25.3.1 Outside the PFI field, there are relatively few differences between the insurance coverage available in Great Britain and those available in Northern Ireland. All the basic classes are available in Northern Ireland as are the vast majority of the extensions and additions which might be sought. Likely restrictions in cover will arise from the lack of competition in the market, as mentioned previously, and the unique political situation existing in Northern Ireland. The most significant issue will be that of cover for acts of terrorism due to the market-wide provisions of the Northern Ireland Terrorism and Overriding Exclusion clause, as described in Section 25.3.3 below.
25.3.2 Damage to property through terrorist attacks in Northern Ireland became prevalent in 1968. Between 1968 and 1977 either the public sector authority or the Government settled terrorist damage claims (whether as a result of fire bombs or explosions) on an indemnity basis, which means that only the value of the loss suffered was reimbursed. In those areas where explosion or fire was an insured peril, the normal practice for insurers at that time was to create a reserve to be paid to the claimant which approximately reflected the difference between a reinstatement settlement and the Government indemnity basis. Under a reinstatement settlement, the claimant would receive the full replacement cost of the asset, without deduction or depreciation. Investigation has indicated that those reserves were typically between 20% and 40% of the total claim value depending on the extent of the damage and the construction of the buildings concerned. A substantial portion of the payments made in respect of terrorist damage in Northern Ireland, which over the last 30 years has exceeded £600m, was paid during the years between 1968 and 1977.
25.3.3 In November 1977, legislation was passed under the Criminal Damage (Compensation) (Northern Ireland) Order 1977 which took effect from 1 April 1978 (the "Compensation Order"). As a result, all Fire and Business Interruption Policies were made subject to the following exclusion regarding acts of terrorism in Northern Ireland (the "Northern Ireland Terrorism and Overriding Exclusion clause").
''This policy does not cover loss, destruction or damage to any Property (other than private dwellings) in Northern Ireland or Business Interruption resulting therefrom occasioned by or happening through -
(i) civil commotion
(ii) any unlawful wanton or malicious act committed maliciously by a person or persons acting on behalf of or in connection with any unlawful association
For the purpose of this exclusion
"unlawful association" means any organisation which is engaged in terrorism and includes an organisation which at any relevant time is a proscribed organisation within the meaning of the Northern Ireland (Emergency Provisions) Act 1973
"Terrorism" means the use of violence for political ends and includes any use of violence for the purpose of putting the public or any section of the public in fear
In any action suit or other proceedings where Insurers allege that by reason of the provisions of this exclusion any loss, destruction or damage or Business Interruption is not covered by this policy the burden of proving that such loss, destruction or damage or Business Interruption covered shall be upon the Insured."
25.3.4 Under the Compensation Order, the Northern Ireland office will pay the claimant for losses incurred to property on an indemnity437 basis, the effect of which is to remove the responsibility from insurers to meet losses arising from actual physical damage which could be proven to be the result of a politically motivated terrorist act. This creates two risks for the Project:
(a) there is likely to be a capital shortfall as the indemnity payment is unlikely to cover the full reinstatement value of the asset; and
(b) there is likely to be a cash flow problem for the Contractor due to delays in receipt of payments.
25.3.5 Under an insurance policy, cover will continue to operate whenever damage occurs otherwise than through terrorist action.
25.3.6 Whether the claimant can make a claim under the Compensation Order will, in practice, be determined by whether the Chief Constable issues or withholds a certificate under the provisions of legislation. If a certificate is granted, then a person with an interest in property may proceed with this claim for compensation under the Compensation Order. If a certificate is withheld, a claim can be made against the insurer covering the risk and this will be dealt with under the normal terms and conditions of the Insured's policy. In some instances, there may be difficulty in deciding definitively whether acts were politically motivated and there is no guarantee the claim would be met by the insurers.
25.3.7 It is not the practice of property insurers, having included the Northern Ireland Terrorism and Overriding Exclusion clause, to make any special provision to include any element of cover that would not be met by Government compensation under the Compensation Order.
