April 26, 2019

Terrorism insured – a German view

After September 11th 2001, German insurers excluded terrorism risks from the standard insurance coverage in particular under property insurances as well as under business interruption insurances. However, they developed a new approach: to the extent of a total sum insured of EUR 25 million, the insurers offer to include coverage for terrorism risks. If the total sum insured exceeds EUR 25 million, insurance coverage for terrorism risks may only be obtained from the specialist insurer EXTREMUS. In this context, two major issues are in the centre of our practice: contractual exclusion of terrorism risks, and providing suitable insurance of terrorism risks.

Insurers outside of Germany offered to German customers alternatives to the insurance of terrorism risks by EXTREMUS

1. Contractual exclusion of terrorism risks

The effective exclusion of terrorism risks requires careful and precise drafting of the respective insurance wordings. It is of utmost importance that the wordings clearly reflect the extent of the exclusion so it cannot be construed in a way that does not meet the intentions of the parties to the insurance contract.

In German insurance contracts, the actual clause excluding terrorism risks is mostly taken from the model wordings by the German Insurance Association ("GDV"), particularly from the one containing the general conditions for fire insurance. There it says that irrespective of any contributing causes the insurance does not extend to damages resulting from acts of terrorism. The latter are then defined as any actions by persons or groups of persons which are:

(a) intended to achieve political, religious, ethnic or ideological goals, and

(b) appropriate to spread fear and terror among the population or parts of it and thereby influence a government or governmental institutions.

Using the wording of the model clause for the exclusion of terrorism risks is per se advisable since it mirrors the definition of terrorist acts used in the EXTREMUS insurance conditions and thus facilitates a coordinated insurance solution. The remaining question which is regularly addressed in wording assistance is: Is it sufficient to integrate the model clause in the actual wording? It might, for example, require adjustments if other exclusions, such as the one for war and unrest, are provided. Also it needs to be permanently verified that a specific clause would hold up under judicial review. Finding suitable solutions for our clients meeting their specific needs for all of their various insurance programs is at the core of our expertise.

2. Providing suitable insurance of terrorism risks

In many cases where the coverage of terrorism risks is required, the total sum to be insured exceeds EUR 25 million. One solution to obtain insurance coverage is to turn to EXTREMUS. This insurer was founded by the German insurance industry in 2002 with the sole purpose to provide large risk coverage for damages due to acts of terrorism. Its annual capacity amounts to EUR 10 billion whereby only the first EUR 2.5 billion are carried by EXTREMUS itself. The remaining EUR 7.5 billion are covered by a state guarantee. The insurance contract is governed by the "general conditions for the terror insurance 2016" and provides an annual maximum liability per company or group that amounts to EUR 1.5 billion. While EXTREMUS itself only offers the coverage of risks situated in Germany, it is also able to procure insurance solutions with respect to risks situated in foreign countries.

During the last years, we observed that other insurers outside of Germany, especially from Great Britain, offered to German customers alternatives to the insurance of terrorism risks by EXTREMUS. As part of these alternatives, the German customer may choose between the applicability of British or of German law. This gives rise to questions that refer to the specific (dis-)advantages resulting not only from the choice of the applicable law but also from the choice of the overall insurance structure. With our international set-up and expertise spread around the globe, we are best suited to assist our client in choosing the best solution for their business. Issues around international insurance programs and the specific chances and pitfalls connected to these influence our daily business and is met by exceptional know-how.