Pool Re was (and still is) one of the most significant developments in British insurance in the last twenty years, but why is it important to the construction industry?
What is Pool Re?
Pool Reinsurance Company Ltd (Pool Re) is a mutual reinsurance company. It provides reinsurance on a direct basis (that is, without broker intervention) to its members in respect of damage or business interruption caused by “an act of terrorism” to commercial property located in Great Britain. In turn, the Government provides unlimited reinsurance to Pool Re, protecting Pool Re if all its financial resources are exhausted following claim payments.
Pool Re was founded in the 1990s in response to insurers’ growing reluctance to insure commercial property against terrorism. The Government initially considered the creation of Pool Re a temporary measure. However, a heightened awareness of terrorist threats in the past decade has forced the Government to put Pool Re on a more permanent footing.
The majority of insurance companies now operating in the British commercial property market are members of Pool Re.
Relevance to construction
Typically, a building contract obliges one party to maintain “all risks” cover of the works, which includes terrorism cover. While “all risks” cover is often referred to generically, its scope varies from policy to policy and its terrorism provisions are particularly prone to variation between insurers.
Any party that is obliged to maintain terrorism cover of works under a building contract should ensure the scope of cover required under the building contract is mirrored in the insurance policy it actually maintains. This is particularly important for a contractor that is obliged to maintain all risks insurance, as it may have relatively little experience of Pool Re and terrorism insurance (whereas these issues are often familiar to an employer who owns the site of the works).
JCT terrorism cover update
The JCT Terrorism Cover Update December 2009 perfectly illustrates the importance of understanding Pool Re and terrorism insurance.
In December 2009, the JCT updated the terrorism insurance provisions of several of its standard forms of contract. This reflected a recognition by the JCT that the insurance market had moved away from the position envisaged in its existing wording. Indeed, the JCT attached such importance to the issue of terrorism cover that it issued its terrorism update outside its usual programme of contract revisions.
The JCT’s example underlines that practitioners should not assume that standard forms of contract reflect current market practice. While the JCT has updated its forms of contract, other contract publishers have not. In any event, there is an inevitable lag between a change in the insurance market and that change being reflected in changes to any standard form of contract.
Points to remember
Five key points to remember are:
- Consider the meaning of “terrorism”. There is no universally agreed definition of terrorism, even in Government legislation. The Reinsurance Act 1993 adopts a relatively narrow definition of terrorism. This is the definition used by Pool Re. In contrast, the Terrorism Act 2000 adopts a relatively wide definition.
- Be prepared to negotiate contract terms or extend your insurance. Insurers increasingly use the Terrorism Act 2000 to define acts of terrorism that are excluded from their policies. This exposes a contractor who is responsible for insuring a site to the risk of being without cover for damage that falls within the wide terrorism exclusion to its all risks policy, but outside the narrow definition of terrorism covered by Pool Re. In practice, this may require a contractor to negotiate amendments to the cover required under the building contract and to its liability to pay for remediation in the event of a terrorist incident, or to secure an extension to the terrorism cover it maintains.
- Agree who pays. Parties should agree express provisions setting out who bears the cost of insuring against terrorism risks, especially where a party is having to extend the scope of its existing cover.
- Check specific exclusions. Even if an insurance policy provides cover against terrorism in its widest sense, practitioners should take care to check whether there are any specific exclusions from that cover. For example, Lloyds’ market cover refers to a wide definition of terrorism, but does not extend to chemical or biological damage and may require an extension for nuclear risks.
- Take specialist insurance advice. While a party should be aware of Pool Re and the issues surrounding terrorism insurance, it should still take specialist insurance advice (perhaps from its own brokers) before agreeing any contract wording. Also, you should not assume that specialist advice received in the past is applicable at the moment; the insurance market is notoriously volatile.