25.3.8 It has been the practice of the Northern Ireland Office to meet business interruption claims provided that a certificate has been issued by the Chief Constable relating to actual physical damage and the interruption to the claimant's business flows from that physical damage.
25.3.9 Following the bombing of St. Mary Axe in London in April 1992, insurers became concerned about the cost of meeting losses arising from terrorist activity in Great Britain. The original total loss estimates for St. Mary Axe exceeded the total amount paid by the Northern Ireland Office as compensation since the introduction of the Compensation Order in 1977.
25.3.10 With effect from 1 January 1993, it became UK market practice to apply a terrorism exclusion to property situated in England, Scotland and Wales. Some insurers have combined this exclusion with the Northern Ireland Terrorism and Overriding Exclusion clause. However, from the same date, it was possible to buy terrorism cover for the excluded territories from a Government supported reinsurance provider (Pool Re). This change in market practice was enabled by the Reinsurance (Acts of Terrorism) Act 1993. The legislation clearly states that it does not extend to Northern Ireland. Pool Re is unable to provide any protection for any property situated in Northern Ireland without a change in legislation.
25.3.11 The Authority should bear the risk to the Project resulting from the difference between the sum paid to the Contractor under the Compensation Order and that which would otherwise be payable under insurance policies. The Authority should either bear the shortfall, or consider with its advisers whether purchasing insurance to cover the risk is better value for money. The insurance policies available to the Authority will be in the form of Difference in Conditions type policies:438 one cover will be sought to "top up" the shortfall between the indemnity settlement offered by the Northern Ireland Office under the Compensation Order and the reinstatement basis ordinarily offered in the insurance market. Secondly since the Government Scheme will only operate for incidents perpetrated by groups identified by the Northern Ireland (Emergency Provisions) Act 1973, a "gap" cover would be required to cover acts perpetrated by terrorist groups which fall outside the scope of the Act.439
25.3.12 The Compensation Order does not provide protection for third party property. Accordingly, Third Party Liability cover will need to be effected by the Contractor.
Suitable drafting is as follows:
means the Criminal Damage (Compensation) (Northern Ireland) Order 1977
means any event which gives rise to a claim for compensation under the Compensation Order.
(a) In the event that a Criminal Damage Event occurs, the provisions of [Annex 1] (Criminal Damage))440 shall apply.
(b) Without prejudice to the remainder of the obligations on the part of the Contractor in this Contract, the Contractor shall maintain in relation to each Site and each Project Facility such standards of vigilance and will take all such reasonable precautions as are recommended by the Police Service of Northern Ireland or the Northern Ireland Office (or, if replaced, by their successors), for the protection and security of the Sites and/or the Project Facilities and will compensate the Authority for any loss caused by a breach of this obligation (including any diminution of monies received by the Authority under any insurance policy or the criminal damage legislation in Northern Ireland and any amount for which the Authority would not have been liable but for such breach by the Contractor).
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437 See Section 25.3.2 above.
438 Paragraph 2 of Annex 1 provides that the Authority will meet loss suffered following a Criminal Damage Event in circumstances where claims under the Contractor's commercial insurance or the Compensation Order are unsuccessful. Care must be taken by bidders and their advisers to ensure that payment will still be forthcoming under any commercial insurance even in circumstances where the Authority has accepted that it is ultimately responsible if claims under commercial insurances or the Compensation Order are unsuccessful.
439 Bidders and their advisers should check which terrorist organisations are "proscribed" under relevant legislation at the time of bid submission. In these circumstances, the Compensation Agency will determine whether or not a claim comes within the terms of the legislation and to do this relies heavily on police information. The evidence normally provided to establish entitlement is a Chief Constable's Certificate which applicants can apply for when completing the appropriate section of the Notice of Intention.
440 Annex 1 (Criminal Damage) sets out procedure for dealing with Criminal Damage Events and should be appended as a schedule to the relevant Contract.