A suicide bomber infiltrates a nightclub in an English city wearing explosives and detonates his device among 500 young clubbers. Six people are killed instantly, ten are seriously injured, and in the stampede to escape the club, two more people die and four are seriously injured. Eleven other people suffer minor injuries, smoke inhalation and shock. The door staff didn’t detect the explosives, failing in their duty of care, and evacuation procedures were ineffective, so the club is ultimately found liable for £9.5 million to compensate for deaths, long-term medical care, minor injuries, the foregone salaries of the victims and legal costs.
The nightclub’s liability from that incident is small when compared to the explosion at a US-owned refinery in a Middle Eastern state that is infiltrated by an Al-Qaeda-inspired suicide bomber. The terrorist detonates a vehicle filled with explosives, killing ten foreign and local contractors and seriously injuring 15 more. The attack also causes nearby storage tanks and pipelines to rupture, resulting in major contamination. The refinery owner is sued in the United States, his state of domicile. Liability costs amount to approximately £50 million to cover damages to employees, contractors, pollution, third party damage and defense costs.
These vivid hypothetical scenarios are both realistic and not unlikely, according to Ben Garston, an underwriter at MAP Underwriting at Lloyd’s and the architect of the first terrorism liability policy. He created the cover in the weeks following September 11th, when most other insurers were pulling out of terrorism coverage entirely. Garston advises clients considering terrorism coverage to take account of the true cost of potential liabilities, not just the physical losses that a company could suffer from an attack. He said, “Many companies simply don’t realise the scale of their potential liabilities, the value of which could easily outstrip the loss of physical assets.”
Indeed, in the weeks following September 11th, liability lawsuits took off as victims looked for financial redress for the tragedies they suffered. It was perhaps the first time that companies were faced with large-scale liabilities associated with terrorism, both because the levels of damage from the incident were unprecedented, and companies were operating in a highly litigious environment.
The liability risks for companies, in the event that a terrorist strikes, are wide ranging. A series of simple errors in security, such as failing to control or monitor the entry of people into the building and failing to check passes or search bags, to simply not having a procedure for police emergency liaison, could put a company in the frame for major exposure in relation both to its own employees and other people. The products offered by MAP cover third party bodily injury, property damage, pollution clean-up and defence costs as a direct result of an act of terrorism. There is even a version that includes nuclear, chemical and biological terrorism.
Companies are increasingly alert to the dangers of terrorism and its potential impact on their businesses. The percentage of companies taking out terrorism insurance has increased dramatically since September 11th, with nearly twice as many companies buying terrorism insurance coverage today than they did in 2001, according to the Lloyd’s report, Under Attack. However, most terrorism policies that are being bought are limited to coverage for property risks and physical assets. The purchase of terrorism liability insurance is still in its infancy; the standalone market for casualty terrorism insurance can offer perhaps £100 million of per risk capacity compared to up to approximately £1 billion of physical damage terrorism.
In the UK, companies do have some terrorism employer’s liability cover, as the law requires insurers to provide a minimum cover of £5 million within any standard employer’s liability policy. But without additional cover, the reality for thousands of British companies is that they may be massively underinsured for the scale of liabilities they could face in the event of a terrorist incident. Indeed, when one considers that just one employee at a City financial firm might earn over £5 million a year, the minimum limit seems negligible.
In the US, where companies and insurers are compelled to pay medical costs and wage replacement under workers compensation policies, experts project that a ‘worst-case’ liability cost of a terrorism incident could exceed £45 billion. For the UK, where laws do not compel a similar level of compensation, the figure is less clear. Nonetheless, significant sums are involved when employees, and third parties, seek redress in the courts.
In the UK, the companies that are currently buying terrorism liability insurance tend to be large and highly sophisticated financial companies, including investment banks, law firms and insurance brokers, many of which have US operations and are aware of the possibility of terrorist attack in the UK leading to expensive litigation in the US. US-based buyers of liability terrorism insurance tend to be more diverse and include hospitals, universities, schools, shopping malls and municipalities.
According to Nick Armitage at the Willis Terrorism Practice, organisations in the UK that take-up terrorism liability products tend to be those who have identified terrorism exclusions or limitations under their liability policies. They also may be a target risk or operate in industry sectors that have an above average terrorism exposure. The products are still relatively new and liability for terrorism has been untested in the UK courts so companies may not fully appreciate the potential of this risk exposure. Armitage said, “The stand alone terrorism market needs to continue to compete with a softening liability market in order increase take-up. We would suggest that whilst take-up hasn't increased significantly, there are still a number of clients who recognise their potential exposure, and who are therefore purchasing the cover."
What will it take to increase awareness of these potentially significant liability risks? Short of another major attack, it will require ongoing education within the industry and the wider business community. Buying insurance is one answer, but ongoing and effective risk management and planning are also crucial for companies doing business in a world where terrorist risks could be literally standing on the doorstep.
