against explosion.

As a terrorist attack would probably involve an explosion, the judges decided that terrorism cover should be in place. That had far-reaching effects because most leases require cover in accordance with CML [Council of Mortgage Lenders] recommendations, and that includes explosion.

What are the risks?

While the likelihood of a terrorist incident is still statistically low, the impact would be very high. Losses could be massive and being uninsured is too big a risk. Indeed, some mortgage providers will not lend on a flat unless terrorism cover is in place.

We hear of “bomb factories” in flats. No doubt their target is not the block itself, but often the very amateurism of many of these people puts residents at risk.  Explosion aside, there is the danger of a so called “dirty bomb” and the subsequent damage it could cause. The policy definition of terrorism is broad and can include the activities of animal right extremists.   Could a research scientist or a politician living in the block be an unwitting target for attack? Not all policies offer cover for that and you should ask the insurer for a full list of exclusions (as indeed you should for all policies).

Why is cover quoted as an extra if it’s as good as universally required?

Standard policies do not cover terrorism, in the same way they do not cover acts of war, because of the potential scale of any losses. So, insurers have clubbed together to set up the Pool Re scheme to pool terrorism risk. Pool Re is a private sector solution to a public policy objective, but it is ultimately backed by the Treasury.  So terrorism is always quoted separately in your renewal documents.

Can leaseholders refuse the cover?

Here the answer is simple: if they are obliged by the lease to insure and fail to do so, then  the management company directors will be personally liable for losses and consequential losses (Directors & Officers Liability cover will not indemnify them in this case).

Deacon has produced a free fact sheet on Terrorism Insurance available at www.deacon.co.uk/guides

www.deacon.co.uk

FP503-2017