If the worst happens

Under the JCT main forms, there is an obligation on the contractor or employer to take out an “all-risk” insurance policy to cover the works during construction. From 2001, such policies were amended to cover acts of terrorism as defined by the Reinsurance (Acts of Terrorism) Act 1993, that is: “Acts of persons acting on behalf of, or in connection with, any organisation that carries out activities directed towards the overthrowing or influencing, by force or violence, of Her Majesty’s government in the United Kingdom or any other government de jure or de facto”. The standard limit of cover for loss or damage due to terrorism is £100,000 and the employer or contractor is obliged to pay an additional premium for more cover.

However, contractors and employers who use the JCT Major Projects Form should not assume they are covered for all acts of terrorism. Under the MPF, terrorism is defined by the Terrorism Act 2000 not by the 1993 act, which creates a problem for insurers’ reinsurance arrangements. This is because reinsurance cover provided by Pool Re is only available for acts of terrorism as defined in the 1993 act, a narrower definition than that of the Terrorism Act. If an insurer underwriting the terrorism risk cannot obtain reinsurance cover for acts of terrorism outside the definition in the act, cover for such acts of terrorism will be excluded from the policy. In particular, insurers may not provide cover for loss or damage caused by:

• Terrorists whose only motivation is vengeance (for example revenge for the presence of “infidels” in Iraq and Afghanistan), religious extremism (martyrdom, doing “God’s will” or jihad against the enemies of Islam) or who seek merely to damage “Western democracy” or “international capitalism” and whose activities are not directed towards “overthrowing or influencing … government”.
• A “sympathiser acting alone”, which means not acting on behalf of, or in connection with, any organisation, but merely sharing an organisation’s objectives (as was thought to be the case with Richard Reid, the “shoe bomber”).

Another concern for policy holders is the duration of cover. As with most insurance policies, terrorism cover is renewable on an annual basis. So for a building contract of more than 12 months, it may be the case that following a series of terrorist incidents it is not possible to renew the terrorism cover. If the cover is not renewed the employer may “determine” the contractor’s employment or require the contractor to complete the works on the basis that the employer assumes the risk of loss or damage to the works caused by an act of terrorism. Although this protects the contractor from being in breach of contract, it exposes employers and their funders to increased risk. Should terrorism cover cease, most employers will have to continue with the works or face a financial loss.

Failure to renew terrorism cover could also place the employer in breach of its funding agreement with its bank, which could call in the loan. To avoid this, employers should write into the funding agreement that terrorism cover is only required if it is available at a reasonable commercial rate. Such clauses are also advisable in agreements for lease between the developer and the tenant where the latter requires terrorism cover.

Policy holders face the difficult task of having to prove that the loss or damage is covered by an insured act of terrorism. The Treasury published a set of principles in December 2004 for certifying whether a particular incident falls within the 1993 Act definition of an “act of terrorism”, and hence whether reinsurance cover is available. However, it warned: “In view of the fact that the definition has not been the subject of a judicial decision, these principles cannot be taken as a definitive legal interpretation.”

Under the JCT Major Projects Form, you may not be covered against terrorists whose only motivation is vengeance – for example revenge for the presence of ‘infidels’ in Iraq and Afghanistan – or religious extremism

Footnotes to the JCT main forms anticipate that insurance for some of the risks covered by all-risks policies may not be available and advise the parties to arrange these matters before entering into the contract by amending the definition of all-risks insurance so it is consistent with the risks actually covered.

It will be a matter of negotiation between employer and contractor as to who bears these uninsurable terrorist risks, and funders and tenants will also have an interest in the outcome of that negotiation. As and when the parties have agreed the allocation of such risks, they should make sure that the insurance arrangements for terrorism in all the project documentation are consistent.